[Senate Hearing 111-751]
[From the U.S. Government Publishing Office]
S. Hrg. 111-751
LOAN GUARANTEE PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON THE U.S. DEPARTMENT OF ENERGY'S LOAN GUARANTEE
PROGRAM AND ITS EFFECTIVENESS IN SPURRING THE NEAR-TERM DEPLOYMENT OF
CLEAN ENERGY TECHNOLOGY
__________
SEPTEMBER 23, 2010
Printed for the use of the
Committee on Energy and Natural Resources
U.S. GOVERNMENT PRINTING OFFICE
62-706 WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska
RON WYDEN, Oregon RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
EVAN BAYH, Indiana JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
----------
STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Burr, Hon. Richard, U.S. Senator From North Carolina............. 3
Fertel, Marvin S., President and Chief Executive Officer, Nuclear
Energy Institute............................................... 58
Meyerhoff, Jens, President, Utility Systems Business, First
Solar, Tempe, AZ............................................... 34
Newell, Timothy, Senior Advisor, U.S. Renewables Group, Santa
Monica, CA..................................................... 24
Scott, Michael D., Managing Director, Miller Buckfire & Company,
LLC, New York, NY.............................................. 41
Silver, Jonathan, Executive Director, Loan Programs Office,
Department of Energy........................................... 4
APPENDIXES
Appendix I
Responses to additional questions................................ 73
Appendix II
Additional material submitted for the record..................... 111
LOAN GUARANTEE PROGRAM
----------
THURSDAY, SEPTEMBER 23, 2010
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. OK, why don't we get started here?
The purpose of this hearing is to take an assessment of the
Department of Energy's Loan Guarantee Program. This is a topic
of great concern to members of this committee. It's also a
complex subject. I appreciate the efforts of the witnesses to
help us understand it.
Unfortunately, though we invited the Office of Management
and Budget to attend and comment on their role in the process
they were either unable or unwilling to do so. They have not
provided us with a witness today. We have asked them to submit
written testimony for the record and will ask them to also
respond to any questions that members of the committee and
myself have for them at the end of the hearing.
Since this is not the first hearing we've had on this topic
I'll not go into great depth about the problems that we've had
with implementing this program. In short, in the 5-years since
the program was authorized 14 loan guarantees have actually
been issued, all of them, in the last 14 months, ten of those
within the last year. While the Department, under Secretary
Chu's leadership, should be commended for its obvious
commitment to getting this program moving it's impossible to
ignore the enormous gap between our efforts and those of our
competitors overseas.
Just last week the New York Times had an extensive article
on the aggressive support China is providing to new clean
energy ventures which includes everything from rich tax credits
to subsidized lands to exceptionally cheap capital. While we're
arguing about whether or not we can afford to restore the $3.5
billion that was withdrawn from the $6 billion program set up
less than 2 years ago, they're offering support that is
measured in the hundreds of billions. While I would not argue
that we need to match their level of support in order to remain
competitive there are many other reasons why companies would
choose to locate in the United States.
I would argue that we must lift the barriers that currently
make it impossible to develop and manufacture new clean energy
technologies here. I'm concerned that there are those,
including some in the Administration, that view that financing
is merely another benefit, like tax credits, to be cut when
other needs dictate rather than as a remedy to a fundamental
market failure that is acting as a barrier to domestic
technology development. What I believe those skeptics fail to
recognize is that though banks are often happy to finance the
next factory of an established company or the tenth deployment
of a developed technology, they have very little interest or
inclination in participating in the first deployment of a
technology.
There is simply too much uncertainty both in the technology
and in the market, too many other attractive investments to
spend the significant time required to focus on new risks. As
our international competitors have already recognized the
government needs to step in in these circumstances. Biofuels is
a good example.
Although we passed laws that would seem to create a stable
market for biofuels in the United States, companies are finding
it impossible to get financing for large scale operations.
Banks, investors and buyers won't commit unless they've seen
commercial scale production and until completing technology--
competing technologies have sorted themselves out. The result
is that our biofuels targets go unmet as companies remain stuck
in the pilot projects stage of development.
This is causing domestic companies to look elsewhere to
develop and to subsequently manufacture their technologies
beginning the cycle of further research and refinement and
continued production there rather than here where the
technology, in many cases, was originally developed. I believe
it is this risk that we need to balance against any perceived
risk of failure of a given project. Congress has repeatedly
committed itself to taking on this market failure in 2005
Energy bill, in the 2007 Energy bill, in the Recovery Act's
funding and in this committee's bipartisan efforts to develop a
robust successor program to the Clean Energy--in the name of
the Clean Energy Deployment Administration.
What I'd like to see us explore today is the level of the
Administration's commitment to the effort, not just in the
Department of Energy which I'm persuaded does have a commitment
in this area, but at other key decision centers such as the
Office of Management and Budget. The President said on many
occasions that the American people will not be satisfied with
second place in the race to develop clean energy technologies.
Unless we fix this problem with financing I fear we are
destining ourselves to be in second place, if that high in the
ranking order.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
Mr. Chairman, thank you for holding this hearing on DOE's loan
guarantee programs. I appreciate the opportunity to discuss their
effectiveness and their impact on our country.
The first loan guarantee program, often referred to as section
1703, was authorized in the 2005 Energy Policy Act. I supported this
piece of legislation because it does many good things, including
authorize this program which helps innovative clean energy technologies
that are typically unable to obtain conventional private financing due
to high technology risks.
Luckily, Louisiana has already benefited from this program. Red
River Environmental Products in Coushatta, LA is the recipient of a
$245 million DOE loan guarantee to build an activated carbon
manufacturing facility. Activated carbon is the leading technology for
reducing mercury emissions from coal-fired boilers and can reduce
mercury emissions by up to 90 percent by absorbing the mercury.
This is important to improving our environment and helping
eliminate mercury pollution in our seafood.
While Louisiana is grateful for this award, I am troubled to hear
that there are approximately 170 other applicants in the pool that are
frustrated with the slow approval process of awards and the lack of
ability to review their rejected applications. I hope that those kinks
can be worked out as quickly as possible to make this program more
efficient, which in turn, should help create more jobs and investment
in our economy.
In addition, I recently learned of another problem with the DOE's
administration of the loan guarantee program that I hope can be
resolved quickly.
The maritime industry informs me that DOE has taken the position
that they do not need to abide by the Cargo Preferences Act when
administering this program. Under that law, any U.S. financed project,
including guarantees made by or on behalf of the U.S., must use U.S.
flagged vessels for at least 50 percent of the goods shipped by water.
I find it perplexing that DOE would take this position when the
entire purpose of these loan guarantee programs is to spur domestic
development and job creation. I'd like to understand why DOE believes
utilizing foreign flagged vessels, which will not supply domestic jobs,
is in the better interest of the U.S. I hope DOE can see the error of
their position and change it immediately.
Finally, I would like to speak to the other DOE loan guarantee
program, the Advanced Technology Vehicle Manufacturing program, or
ATVM.
A very innovative company named V-Vehicle plans to re-quip a shut-
down plant in Monroe, Louisiana. This would transform communities in my
state as the production facility would bring approximately 1,400 direct
jobs and an additional 1,800 indirect jobs to Northeast Louisiana.
The V-Vehicle car is a low cost, fuel-efficient vehicle that will
meet aggressive emissions standards and the highest safety ratings.
Every year, each V-Vehicle car will save over 5,700 pounds of CO2 and
280 gallons of gas relative to the U.S. fleet average. In addition, the
car will be a cost effective option for a range of customers.
V-Vehicle had their original application denied, but I want to
commend the DOE's ATVM program for reviewing their application,
suggesting ways to improve their application and encouraging the
company to re-submit an application.
I understand that the company and DOE have made great progress on
V-Vehicle's application and may be close to a decision in the coming
weeks. I am happy to hear of this progress, but I want to reiterate
the importance and urgency of coming to a decision about this project
so that we start putting people to work in Louisiana.
The Chairman. Senator Burr.
STATEMENT OF HON. RICHARD BURR, U.S. SENATOR FROM NORTH
CAROLINA
Senator Burr. Mr. Chairman, thank you. Thank you for
calling this hearing. I want to take this opportunity to
welcome all of our witnesses.
I want to single out Michael Scott even though it's listed
that it's New York. I just want to point out he's a North
Carolinian. I like to claim them all when they come.
Mr. Chairman, I was proud to work on the Department of
Energy Loan Guarantee Program created in title XVII of the 2005
Energy Policy Act. The goal of this title was to bring clean,
innovative energy technology projects to market. Since 2005 the
program has been slow to issue loan guarantees. I understand
there may be an issue with credit subsidy costs applied at the
Office of Management and Budget.
In June I joined Senator Coburn in sending a letter to the
President requesting his direct leadership in addressing this
issue at OMB. For the purpose of informing my colleagues, let
me just read one line from the letter. It's our understanding
that much of the delay is the result of OMB's reliance on
outdated CBO analysis that predates the program.'' I have yet
to receive a response from that letter.
It is absolutely essential that if we want a loan guarantee
program, we've got to have a push from the top. I urge my
colleagues to join with me in making sure that we overcome the
obstacles, not just of this Administration at OMB, but every
Administration at OMB. The Loan Guarantee Program was expanded
in 2009 to rapidly deploy renewable energy and transmission
projects.
I'm interested in learning more about the job creations
associated with those new initiatives. I look forward, very
forward, to hearing the testimonies of all our witnesses. I
thank the Chair.
The Chairman. Thank you very much. We have 2 panels today.
Our first panel is Jonathan Silver, the Executive Director
of the Loan Programs Office in the Department of Energy.
Jonathan, why don't you come ahead and give us your
testimony?
We will then have questions of you. Then we will call the
second panel after we're finished with your testimony.
Thank you for being here.
STATEMENT OF JONATHAN SILVER, EXECUTIVE DIRECTOR, LOAN PROGRAMS
OFFICE, DEPARTMENT OF ENERGY
Mr. Silver. Thank you, Chairman Bingaman. Good morning Mr.
Chairman and members of the committee. Thank you for the
opportunity to testify today. My name is Jonathan Silver, and I
am the Executive Director of the Department of Energy's Loan
Programs Office.
I want to thank this committee for the significant role it
has played in creating the various loan programs at DOE and for
your ongoing support for clean energy investment through the
American Recovery and Reinvestment Act. Your leadership has
already resulted in the financing of numerous projects creating
thousands of jobs and reducing millions of tons of
CO2. The projects we fund through the Loan Programs
are critical to our economy, our national security and the
environment. After not quite 10 months as Executive Director, I
am pleased to share with you the progress we have made to date,
describe where we're headed and discuss how we can even more
effectively deliver on the promise to help move America toward
a new clean energy economy.
My message today is simple: DOE's Loan Programs have
improved, and old perceptions about the program do not
accurately reflect the new reality. The programs have been
criticized for being slow to push loans out the door, and
earlier that was true.
I should note that these projects are complex and, much
like in the private sector, do take time to process. However,
as noted in my written testimony, we have now implemented a
number of important changes to improve the loan programs. These
changes have made us more efficient, more transparent, and more
effective.
Prior to joining the Department of Energy last November, I
spent over 25 years in the private sector, the last ten as a
venture capitalist. The past year reminds me, at times, of my
time in venture capital. We spent an awful lot of time in the
startup mode, ramping up operations and instituting operational
best practices, even as we raced and succeeded, I think, in
financing a number of large, complex energy projects. We are
now in a position to process applications at scale, and I
believe the results are beginning to speak for themselves.
As you noted, Mr. Chairman, when this Administration took
office the Loan Programs had not issued a single conditional
commitment for a loan guarantee since the program's inception
in 2005. Under Secretary Chu's leadership, DOE issued its first
conditional commitment in March 2009. Since then, the
Department has issued conditional commitments to 13 more title
XVII projects, 4 of which have reached financial close. We have
also, at the same time, obligated billions of dollars in
funding to 4 auto projects under the Advanced Technology
Vehicle Manufacturing Program.
Together the 14 title XVII projects represent loan
guarantees totaling almost $13 billion in loan volume,
supporting projects with total estimated costs of over 22
billion. These projects are being built in 12 states. They
represent an array of clean energy technologies from wind,
solar, and geothermal, to nuclear, battery storage,
transmission and more, and will create over 13,000 construction
jobs and over 4,000 operating jobs.
Cumulatively these 14 projects will produce almost 4
gigawatts of clean power, equal to about eight large coal
plants, and will avoid approximately 38 million tons of carbon
dioxide every year, equivalent to the annual emissions from
about 5 million American households. The 4-ATVM supported
projects, which are located in eight different states, will
create or save an additional 37,000 American jobs and save
almost 275 million gallons of fuel per year.
It is real progress--a sign, I think, that the changes we
are making have worked. That is not, however, to suggest that
there is not substantial additional work to be done.
In fact, process improvements should never stop. We
continue to refine our activities in response to both GAO
recommendations, input from applicants and other interested
parties and our own desire to achieve efficiencies. It is
important that we get this program to work effectively.
As Secretary Chu often notes, America's future prosperity
may depend on our ability to lead the global transition to a
clean energy future. The widespread deployment of large scale,
innovative, clean energy technologies is critical to that
global leadership. But only the private sector can provide the
kind of massive sustained investment required to achieve our
national energy goals.
Congress has, for example, discussed a renewable
electricity standard of 15 to 20 percent. It has been estimated
that meeting a 20 percent renewable electricity standard by
2020 would require aggregate capital expenditures of over $350
billion, or an average annual investment of approximately $32
billion. Government financing programs are essential to
encouraging and facilitating investment at this scale.
With traditional lenders having reduced their appetite for
risk and the tax equity market, one of the principle sources of
equity for renewable projects cut nearly in half since 2007,
investors will continue to need help absorbing some of the risk
inherent in funding innovative technologies. The loan programs
do that. By lowering the cost of capital for clean energy
projects, they encourage private sector investment that would
not otherwise take place. They contribute to the growth of our
domestic manufacturing base. They help us move toward a more
stable, secure and sustainable domestic energy supply, and they
create jobs.
If we are serious about our national energy goals, the
Federal Government must provide the incentives necessary to
support meaningful, continued investment in clean energy--which
includes a robust loan guarantee program. In my personal
opinion this means that we need to ensure a stable and
substantial level of funding for some years to come. Over the
last year and a half, the Department Loan Programs have started
delivering on the promise Congress envisioned in creating them.
I look forward to working with the members of this committee to
make them as efficient and effective as they can be.
Thank you again for inviting me here today, and I look
forward to answering any questions you may have.
[The prepared statement of Mr. Silver follows:]
Prepared Statement of Jonathan Silver, Executive Director, Loan
Programs Office, Department of Energy
INTRODUCTION
Chairman Bingaman, Ranking Member Murkowski, and members of the
Committee, thank you for the opportunity to testify today. My name is
Jonathan Silver, and I am the Executive Director of the Department of
Energy's (DOE) Loan Programs Office (LPO). I want to thank you for your
leadership in supporting clean energy investments. DOE's loan programs
are a critical part of the Administration's commitment to transition to
a cleaner, greener economy that will create jobs, protect our national
security, and protect the environment.
I welcome the opportunity to present the Administration's views on
the loan programs. I am particularly excited to share with you the
progress that we have made to date and additional changes we are making
to continue that progress.
global and domestic context in which the loan programs operate
Before reviewing the specifics of the programs, I'd like to touch
briefly on the broader context in which we operate. As Secretary Chu
often notes, America's future prosperity may well depend on our ability
to lead in the global transition to a clean energy future. Yet,
according to a report by the Pew Charitable Trusts, while the U.S. had
the world's highest GDP in 2009, we ranked eleventh in clean energy
investment as a percentage of GDP.\1\ Allowing this gap to continue to
grow will have serious implications not only for our global
competitiveness, but also for our national security and the
environment.
---------------------------------------------------------------------------
\1\ ``Who's Winning the Clean Energy Race,'' 2010 Global Energy
Profile, The Pew Charitable Trusts, at 10.
---------------------------------------------------------------------------
The United States can and should retain a position of global clean
energy leadership through the widespread and large-scale deployment of
new and innovative clean energy technologies. Government policies, such
as those proposed by this Administration can encourage and facilitate
such deployment. But only the private sector can provide the type of
massive, sustained investment that is required to achieve our national
clean energy goals.
Yet the private sector has not invested in clean energy at the the
scale necessary to drive meaningful change. The economic crisis slowed
the pace of investment in clean energy projects. Traditional lenders
have pared back their appetite for risk, resulting in reduced liquidity
in the market. Additionally, the tax equity market--one of the
principal sources of equity for renewables projects--has shrunk by more
than half since 2007.
A fundamental impediment for investors in the clean energy space
stems from the relatively high completion risks associated with clean
energy projects, including, in particular, technology risk and
execution risk. Private sector lenders have limited capacity or
appetite to underwrite such risks on their own, particularly because
large-scale clean energy projects are very capitalintensive and often
require loans with unusually long tenors. Without the federal
government's financial support--following a careful review of the
underlying technology--many promising technologies may not get funded
or reach commercial scale or scope.
The Department of Energy's loan programs were designed to address
these impediments. Loan guarantees lower the cost of capital for
projects utilizing innovative technologies, making them more
competitive with conventional technologies, and thus more attractive to
lenders and equity investors. Moreover, the programs leverage the
Department's expertise in technical due diligence, which private sector
lenders are often unwilling or unable to conduct themselves.
Simply put, achieving our nation's clean energy goals will require
the deployment of innovative technologies at a massive scale, and the
DOE loan guarantee program is an important element of federal policy to
facilitate that deployment.
BACKGROUND ON THE LOAN PROGRAMS
As you know, the LPO actually administers three separate programs:
title XVII section 1703, section 1705--and also the Advanced
Technologies Vehicle Manufacturing loan program, or ATVM. While my
testimony today will focus primarily on the title XVII programs, I do
want to briefly highlight ATVM's significant accomplishments to date.
The ATVM program is charged with issuing loans to support the
development of advanced vehicle technologies to help achieve higher
CAFE standards, create jobs, and reduce the nation's dependence on oil.
To date, DOE has committed and closed four ATVM loans, totaling $8.4
billion, which will support advanced vehicle projects in eight states.
According to information provided by the project's sponsors, these
projects will create or save over 37,000 U.S. jobs. We anticipate
making a number of additional ATVM loan commitments in the coming
months. While the rest of my testimony will focus on the 1703 and 1705
programs, I note that many of the same issues that are challenges in
these programs also apply to ATVM.
The 1703 and 1705 programs are often conflated, but they are in
fact quite different in a number of important ways. 1703 was created as
part of the Energy Policy Act of 2005 in order to support the
deployment of innovative technologies that avoid, reduce, or sequester
greenhouse gas emissions. Currently, the program has $18.5B in loan
guarantee authority for nuclear power projects, $18.5B in authority for
energy efficiency and renewable energy projects, $8 billion for
advanced fossil projects, $4 billion for front-end nuclear projects,
and $2 billion in mixed authority, following the reprogramming of $2
billion from mixed to front end nuclear authority.
The section 1703 program was designed to be cost-neutral to the
government. To that end, the legislation directs DOE to charge fees
sufficient to cover the program's administrative costs. 1703 has, so
far, been executed as a ``self pay'' program, meaning that applicants
pay the credit subsidy cost associated with any loan guarantees they
received from DOE.
The section 1705 program was created as part of the American
Recovery and Reinvestment Act of 2009 (Recovery Act), to jumpstart the
country's clean energy sector by supporting projects that had
difficulty securing financing in a tight credit market. The 1705
program has different objectives than 1703, and different programmatic
features. Most notably, applicants under 1705 are not required to pay
the credit subsidy costs associated with the loan guarantees they
receive. Those costs are paid by DOE, using monies appropriated by
Congress (though applicants still must pay application and other fees).
Additionally, to qualify for 1705 funding, projects must begin
construction no later than September 30, 2011. DOE's authority to issue
guarantees under 1705 expires on that date, as well.
Under the section 1703 program, DOE has offered conditional
commitments for four projects so far, including nuclear power, front
end nuclear, and two efficiency projects. Under 1705, we have issued
conditional commitments to 10 projects so far, totaling over $4 billion
in loan volume.
Although we have, under 1703, the $18.5 billion in renewbles
authority referenced above, there has been very little demand for
renewables loan guarantees under that program. This may, in part,
reflect the ability of renewable projects to apply for a guarantee
under 1705.
RECENT PROGRESS
These programs have made great strides since this Administration
took office twenty-one months ago. At that time, DOE had yet to issue a
single loan guarantee under the loan programs. In March 2009, under
Secretary Chu's leadership, the title XVII programs issued the first
ever conditional commitment for a loan guarantee. Since then, the
Department has issued conditional commitments to 13 more title XVII
projects, four of which have reached financial close--with more to
follow soon.
Together, these 14 projects represent loan guarantees totaling
almost $13 billion, and have total project costs exceeding $22 billion.
They are spread across 12 states, represent an array of clean energy
technologies--including wind, solar, geothermal, transmission, battery
storage, and nuclear. Project sponsors estimate these projects will
create over 13,000 construction jobs, and over 4,000 operating jobs.
Cumulatively, according to data provided by their sponsors, these 14
projects will produce almost 4GW of clean energy capacity, and they
will remove approximately 38 million tons of carbon dioxide from the
air every year.
These projects are not just noteworthy; they represent a real and
significant contribution to the clean energy landscape in the United
States.
RECENT IMPROVEMENTS TO LOAN PROGRAMS
Our ability to underwrite 14 projects in the past 18 months is a
function of the many improvements we have made to the loan programs. By
better leveraging our existing resources and re-engineering our
processes, we have been able to significantly reduce the amount of time
it takes to review applications, to expedite the transaction approval
process, and to provide greater transparency into our work. For
example:
We have increased our staff and are now able to process
applications more efficiently and effectively. As recently as
January 2009, the loan programs had only 16 federal employees.
Through aggressive recruitment efforts, we now have over 80
federal employees supported by a number of subject-matter
experts engaged on a contract basis.
We created a new online portal for completing and submitting
applications electronically, which has both improved the
quality of applications and shortened the amount of time that
it takes to complete and process them. It used to take DOE up
to 2-3 months to complete the initial review of an application;
we can now complete that review in approximately 30 days, and
we are working to reduce that time period even more.
We have developed a model for issuing more targeted and
understandable solicitations for applications, as exemplified
by our recently issued Manufacturing solicitation. We expect
simplified solicitations to result in better applications that
will more directly address the critical issues, and which can
be reviewed more efficiently and effectively by our staff.
We have improved communication with applicants.
We reorganized our staff into technology domain groups, to
create efficiencies and capitalize on the expertise of our
staff.
We have worked creatively to ensure that projects seeking
loan guarantees can meet important and fast approaching
deadlines, including the year-end expiration date for the
section 1603 cash grant program, which is critical to many of
our projects, and the 1705 program's sunset date of September
30, 2011.
In light of these many changes and improvements, the Loan Programs
are well positioned to carry out the important mission we have been
given by Congress and the Secretary. Over the last few months, we have
significantly improved the pace at which we are processing
transactions, and aim to do even better.
the process of reviewing and approving a loan guarantee application
I would like to take this opportunity to describe the process
through which DOE reviews and approves loan guarantee applications. The
loan programs accept applications only through targeted solicitations,
so that we can award loan gurantees on a competitive basis. DOE
currently has three open solicitations: the first seeks applications
for renewable energy generation or transmission projects using
innovative technology; the second is open to renewable energy
manufacturing projects employing commercial technology; and the third
is issued under our FIPP program, through which DOE partners with
private sector lenders for renewable energy generation projects
employing commercial technology.
A loan guarantee goes through a number of stages as it moves
through the review process. Those are: (1) Intake, (2) Due Diligence
and Term Sheet Negotiation, (3) Credit Analysis and Review; (4) Deal
Approval and Conditional Commitment, (5) Post-Conditional Commitment
Due Diligence and Financing Documents Negotiation, and (6) Closing.
Intake
Our Intake process has two phases, Part I and Part II. In Part I,
an applicant submits only a summary application, which LPO reviews to
determine if the proposed project is eligible for the program. In Part
II, the applicant submits a more comprehensive application, which is
analyzed to determine if the project warrants additional review and
discussion and, possibly, negotiation of a term sheet. This two-part
process was designed so that applications deemed ineligible in Part I
could avoid paying the larger fees required for the full review.
Initial Due Diligence and Term Sheet Negotiation
The second stage combines the initial due diligence and term sheet
negotiation. Deals that are not rejected during the intake process move
into full due diligence. The due diligence includes, among other
things, a close examination of the technology, and an analysis of the
financial model and plan for the project. The projects also undergo
detailed legal, market, and environmental reviews, including an
evaluation to determine if they are and will be in compliance with the
National Environmental Policy Act (NEPA), the Endangered Species Act
(ESA), Davis-Bacon labor requirements, and other state and local laws
and regulations. It is during this work that the LPO deal team engages
outside consultants and advisors with specialized expertise relevant to
the project to assist with the transaction.
After due diligence has proceeded to a point where discussion of
substantive business issues makes sense, LPO begins an often lengthy
negotiation with the applicant on the terms and conditions of the
potential loan guarantee. In some instances, the proposed project must
be significantly restructured to ensure that it is creditworthy and
meets the statutory requirement of a reasonable prospect of repayment.
Credit Analysis and Review
During the second phase, the LPO credit staff undertakes a
comprehensive credit analysis of the proposed transaction. The credit
team calculates an estimated credit subsidy score based on the agreed
upon term sheet between the applicant and DOE. This credit subsidy
score is calculated using a methodology approved by OMB. As part of
this analysis, LPO credit staff reviews and scores every aspect of the
transaction, including, but not limited to: pledged collateral, market
risk, technology risk, regulatory risk, contractual foundation,
operational risk, and recovery profile. The result is a credit subsidy
range that incorporates all available information regarding the project
and financing at the time.
Deal Approval
Once the term sheet has been agreed upon between the applicant and
the LPO, the transaction is submitted for the necessary approvals
culminating in the Secretary determining whether to issue a loan
guarantee.
The first step in the approval process is the credit committee,
which consists of senior DOE officials with significant financial and
technical expertise. If the credit committee recommends the project for
approval, the transaction is then presented to the Department's Credit
Review Board (CRB), which consists of senior-level officials. Prior to
presenting the deal to the CRB, LPO presents it to OMB and Treasury for
review, consistent with statutory requirements. If CRB recommends
approval of the deal, it is presented to the Secretary, who has the
ultimate authority to approve loan guarantees.
Following the Secretary's approval, LPO offers a conditional
commitment for a loan guarantee. If the applicant signs and returns the
conditional commitment with the required fee, it becomes a conditional
commitment of the Department. This commitment is ``conditional''
because it is contingent on the applicant meeting a number of
conditions precedent to financial close. These are articulated in the
agreed-upon term sheet between the parties.
Post-Conditional Commitment Due Diligence and Financing Documents
Negotiation
After conditional commitment, the LPO staff completes any remaining
due diligence, ensuring that any conditions identified in the
conditional commitment are met by the applicant prior to closing. The
parties simultaneously draft and negotiate the final loan
documentation. In some instances, the applicant is also negotiating the
final project documents at the same time.
Closing
Once all of the due diligence is completed and the necessary
financing documents are agreed--and all other statutory, regulatory,
and other requirements have been met--the LPO credit staff conducts a
comprehensive credit analysis. This analysis is based on the final
terms and conditions of the loan, and any other updated information,
and results in the calculation of the project's estimated credit
subsidy cost. OMB must review and approve the credit subsidy cost. Once
the credit subsidy score is finalized, the project may move to a
financial closing. At closing, the loan guarantee is obligated by DOE.
After the guarantee is obligated and issued, the applicant often
can immediately draw on the loan to support the proposed project.
However, sometimes, there are additional conditions that must be
satisfied under the financing documents before the loan may be
disbursed.
key considerations in analyzing a loan guarantee application
DOE takes its responsibility to protect the US taxpayer seriously.
DOE's review of each application includes a thorough review of all
financial, technical, legal, environmental and other relevant data.
DOE's internal review is complemented and supported by outside
technical, legal, and financial consultants. Based on the results of
this analysis, DOE identifies key risks and works diligently with
applicants to mitigate those risks to the extent possible. There are a
number of financial and technical features that help distinguish strong
applications with respect to meeting eligibility requirements and
creditworthiness.
Financial Attributes
Ability to service the debt from operation cash flows.--A
critical component of any debt transaction is the ability of
the project to repay the debt on agreed upon terms from
operating cash flows. Applicants can prove this ability by
showing strong contracts with both their intended suppliers and
consumers. These contracts may provide a reliable source of raw
materials for the project, or may take the form of revenue
contracts such as off-take agreements for generation projects
or purchase orders for manufacturing projects. Applications
that do not include such agreements, even in draft form, may
not be compared favorably to those that do. The strongest
applications will provide agreements with third-parties that
also have strong credit profiles for a term that exceeds the
proposed tenor of the loan.
Simplicity rather than complexity.--A project that has
numerous credit instruments, an abundance of sponsors, a
complex proposed capital structure may have strong economics,
but should be prepared for a longer period of due diligence
based on its complexity. Conversely, projects that have strong
equity participation that pledges to be involved in ongoing
project operations, straight amortizations and relatively quick
paybacks, improve project transparency and can speed loan
processing.
Clear, flexible, well-defined financial model.--A
demonstrated ability to forecast the financial performance of a
project both during construction and operation is critical in
DOE's evaluation of a project. Each model should include
supporting documents that offer a thorough explanation of the
assumptions underlying the model and a robust ability to change
those assumptions to test sensitivities within the model.
Although each project will have different characteristics, an
example of key elements in the financial model include the
following:
--Detailed construction budgets--applications that do not provide
detail for the construction phase of their project
typically fail to contemplate the total cost of the plant
as a single item, may fail to provide for reserves or
contingencies, and often face an increased risk of cost
overrun.
--Identification of resources--Strong applications clearly identify
and account for all resources necessary for their projects
to become fully and profitably operational, including
capital goods, raw materials, O&M requirements, and
decommissioning. o Market and competition--The model should
also provide information on the intended market for their
products and detailed information on potential and existing
competitors in those markets. This information should
include assumptions around market sizing, average prices,
market segmentation, and both historical and projected
macro and micro economic trends that may affect the
intended market.
--Proposed capital structure, including sources of equity--A strong
financial model will also detail the intended capital
structure of the proposed transaction and will identify the
proposed sources of equity for the project. The model
should show a capital structure that is fully able to
support the project, irrespective of DOE's involvement with
a loan guarantee. Equity is a piece of this capital
structure, and therefore significant equity participation
is a requirement for all projects in the Loan Programs.
Each applicant should clearly substantiate each source and
the terms behind their equity support.
Proven leadership by management.--Each applicant should have
a management team that can demonstrate successful relevant
experience for their project. This experience may include
operating within the project's development stage, industry/
technology sector, or intended markets and regulatory
frameworks. Projects that show seasoned, successful, relevant
experience will be viewed more favorably than those that do
not.
Strong development and operational relationships.--Another
key component for each project is the contractual relationships
with the partners that will help design, develop, construct and
operate the project. Strong EPC (engineering, procurement, and
construction) and O&M contracts (operations and maintenance)
often provide for liquidated damages and performance guarantees
by the contractor, which reduces the risk of default by the
borrower. While strong EPC and O&M contracts may not be
included in every project, an application that lacks these
elements may be deemed weaker than comparable applications in a
given technology that includes these agreements.
Intellectual Property.--Strong applications will demonstrate
both clear rights to the intellectual property necessary to
implement the project, and an understanding that such rights
must be assigned to DOE as collateral in the event of default.
By assigning the IP rights to DOE in a default scenario, DOE
may continue operating the project at its discretion, which
mitigates some of the default risk associated with a particular
transaction.
Site selection, permitting and environmental review.--
Applicants should identify the potential sites for their
projects, as whether the site is on public or private land can
affect the federal nexus with regard to environmental reviews.
Applicants should also demonstrate control over project
site(s), or document the steps necessary to assume control. In
addition, applicants should fully meet all permitting
requirements, particularly those of NEPA (National
Environmental Policy Act) and all state, local, and tribal
authorities. The timely acquisition of the relevant federal,
state, local, and tribal permits may be needed to implement a
project within their projected timelines. More guidance on NEPA
and the environmental requirements for loan guarantees may be
found on the Program website at (http://
loanprograms.energy.gov).
Technical Attributes
Pilot / Demonstration Data.--In general, applicants
proposing innovative projects should be able to submit a
minimum of 1,000 to 2,000 hours of operating data from a
demonstration facility that uses the same technology as
proposed in the project application.
Engineering reports.--Strong applications include an
engineering report that discusses the technology in the
specific context of the proposed project, rather than a report
that addresses the technology only generally.
Technological advantages.--Applications required to satisfy
section 1703 should discuss and highlight how the technology,
as proposed in the project, constitutes a new or significant
improvement over existing competing technologies in the
commercial marketplace today.
Mitigation of technology risk.--Strong applications,
particularly those proposing innovative projects, will discuss
how to mitigate technology risk. They will present alternative
scenarios in the vent that critical technologies fail or do not
perform as expected (e.g., warranties, production or
performance guarantees, performance bonds, etc.).
CHALLENGES FACING THE LOAN PROGRAMS
Despite the improvements referenced above, we are aware that there
remains frustration in the Congress and in the private sector that the
programs move too slowly. While we have made significant improvements,
we continue to work to simplify the process and complete deals more
quickly. However, there are a number of factors that affect the
timeline. Some of these constraints are inherent to the types of deals
that we do, while others are programmatic or statutory in nature.
First, the deals processed by the loan programs are often large and
complex, sometimes involving billions of dollars and an array of
diverse parties. As a result, to ensure necessary protection of
taxpayer resources, significant due diligence and negotiations are
required. Indeed, even in the private sector, the due diligence and
negotiations surrounding such transactions are measured in months, not
weeks. The renewables projects for which LPO has issued conditional
commitments have an average total project cost of over $600 million--
and this does not include the multi-billion dollar nuclear projects for
which we have issued conditional commitments under 1703. Moreover, as
government lenders, the projects we support must, unlike those financed
in the private sector, also meet NEPA, Davis-Bacon, and other
regulatory requirements and guidelines.
Second, as a loan guarantor, DOE is only one of several parties to
each transaction. At each stage in the process--from due diligence to
negotiation to closing--we require the cooperation of the borrowers,
the project sponsors, various other project participants, and, in some
cases, other lenders. Not surprisingly, the parties often have separate
interests that are not perfectly aligned, and any one party can slow
down the process significantly, if it so chooses, or if contractual,
legal, or other obstacles, outside its control, arise.
pending legislative proposals regarding the loan programs
I would like to touch briefly on potential legislative changes that
could improve our Loan Programs. The Administration has proposed
several changes which we believe would facilitate better program
execution. Specifically, the Administration supports legislation that
would:
Provide that subsidy costs for modifications to title XVII
loan guarantees can be paid from a combination of borrower
payments and appropriated funds.
Expand the 1705 program to include energy efficiency
technologies and systems.
Permit project applicants and sponsors to submit more than
one application for a given technology under 1705. This
amendment will broaden the pool of projects eligible for the
program--which is consistent with the stimulative intent of
1705.
Clarify that an eligible project may be located on two or
more non-contiguous sites in the United States. Some phased, or
bundled, projects do not apply for the programs under the
mistaken belief that they are ineligible. This change will
provide assurances to the sponsors of such projects and remove
a perceived application barrier that has proved problematic.
CONCLUSION
Over the last year and a half, the Department's Loan Programs have
started delivering on the promises Congress made in creating and
funding them. We are making a serious contribution to our clean energy
goals, and we look forward to continuing that trend. That being said,
it is important to recognize that the loan programs represent only one
of a variety of potential approaches to providing federal support for
clean energy. Moving forward, we must think about enabling private
sector clean energy financing in a comprehensive manner, ensuring that
our limited resources are deployed in the most effective and
coordinated manner possible. Only then will we be able to create an
environment where the private sector will invest in clean energy
technologies at the scale needed to reach our national clean energy
goals.
Thank you again for inviting me here today, and for allowing me to
submit this statement for the record. I look forward to responding to
your questions.
The Chairman. Let me start with a few questions. One of the
issues that has been raised when we've had other hearings on
this is the comparison of this Loan Guarantee Program to what
we have already in place with OPIC, the Overseas Private
Investment Corporation, with Eximbank and with the Department
of Agriculture. It seems as though the involvement of OMB in
reviewing the loans made by those other agencies is
substantially less than it is in connection with the loans that
your office is trying to guarantee.
What is your understanding of the difference in OMB
involvement? Any difference that does exist how can it be
explained or justified?
Mr. Silver. Thank you, Mr. Chairman, for that question. I
should say first that I am not an authority on the mechanisms
by which OMB and the Export/Import Bank and OPIC do their work.
But I will say that my observation is that those programs are
of much longer standing than ours and consequently some of the
growing pains that perhaps we have experienced in this process
have already taken place.
Ours is a new program, and as such, we have worked hard to
streamline our own activities and the activities of the
interagency processes as well. We do the work on the
transactions and then work with OMB and other agencies to
review those projects because the Federal Government as a whole
has a strong fiduciary obligation to the taxpayer and the
interagency review process is used to ensure that that work is
done properly.
The Chairman. To get down to a specific, in my state
there's a company named Sapphire that has made application for
a loan guarantee to the Department of Agriculture for an algae
based production. They'll soon break ground on a commercial
facility. As I understand it USDA has provided a loan guarantee
to the company and they were not able to access anything
similar from the Department of Energy.
Why would that be? Can you give us any comparison there as
to, again, why your office is unable to provide assistance to
that kind of project where the Department of Agriculture is
able to?
Mr. Silver. I cannot speak specifically to any individual
transaction that we may or may not have in house, but I will
say that we share a common set of objectives with the
Department of Agriculture in issuing loan guarantees. However,
we do have certain programmatic differences between the 2
programs and we examine projects somewhat differently.
Among the features I would point out that are unique to the
programmatic mix here is that we must ensure that each of the
projects that we fund has a reasonable prospect of repayment
and it is one of the items that is of significance as we
evaluate projects.
The Chairman. I think you also, in your testimony, you
mention that before deals are presented to the Secretary there
has to be a review consistent with statutory requirements.
Title XVII requires consultation before a loan can be issued.
The Federal Credit Reform Act charges OMB with coordinating
cost estimates.
Is there some other statutory requirement that brings about
the increased scrutiny of OMB in these areas that I'm just not
aware of? Those are the only 2 so called statutory requirements
I'm aware of.
Mr. Silver. No, Senator, I think you are completely
correct. The statutory requirement for review focuses
principally around the final assessment of and calculation of
the credit subsidy cost and our analysis of it. Historically,
we have worked, perhaps more closely, within the interagency
process, earlier in that process. As we have stood up this
program, a number of policy issues have arisen through the work
we have done on projects. It has been, I think, wise for us to
ensure that we could reach agreement across agencies as to how
we would proceed.
The interagency process does, from time to time, include
queries which do affect cashflows in and out of the Federal
Government. So in that respect OMB would have a role to play.
But you are correct in pointing out that there is a more active
interagency process here than perhaps a statutorily required.
The Chairman. Senator Burr.
Senator Burr. Mr. Silver, thank you for your testimony.
In that opening statement you stressed not only the
importance of the loan guarantee program but specific
projections on what the need is for us to accomplish this
transition. Now, the temporary section 1705 program created in
2009 was funded with $6 billion. Since that period we've
diverted $2 billion to Cash for Clunkers. We've diverted 1.5
billion to the State Bailout bill which leaves just $2.5
billion in that original fund in 1705.
Does the Department or the Administration intend to request
a refill for part or all of the funding that's been taken out
of section 1705 program?
Mr. Silver. We have resources in hand now, Senator,
sufficient to process the applications that are in the pipeline
and robust applications that we expect to come in. It will not
surprise you to learn that there are more applications in the
larger applicant pool than for which we have resources. We are
working with the White House and with Congress to figure out
the best ways to address those issues as we go forward.
Senator Burr. Given the types of projects involved in the
program and the length of time it does take for new
applications to be considered, do you believe that such
appropriations should qualify as emergency funding?
Mr. Silver. I believe that the projects that we are funding
and will fund in the future are of critical importance to the
future of the American clean energy economy. They create large
numbers of jobs. They have meaningful impacts on our
environment.
I would like to respond later, if I may, to you in writing,
sir, with respect to whether or not that would qualify as an
emergency funding requirement.
[The information referred to follows:]
The Administration believes that honest budgeting is a key to
fiscal discipline and that the bar for emergency funding designations
should be a high one. The Administration also believes that the
projects that have received financing through the Loan Programs Office
will have an important and positive impact on our clean energy economy,
in terms of job creation, economic competitiveness, energy security,
and our environmental legacy, and continues to support clean energy
through the regular budget process. The Administration is monitoring
the Loan Guarantee Program and will continue to seek appropriate
funding levels to ensure the program can achieve its objectives.
Senator Burr. I only asked the question because you were
very specific about one, the importance of the program.
Two, the future funding needs given that we have that
degree of clarity I think it's important that we understand
this is probably than a line item of our budget and not
necessarily an addition to a supplemental bill.
Let me just ask you, have you personally had conversations
with OMB relative to additional funding needs?
Mr. Silver. We speak regularly with all of our interagency
partners on the projects in the pipeline and the cash
requirements that will be required to support them, yes.
Senator Burr. Has OMB to date rejected any request for
additional funding to the program?
Mr. Silver. These are ongoing discussions and we are trying
to figure out the best path forward.
Senator Burr. But have there been specific requests for
additional funding from OMB by the Department?
Mr. Silver. The budget process is an ongoing process, as
you know. The FY11 submission is here. I think it reflects the
joint considered opinion of both the Department and the Office
of Management and Budget. The FY12 budget is under discussion.
Senator Burr. So one could conclude from that that if the
`011 budget were passed based upon what the request was there
would be no additional need for funds in section 1705?
Mr. Silver. As I said before, Senator, there are more
applications in the pool than we have resources to fund at this
point.
Senator Burr. I realize that but you--with ongoing
conversations at OMB you reverted back to the 2011 proposal is
here. It has yet to be acted on by Congress therefore I assume
that the `011 proposal took into account all the applications
and all the needs that you thought you had for the 2011 budget.
Mr. Silver. I think the FY11 budget reflects the
President's priorities.
Senator Burr. Mr. Silver, it's now been 5 years since the
first of the Department's Loan Guarantee Programs were created.
In that time, as you said, a total of 14 conditional guarantees
have been given and 4 loans have actually gone out the door.
Can you help by naming for us the top factors, in your view,
that have caused the greatest slow down in the distribution of
loan guarantee funds under the 2005 Energy bill, section 1703?
Mr. Silver. The process by which we review applications
does not differ substantially between 1703 and 1705, although
there are different policy objectives and different
programmatic objectives.
To summarize we take each application received through a
solicitation through an intake process, review it for
eligibility, conduct early due diligence, ask applicants for
additional materials, and conduct a more robust due diligence
which includes technical, legal, financial, market and other
kinds of issues, which leads to a negotiation process, which if
successful and mutually agreeable, leads to taking an
application through the approvals process.
There are challenges in each one of those activities.
Initially the intake activity took us about 3 to 4 months.
We have been able to bring that down into the one to 2 week
timeframe through some of the changes I outlined in my written
testimony.
The due diligence process takes a certain amount of time
and is driven, to a certain extent, by the complexity of the
transaction itself and by the uniqueness of the underlying
technologies.
The negotiation process is driven principally by the
variety of and number of stakeholders at the discussion. We are
but a counter party in those negotiations, but to the extent
that projects are robust and do not need to be redesigned,
which is yet another element in the time it takes, we can move
relatively quickly through to an approval process.
In the approval process, as I alluded to earlier in
response to the chairman's questions, there is an interagency
process that reviews these transactions for any policy issues
that may arise, as well as to ensure that the transactions are
as robust as we can make them.
Once through the approval process, they go for a final
recommendation of approval to the Secretary. But that is
actually the issuance of a conditional commitment, not the loan
guarantee itself. Very frequently in these transactions and
this is also true, based on my experience in the private
sector, there are what we call CPs or conditions precedent to a
financial close. These are items that the applicant must
accomplish or achieve before we can reach financial close.
The easiest example I can give you, Senator, is that when
we would make a conditional commitment to a nuclear power
project, one of the conditions precedent to a final close is
the issuance of a permit by the Nuclear Regulatory Commission.
So there is an extended period of time, whatever it is, that is
required until those CPs are met. Assuming the CPs are met,
there is a good deal of legal documentation that then flows
back and forth before the issuance of the loan guarantee.
We have been able, over the last 10 or 12 months, to drive
that process down for what I would describe as relatively
straight forward transactions to about a 5 to 6 month
timeframe. Any complexity adds another level of diligence and
of transactional interaction, if you will, which would cause an
extension of that. That is one of the reasons that we spend as
much time as we do now, during the intake process, helping
candidates identify the best kinds and strongest kinds of
proposals.
Senator Burr. Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Mr. Silver, thank
you for meeting with me. I'm going to reflect a number of the
same concerns we talked about.
You can have a debate about whether there ought to be loan
guarantees and whether you ought to have the program. But what
all sides can agree on, I think Senator Burr touched on it as
well, that when you're going to have them, you need a process
that is transparent and coherent. It seems to me we've got a
long way to go to get that in place.
Particularly you can't have different people saying
different things, which is what has happened at the Department
particularly with the project you and I have been discussing in
Eastern Oregon at Shepherd's Flat. This will be the world's
biggest wind farm, not the biggest in the United States, the
biggest in the world. I'm particularly concerned about some of
the permitting issues that have arisen so that we can
understand what the policy is going to be at the agency with
respect to permitting.
When Shepherd's Flat ran into some issues with respect to
siting, they were resolved. They were with the Department of
Defense, as you know. It's our understanding that the
Department simply stopped working on the project's loan
application.
Now you're from the private sector, great qualification for
this job. You know time is money. Stop working costs money.
Instead of going ahead and making sure the loan package was
ready to go when these issues were resolved and they were. The
Department just stopped working and the company just sort of
stands there in suspended, you know, animation. The reason I
ask this, it's my understanding that on other projects
financing did move forward even before all the permits were
resolved.
So I'm left having the prospect of additional efforts, as
you know with renewable energy, to try to explain to
constituents how the country isn't going to have a double
standard with respect to permits. That some permits get to go
forward expeditiously, excuse me, some financing gets to go
through forward expeditiously even before all of the issues are
resolved and others are held up. So could you lay out for me,
so that everybody's going to understand what the standard is
with respect to permits and how that affects your process of
going forward?
Mr. Silver. Yes, Senator. Thank you. Let me take your
question in the order in which you asked it.
We completely agree, and we share your concern about and
desire for transparency. We have done a lot in the last year to
ensure that the program is as transparent as possible.
We meet regularly with companies, as you know. We meet
regularly with constituency groups and others that are
interested in the program. We have a brand new Web site that
has gone up this week that provides for anonymous feedback
about the program, and many of the changes that we have
implemented have been the result of an ongoing dialog with
stakeholders. By definition, applicants know where they are in
the process with us post the part one filing because we are in
negotiations with them and talking to them and meeting with
them on a regular basis.
I would also say that the solicitations under which an
applicant applies clearly spell out the mechanics by which, and
the criteria by which, we will judge the applications in that
particular solicitation. So we do everything we possibly can in
accordance with the solicitation language to ensure that every
candidate and every applicant is treated not only fairly, but
in exactly the same way. Unique projects have unique features
and unique circumstances. While I can't speak to the specifics
of any individual project, I can say that we make every effort
to ensure that projects move as quickly as they possibly can.
One of the things that can hold projects up relates to
permitting. Permitting has different levels of degree of
impact, if you will. Among the many things we've done to ensure
that the permitting, as a mechanism, is not a problem is to
streamline our own NEPA process.
We have designed MOUs with BLM's, California and Nevada
arms in order to speed up and facilitate those reviews, and we
do everything we possibly can to ensure that nothing can get in
the way of a transaction moving forward. In fact, I would make
reference to my prior comment about conditions precedent. Very
frequently we now build transactions in such a way that, while
the successful completion or receipt of a permit is a condition
precedent to a final close, an applicant is still permitted to
receive a conditional commitment in advance.
Senator Wyden. My time is up. Thank you, Mr. Chairman.
The Chairman. Thank you. Senator Udall.
Senator Udall. Thank you, Mr. Chairman. Good morning, Mr.
Silver.
Let me turn to some testimony, written testimony that will
follow yours. Mr. Fertel, who is here representing the Nuclear
Energy Institute, he criticizes the one size fits all
methodology for determining the credit subsidy cost. In
particular he takes aim at the recovery rate used saying that
the recovery rate chosen, 55 percent, is an arbitrary number
and has no basis in actual market experience with financial
structures.
He believes that the methodology used by the Executive
branch, by the DOE, inflates the credit subsidy cost well
beyond the level required to compensate the Federal Government
for the risk taken in providing a loan guarantee initially. Can
you respond to that, I think, legitimate concern?
Mr. Silver. Let me take a step back, Senator, in attempting
to answer your question and describe for a moment the credit
subsidy cost mechanism itself.
Credit subsidy cost is, to a certain extent, an insurance
premium paid which represents the potential for the recovery of
a default at the period at which it occurs on post-default
cashflows. As a result, it needs to identify and include and
incorporate both what I would call preconstruction risks, as
well as post-construction risks, and it needs to do that by
looking at internal risk rates and recovery rates.
As a result, the recovery rate is a part of the overall
algorithm that drives the credit subsidy score, and I will also
say that it is an important part. The use of an anchor rate of
any kind is actually a good idea and is regularly used in the
private sector as a way to ensure that projects of similar
shape, kind, size and complexity, start from a common baseline.
Typically what happens then is that projects are notched up or
notched down on the basis of unique features of a particular
transaction.
The goal is to ensure that an anchor rate is both flexible
enough to be used by a generic set of projects and yet specific
enough to a particular sector that it is a meaningful base from
which to notch. As we look at many of the ways we can continue
to improve and address challenges in the program, one of the
things we should be looking at is the constant effort to
improve and upgrade our models and the inputs to those models,
and certainly a recovery rate would be part of that.
Senator Udall. I appreciate the care with which you are
focused on taxpayer dollars. I also would agree with Senator
Wyden, time is money. The nuclear industry is eager to prove
that they can build projects and provide base load power as we
look for more carbon reduction in our emissions. So anything
that can be done to respond to the concerns that Mr. Fertel is
going to talk about later, I would really appreciate it.
Mr. Silver. I appreciate that. We have, as you know,
provided financing for the first nuclear power facility in the
last several decades. It is common knowledge that there are a
number of other projects that are in active due diligence in
our pipeline, and I am hopeful that we will be able to reach
resolution there in one fashion or another in the near term.
Senator Udall. Let me turn to the 1603 cash grant program.
Mr. Meyerhoff, who is here representing First Solar, he'll
recommend a lining that 1603 cash grant program with a loan
guarantee program. Could you comment on that? Do those programs
currently interact?
How could they be improved or how could we better encourage
that kind of energy development?
Mr. Silver. First I think it's important to say, Senator,
that 1603 is not a program that the loan guarantee program
administers directly, and so we have no direct authority or
responsibility for that. That being said, it is also true that
the vast majority of our applicants are interested in and/or
have made application for or qualify for 1603 grants, and those
are often integral to the projects that they are interested in
undertaking.
We are highly sensitive to the timeframes with respect to
1603, and have continued to make some additional changes in
order to move as many projects through as possible. There are
several mechanisms by which an applicant can qualify for a 1603
grant, only one of which requires the closure of the Loan
Guarantee Program's activities to the extent it is relevant to
that transaction.
They can also purchase goods and services equal to a
specific percentage of the project in hand. But it is a time
deadline that is of great urgency and great importance to our
applicants. We are very keenly aware of it.
In all honesty Senator, if there are candidates whose
applications rest on 1603, and 1603, in turn, for some reason
rests on a loan guarantee, they would be well advised to ensure
that they are not only working with us, but looking for
alternative sources of potential financing as well. We will do
everything we possibly can to move the applications that are
now in the pipeline through the process in a timely fashion,
but there are more applications than that behind them.
Senator Udall. Thank you.
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
Mr. Silver, as you pointed out this program for a number of
years was moribund in terms of the number of loans that--
guarantees that it provided. So I appreciate the leadership
that you've shown and the fact that there are actually projects
now that are being guaranteed and going out the door. However
as you also acknowledge there's still an incredible amount of
frustration out there among companies that have great ideas,
good business plans that are operating and could really use the
kind of assistance that this program can provide.
One of those companies in New Hampshire has raised a
concern about a particular sector of new energy technologies.
It has to do with DOE's interpretation of the phrase,
``reasonable prospect of repayment.'' It's been cited as a need
for project developers to have a fixed price, long term off-
take contracts.
What I'm hearing from folks in the biofuels industry is
that this has created a bias against biofuel projects because
unlike the power sector, this type of contract doesn't really
exist in the liquid fuels marketplace. So have you thought
about how to handle these kinds of projects and whether DOE can
take a different approach that might improve the Loan Guarantee
Program for biofuels projects?
Mr. Silver. Day and night. Yes, Senator, thank you. You
raise the very important question of how to address emerging
technologies whose business ecosystems, for lack of a better
phrase, either do not fit the traditional model or have not yet
evolved to fit the more traditional model.
We have, as you know, received a number of biofuels
applications through the various solicitations. I think as many
as 15 percent of the applications we have received are in and
around the biofuels space. No one is keener than I, and I speak
for my organization as a whole, to find ways to make these
projects possible.
You have identified, and so I won't repeat, the challenges
that these projects face. But project finance is a very narrow
and very specific kind of financing tool, which requires, in
order to meet a hurdle of a reasonable prospect of repayment,
at least some visibility into the cashflows which will serve to
handle the repayments against the amortization schedules. In an
industry in which there is both commodity price risk, because
what is being produced is essentially a commodity, and, as you
identified, no long term off-take agreements, it is hard to
make those jive.
We have met regularly with the biofuels industry and
industry leaders, as well as with companies and applicants in
our portfolio, in an effort to find ways to ensure or to
facilitate our ability to do that. We are working with industry
leaders now on challenges around volumetric guidelines and
other things in an effort to make that happen. I will say that
a reasonable prospect of repayment does not require a complete
visibility in repayment, but it requires some visibility in
order to match those cashflows.
We are also working in a joint agency effort with the
Department of Agriculture, and looking at ways that we may be
able to streamline those projects as well. I should say also
that we have one or 2 biofuels projects in advance due
diligence now, and I am cautiously optimistic that we will be
able to issue a loan in this area in the relatively near
future.
Senator Shaheen. Good. Certainly if there's any way that we
can be helpful with that, I think we would be--a number of us
on the committee would be very interested.
Another concern that I've heard from companies is that some
of the requirements are duplicative and one sided. In
particular is the fact that when they're entering into the
application process they have to hire engineers, financial
consultants, various people as independent contractors to
verify what they're doing. Then when they get to the due
diligence phase of the project, they have to rehire those folks
and are concerned about whether there's any way to streamline
that--those outside costs.
Mr. Silver. The issue of cost, I know, is on everyone's
mind and is particularly relevant to smaller companies, and to
the extent that you are referencing biofuel companies, which
tend to be smaller, those fees are important as well. I need to
point out that the program is a self-sustaining program and a
net zero cost program for the Federal Government. So, as a
result, we are required to assess fees in order to provide our
work, our services.
I will say that by comparison with the private sector and
the fee schedules that I am aware of, and I think am aware of
most them in the private sector, these are roughly comparable
for projects of roughly comparable size. That comment does not
address your redundancy question.
Senator Shaheen. Right.
Mr. Silver. We are working on ways of bringing the due
diligence process into a more coherent process even as we
speak. I agree with you that there has been some redundancy in
that process. The need to hire outside consultants is actually
driven, to a certain extent however, by our need to ensure that
each project is competed fairly.
Senator Shaheen. Right. Mr. Silver, I probably wasn't
clear. It's not the need to hire those consultants, it's the
redundancy issue that has been raised with me. You acknowledge
that that is a concern. So hopefully you will continue to work
on that.
Thank you.
Mr. Silver. You have my commitment.
The Chairman. Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman. This
is a really important hearing. So thank you very much for
bringing us together.
Mr. Silver, thank you for the work that's been done. I
mean, you really--this Administration has really taken a
program that wasn't moving at all and has begun to move it.
That's very, very important.
As we are all indicating though and I know you realize
this, there's a lot more to do. There's a lot more potential.
There's a lot of jobs and new technologies.
One of the things that I'd like you to speak about in
coming to this from the private sector and talking about
comparable fees in the private sector or you know, looking at
credit ratings and so on is how we really balance the need, of
course, to have the taxpayers' interests protected. But have
something that isn't just the private sector because if it's
exactly like the private sector we don't need it frankly. I
mean that's--bottom line is that and I speak particularly from
manufacturers right now who are unable to achieve investment
grade credit ratings because of the effects of the recession.
I'm in a position right now where, you know, they are being
turned down for loans that frankly involve technology that is a
little more risky than what they could get the financing for in
the private sector but reflect exactly the goals of what we are
trying to do in terms of jump starting, commercializing these
kinds of technologies and creating the jobs of the future. So,
I'm wondering a couple of things. In order to mitigate the risk
and advance clean energy technologies how much flexibility do
you feel you have in that area in terms of really, you know,
the credit rating issues and so on to be able to deal with
risk?
Also, it's my understanding that DOE also provides
guarantee rates that are below the statutory 80 percent maximum
which can prevent applicants, especially manufacturers, from
obtaining the credit they need to move the project forward. So
can you advise me whether the decision on the level of loan
guarantee percentage to be offered is made by DOE or OMB?
Mr. Silver. Thank you, Senator. A slew of questions I will
try to address sequentially.
With respect to your first concern, or an overarching
concern perhaps, about constraints, I think this actually also
would relate back to my earlier answer to you, Senator.
Senator Shaheen. Right.
Mr. Silver [continuing]. One of the fundamental differences
between this program and the mechanism or the mechanics by
which the private sector would make a set of investments is
that the mandate that each project have a reasonable prospect
of repayment causes us to treat each project on a stand alone
basis.
In the private sector, as I think you will hear from the
later panel, particularly those who are involved in the private
equity part of the next panel, will talk to you, I'm sure,
about portfolio theory and portfolio management theory which is
the ability to balance gains and losses in a portfolio across
the range of projects in that portfolio. What we are producing
in the Loan Guarantee Program looks like a portfolio but is in
fact an amalgam of individual projects. What we lack,
therefore, is any beta in the portfolio.
So one of the fundamental changes/differences between the 2
is the ability to look across your portfolio, to manage risks
in the portfolio which causes you, by extension, to be able to
take certain kinds of more aggressive postures when you know
what the shape of your portfolio looks like.
You asked also about manufacturing. Let me offer one
perhaps misimpression. An investment grade rating is not
required for applications, except in the FIPP Program.
In the FIPP solicitation, a subset if you will of the 1705
solicitation, it is required because those are lender-sponsored
investments rather than equity sponsored investments. These are
transactions that come in through lenders themselves, and so
the investment grade criteria there drives the lender
decisionmaking as much as it drives ours. But an investment
grade rating is not required in any other part of our
application process.
It is true that we have statutory authority to go to 80
percent, and it is also true that we have done so. To the
extent that your interest or question focused, however, on
manufacturing, typically, and this is true in the private
sector as well, you would not see coverage ratios that high.
You would not see guarantees at that level. Typical
manufacturing coverage ratios are in the 40 to 60 percent
range. We have, to a certain extent, mirrored our behavior
against private sector best practices.
Senator Stabenow. I realize my time is up, Mr. Chairman,
but just on that point. Again, I didn't realize that we were
marrying the private sector as we put forward these programs.
Because, again, the question is then why don't we just use the
private sector.
I thought there was a gap and in fact I know there's a gap
that we are trying to fill that is different. So the reason we
put in the 80 percent was to be different, to create--to be
willing to take on a little more risk because of the jobs,
because of the need to move in this new direction, because the
financing wasn't available. In fact in the chairman's
legislation that we passed out of here creating a whole new
clean energy development authority was to do commercialization
because there's not a willingness to finance the first
commercialized product, the fifth maybe, the fourth maybe, but
not the first.
So, so I would just urge you that--and Mr. Chairman, I
think it's just really important discussion to have about the
role of DOE verses the private sector because by definition we
are taking on more risk. Because of a public need to move into
a new area of the economy to create jobs. So, I think this is
an ongoing discussion we really need to have.
Thank you, Mr. Chairman.
Mr. Silver. Senator, you raise a very important point, and
I will take it as a personal responsibility to go back and
review our work in this area to ensure that we are providing as
much capacity as we can. I would only respond by saying that
when I use the word mirroring I meant from a range perspective.
In point of fact, we are undertaking and underwriting
transactions that the private sector would not touch at all
because they are inherently risky by virtue of being first to
market; these are innovative kinds of projects that wouldn't
get financing elsewhere.
The Chairman. I would just underscore the point that
Senator Stabenow made. I do think the whole idea behind this
loan guarantee was to have the government come in and take on
risk where the private sector was not willing to. By doing so
encourage companies to manufacture and create jobs here rather
than being enticed to go somewhere else to manufacture and
create jobs. I think that's our goal here in the Congress as I
understand it. I hope we can see this program fulfilling a
larger role in accomplishing that in the future.
Senator Burr, did you have additional questions?
Any other? Senator Shaheen.
Senator Shaheen. It's not really a question. But it is to
go back to a point that you raised and several other people
raised about the role of OMB as in approving these loan
guarantees. I would hope that as a committee we could take a
very hard look at that. If there's something that is taking
longer about that process than in some other programs, as you
pointed out, that we would try to get to the bottom of that and
see if we can't expedite that process so that the Loan
Guarantee Program and DOE can go forward.
The Chairman. I agree.
Senator Stabenow, did you have another point?
Senator Stabenow. Yes. Thank you, Mr. Chairman, I did on
that point.
In fact it's my understanding that the Energy Policy Act
that we passed in 2005 which established the original DOE Loan
Program did not require OMB to review loan guarantee
applications. But that the Federal Credit Reform Act of 1990
directs OMB to coordinate the cost and estimate of a loan
guarantee. So given that difference is it OMB or is it DOE that
decides whether the applicant's credit is too risky or too
costly to accept?
How do we reconcile that?
Mr. Silver. It is the Department of Energy's Loan Programs
Office that determines through the Loan Guarantee Program which
applications pass from Part One to Part Two, which go through
due diligence and what the negotiations of the underlying
transaction are. As part of that process our credit team
develops an assessment of what the likely credit subsidy score,
or specifically in this case our credit subsidy range would be
called a Gate Two range, would be as part of that process
before a conditional commitment. We do interact, you know, in
the interagency process before a conditional commitment to
ensure that we have flushed out all the public policy issues
that may be of relevance in any particular project, and also to
understand, I think, on an interagency basis that we have
designed and built the best possible project that we can.
But it is an advisory role that other agencies serve. The
Office of Management and Budget has a statutory role, as you
point out, in the final calculation and determination of that
credit subsidy score at financial close, and we engage with
them again there as those conditions precedent are met.
I did speak a little earlier to this point, and I would
like to underscore it again, that while I think there have been
some growing pains in this process, we are working to fix them
inside our program and in the interagency process as well, and
I think we are making very good headway.
The Chairman. Senator Burr has another point.
Senator Burr. My colleague has stirred an answer from you
that I understood. But I've got to ask you to answer it
specifically. Does OMB have the ability to trump a
recommendation for a loan guarantee that the Department of
Energy is after?
Mr. Silver. The Secretary of Energy awards loan guarantees
and----
Senator Burr. Does he require--is he required to get OMB
sign off on any loan guarantee?
Mr. Silver. That's a yes and no answer, Senator, I'm afraid
in the sense that there is a meaningful and important role that
OMB plays in the review of and calculation of final credit
subsidy score----
Senator Burr. Mr. Silver----
Mr. Silver. That's required.
Senator Burr. I understand the interagency process, but and
I'm not suggesting this is limited to this Administration. It
is my understanding that OMB has the ability to say no. Is that
your understanding?
If so, the loan guarantee does not go forward?
Mr. Silver. We have never run into that situation. This is
an active discussion and dialog that takes place on an
interagency basis.
Senator Burr. Ok. Thank you.
The Chairman. Mr. Silver, thank you very much for your
testimony. We appreciate it. We will remain in touch and
continue to work with you to try to see that this program that
you administer works as well as all of us want it to.
Mr. Silver. Thank you, Senator. Thank you for your time.
The Chairman. Ok. Why don't we bring the second panel
forward?
Tim Newell, who is Senior Advisor with U.S. Renewables
Group in Santa Monica, California.
Jens Meyerhoff, who is President of the Utility Systems
Business Group with First Solar.
Michael Scott, who is the Managing Director of Miller
Buckfire and Company in New York.
Marv Fertel, who is the President and CEO of the Nuclear
Energy Institute.
Thank you all for being here. Why don't we start with you,
Mr. Newell?
If you could, each of you give us 5 or 6 minutes of your,
sort of summarize your testimony for us. We'll include your
full testimony in the record and then we'll have some questions
once we've heard from all the witnesses.
Mr. Newell, why don't you go ahead?
STATEMENT OF TIM NEWELL, SENIOR ADVISOR, U.S. RENEWABLES GROUP,
SANTA MONICA, CA
Mr. Newell. Mr. Chairman, thank you. Thank you to the
members of the committee for the opportunity to testify today
on an issue that we think is vitally important to the renewable
energy industry.
My name is Tim Newell. I'm Senior Advisor to the U.S.
Renewables Group where I also serve as Managing Director for
the USRG Renewable Finance.
USRG is a private equity firm that focuses exclusively on
investing in renewable energy. Based in California, USRG is a
leading investor in companies that develop, build and operate
projects in both the fuels and the power fuels that produce
clean, renewable energy and in the infrastructure that supports
that production. Our investments cover a wide range of
renewable technologies including solar, wind, geothermal,
biomass, biofuels, hydropower and energy storage. Collectively
our portfolio companies are either operating renewable energy
facilities or in development of renewable energy facilities in
over 30 states across the country right now.
I'm here today because we believe the Department of
Energy's Loan Guarantee Program is a crucial part of U.S.
energy policy and as well as an important component of our
country's overall economic policies particularly with respect
to supporting a U.S. competitiveness in world energy markets.
USRG has a significant amount of firsthand experience with
the DOE Loan Guarantee Program. We participated both with the
original section 1703 program as well as with the more recent
1705 program and both with the innovative program and the
commercial program or FIPP. I believe that we've been in
position to see and experience both the programs challenges as
well as its considerable promise.
In every economy energy is a critical resource. Is
regulated and subsidized by governments, all forms of energy.
In the U.S. in addition to the Loan Guarantee Program our main
policy mechanisms for supporting renewable energy development
are tax credits that serve to lower the cost of developing and
operating renewable energy facilities, supply site incentives
essentially. While state level renewable portfolio standards
and to a less extent state level fuel standards combined with a
national renewable fuel standard to increase demand for
renewable energy.
There are however 2 areas in which there are glaring
deficiencies and which add to deter investment in renewable
energy.
The first is a specific policy deficiency. The lack of a
national renewable electricity standard to provide a
predictable national market for renewable power production in
the United States, that is a problem that we believe could and
should be fixed and would urge Congress to move as
expeditiously as possible to do so. We appreciate your
leadership in that, Mr. Chairman.
The second is a more systemic problem is the on again/off
again nature of U.S. renewable energy policy in which investors
see policy supports put in place and either withdraw it or
allow it to expire. To see the impact this kind of policy
reversal on renewable energy markets, we need only to look at
the U.S. biodiesel industry which has been severely damaged
over this last year by the failure of Congress to extend the
dollar a gallon biodiesel tax credit after it expired at the
end of 2009. The result is that the growth of this important
renewable fuel sector was halted and more than 20,000 green
economy jobs were put at risk. This should not have happened.
Congress should act immediately to restore that credit.
Looming on the horizon is a similar threat though much
larger in scale. Since it was put in place in 2009 the section
1603 Treasury Grant Program in which grants are provided in
lieu of tax credits for investments in renewable energy
production facilities has been an extremely effective program.
An extremely effective mechanism for attracting private sector
investments in clean energy projects in the U.S. Yet without
further Congressional action this section 1603 Treasury Grant
Program will expire at the end of this year. Again changing the
financial equation for renewable energy projects across our
nation at a time when economic conditions are still acting as a
headwind for this industry, which brings us back to the
Department of Energy's Loan Guarantee Program.
When the program was launched with much fanfare in 2009 it
was funded by $6 billion in appropriated funds. We're talking
about the 1705 program here. It was a level investment that we
believe would support 60 billion to 100 billion of lending to
clean energy projects depending on how you calculated the
subsidy costs.
Now less than 2 years later the DOE Loan Program has seen
its funding cut by nearly 60 percent. That cut will translate
into tens of billions of dollars less that will be available to
support renewable energy development. It's important to
recognize the critically important role that a program can play
and I appreciate the discussion in the last panel about the
role of the program verses the role of the market.
I would offer 2 examples from USRG's own portfolio to
illustrate that.
Solar Reserve which is a portfolio company of ours builds
large utility scale solar power plants. It's concentrated solar
power technology.
Fulcrum BioEnergy is a portfolio company of ours whose
technology converts municipal solid waste into ethanol.
These are just 2 companies among many here in the U.S. that
are on the front line of commercializing clean energy. But with
the support of DOE loan guarantees to build their first
commercial projects these 2 companies alone have the potential
to go on using commercial financing to produce over 8,000
gigawatt hours annually of clean renewable energy, more than
one billion gallons annually of renewable fuels, $20 billion in
new investments across the country supporting over 115,000
jobs. That's just 2 companies as well as providing leadership
for the U.S. in global renewable energy markets. This is the
real promise of the DOE Loan Guarantee Program is to be able to
take companies like that and move them across the gap from--
through their first projects and on into commercial markets.
In my written testimony I've included a number of specific
recommendations for strengthening the Department of Energy's
Loan Guarantee Program. The highlights of those recommendations
include at the top replace the 3.5 billion in funding that's
been diverted from the Loan Guarantee Program. It's very
important.
Second, extend the commence construction date for the
current section 1705 DOE Loan Guarantee Program by 2 years or
modify the section 1703 Program to allow appropriated funds to
cover subsidy costs and to incorporate the authorities provided
in section 1705 including the ability to finance commercial
projects through a FIPP type structure as well as accommodating
the previous solicitations that have been made under 1705.
Third is provide increased access to the program for small
renewable energy developers. This is very important because the
small to medium size developers often face greater barriers to
access to financing than you'll have with the large developers.
They're an important part of our renewable energy ecosystem, if
you will.
Fourth, and there's been some discussion on this, we need
to clarify OMB's role with the program. I appreciate Mr.
Silver's judiciousness in having that discussion. I think we
have more straight forward views about that issue. We would
support the chairman's legislation to limit OMB review of DOE
Loan Guarantees and put some clarity and structure around that.
Five, we think it's important that we provide for a
permanent renewable energy financing mechanism such as CEDA, to
support U.S. leadership in renewable energy.
Thank you, Mr. Chairman and the committee. I'm happy to
answer any questions you may have.
[The prepared statement of Mr. Newell follows:]
Prepared Statement of Timothy Newell, Senior Advisor, U.S. Renewables
Group, Santa Monica, CA
Mr. Chairman, Ranking Member, members of the committee, thank you
for the opportunity to testify today on an issue of vital importance to
the renewable energy industry.
My name is Tim Newell, and I am Senior Advisor to the US Renewables
Group (USRG), where I also serve as a Managing Director for USRG
Renewable Finance. US Renewables Group is a private equity firm that
focuses exclusively on investing in renewable energy. Based in
California, USRG is a leading investor in companies that develop,
build, and operate projects that produce clean renewable energy--both
electricity and fuels--and the infrastructure that supports that
production. Our investments cover a wide range of renewable
technologies, including solar, wind, geothermal, biomass, biofuels,
hydropower, and energy storage. Collectively, USRG's portfolio
companies are currently either operating or developing renewable energy
projects in more than 30 states across the U.S.
I am here today because we believe the Department of Energy's loan
guarantee program to be a crucial part of US renewable energy policy,
as well as an important component of our country's overall economic
policies--particularly with respect to supporting US competitiveness in
global energy markets.
USRG has significant first-hand experience with the DOE Loan
Guarantee Program. Directly and through our portfolio companies, we
have participated in both the original Sec. 1703 program and the more
recent Sec. 1705 ARRA-created program, and have engaged in both the
innovative technology program and the commercial program (FIPP). I
believe that we have been in a position to see and experience the
program's challenges--as well as its considerable promise. In the
spirit of strengthening what we believe is a critical program in
support of our industry, I would like to offer some observations,
recommendations, and areas of inquiry regarding the loan guarantee
program that we believe merit consideration by the Committee.
US GOVERNMENT RENEWABLE ENERGY POLICIES
Before doing that, however, I would like to step back for a moment
and consider the loan guarantee program more broadly within the context
of the US government's renewable energy policy. As major investors in
renewable energy projects, we are keenly aware of the importance of
government programs that provide incentives to build commercial scale
renewable projects in the U.S. In every economy in the world, energy is
considered a critical resource whose development and production is
regulated and supported by government. Renewable energy markets, with
their emerging technologies and promise of clean sustainable growth,
are particularly policy-driven.
In the U.S., in addition to the DOE Loan Guarantee Program, the
most critical of these incentives at the federal level include the
investment tax credits and production tax credits offered to renewable
energy projects--including the Sec. 1603 grants in lieu of credits
program that has been so successful, and which unfortunately is
scheduled to expire at the end of 2010.
These incentives essentially act to encourage the supply of
renewable energy in the U.S., by providing support for the construction
and operation of renewable energy production facilities. They operate
against the backdrop of policies at both the federal and state level
that are intended to increase demand for renewable energy--including
Renewable Portfolio Standards governing electricity purchases in a
majority of US states, and to a lesser extent state Renewable Fuel
Standards covering fuel consumption; as well as the federal Renewable
Fuel Standard (RFS). Collectively, these policies and incentives work
on both the supply side and demand side to leverage billions of dollars
of private investment in clean and renewable energy projects across the
United States.
From the point of view of the investment community, therefore,
there is much that is encouraging about current US policies to promote
renewable energy development. But there are two areas in which there
are glaring deficiencies which act to deter investment.
The first of these is a specific policy deficiency--namely the lack
of a national Renewable Electricity Standard (RES) to provide a
predictable national market for renewable power production in the
United States. This is an issue familiar to this Committee, and one on
which the Chairman and the Committee have shown significant leadership.
The solution is straightforward--the Senate should take up and pass S.
3813, the Renewable Energy Electricity Promotion Act of 2010 as
introduced this week by Chairman Bingaman.
The second deficiency is more systemic. It has to do with the ``on
again, off again'' nature of U.S. renewable energy policy. Investments
in renewable energy are by their nature long term investments.
Renewable energy projects often take years to develop, and require
large amounts of capital to be committed for many more years. Yet too
often investors have seen U.S. policymakers put incentives for
renewable energy production in place, only to reverse them or let them
expire a relatively short time later.
To see the impact of this kind of policy reversal on renewable
energy markets we need only to look at the U.S. biodiesel industry,
which has been severely damaged over the last year by the failure of
Congress to extend the $1/gallon biodiesel tax credit after it expired
at the end of 2009. The result? The growth of this important renewable
fuels sector was halted, and more than 20,000 green economy jobs were
put at risk. This should not have happened and Congress should act
immediately to restore the credit.
Looming on the horizon is a similar threat, though larger in scale.
Since it was put in place in 2009, the Sec. 1603 Treasury Grant program
in which grants are provided in lieu of tax credits for investments in
renewable energy production facilities has been an extremely effective
mechanism for attracting private sector investments into clean energy
projects in the U.S. Yet without further Congressional action, the Sec.
1603 Treasury Grant program will expire at the end of this year, again
changing the financial equation for renewable energy projects across
our nation at a time when economic conditions are still acting as a
headwind for the industry. A recent study by the American Council of
Renewal Energy estimated that failure to extend Sec. 1603 would
threaten more than 100,000 jobs across the U.S. This should not happen,
and Congress should act to prevent it by extending the Sec. 1603
Treasury Grant program for at least two years.
Which brings us back to the Department of Energy's Loan Guarantee
Program. When the program was launched with much fanfare in 2009, it
was funded by $6 billion in appropriated funds--a level of investment
that would support $60 billion to $100 billion of lending to clean
energy projects. Less than two years later, the DOE Loan Program has
seen its funding cut by nearly 60%, with $3.5 billion of its
appropriation rescinded and diverted to other programs. This should not
have happened, and Congress should act immediately to restore funding
for this critical program.
A GLOBAL RACE FOR LEADERSHIP
Why is this important? From investment and production tax credits,
to grants in lieu of tax credits, to Department of Energy loan
guarantees, these incentives are needed to help propel America's effort
to compete with China, Germany, Spain and other countries that are
investing heavily in renewable technologies. But, as several recent
reports reveal, we are falling behind. This is a race we are no longer
winning. Other nations are committing billions of dollars to clean
technology and renewable energy for both environmental and economic
reasons.
As a recent Pew Charitable Trust study (``Who's Winning the Energy
Race: Growth, Competition and Opportunity in the World's Largest
Economies''), for example, reported:
Relative to the size of its economy, the United States' clean
energy finance and investments lag behind many of its G-20
partners. For example, in relative terms, Spain invested five
times more than the United States last year, and China, Brazil
and the United Kingdom invested three times more. In all, 10 G-
20 members devoted a greater percentage of gross domestic
product to clean energy than the United States in 2009.
Finally, the Unites States is on the verge of losing its
leadership position in installed renewable energy capacity,
with China surging in the last several years to a virtual tie.
A similar report (``Out of the Running? How Germany, Spain and
China Are Seizing the Energy Opportunity and Why the United States
Risks Getting Left Behind'') by the Center for American Progress,
succinctly concluded, ``China, Germany, and Spain are forging ahead on
the path to a clean-energy future while the United States lollygags.''
From the standpoint of a major U.S. investor in clean and renewable
energy projects, this is unacceptable. Here we are, the country that
invented the photovoltaic cell, that developed the most efficient solar
thermal technology, that patented and produced LED lighting and
numerous other energy efficient or renewable technologies falling
behind our international rivals. We need to do better.
With regard to the DOE Loan Guarantee Program, there has been much
attention given to delays by the program in making loan guarantee
decisions. To be fair, our firm has experienced its own share of
frustrations, especially early on when the program was critically
hampered by a lack of personnel generally and a specific lack of
seasoned project finance professionals.
examples from usrg portfolio: solarreserve and fulcrum bioenergy
As we examine the loan program, though, it is important to
recognize the critically important role that the program can play, and
I would offer two examples from USRG's portfolio to illustrate.
SolarReserve, based in Santa Monica, CA, is in the business of
building large utility-scale solar power plants with the potential to
replace traditional coal-fired and natural gas-fired power plants. A
SolarReserve power plant captures and focuses the sun's thermal energy
with thousands of tracking mirrors (called heliostats) in a two square
mile field. A tower resides in the center of the heliostat field, and
the heliostats focus concentrated sunlight on a receiver which sits on
top of the tower. Within the receiver, the concentrated sunlight heats
molten salt to over 1000 degrees Fahrenheit. The heated molten salt
then flows into a thermal storage tank where it is stored, maintaining
98% thermal efficiency, and eventually pumped to a steam generator
which drives a standard power turbine to generate electricity--allowing
a SolarReserve power plant to capture the energy of the sun during the
day, and generate electricity into the evening or even through the
night as needed. In this way, a SolarReserve power plant is similar to
a standard coal-fired power plant, except it is fueled by clean and
free solar energy. SolarReserve's technology was originally developed
here in the U.S. for our country's space program, and then--with the
support of this Committee--adapted and demonstrated for terrestrial use
by the Department of Energy.
Today SolarReserve has applications pending with the Department of
Energy for loan guarantees to support the company's first two
commercial projects in Nevada and California. Should those loan
guarantees be approved and the projects built, they would provide
thousands of jobs in rural areas hard hit by the recession. But the
catalytic effect would extend far beyond those communities. With its
first two projects built and operating with proven economics,
SolarReserve would be in position to access commercial lending to build
additional power plants. Beyond its lead projects, SolarReserve
currently has 18 projects under development in the United States with
the potential to deliver approximately 8,100 gigawatt hours of annual
electricity production, generating more than $14 billion of aggregate
investment, and accounting for approximately 90,000 direct, indirect,
and induced jobs. The projects have been sited in underdeveloped
regions in Arizona, California, Colorado, Nevada, and New Mexico, many
of which are experiencing high unemployment. Globally, SolarReserve is
targeting projects in Europe, North Africa, South Africa, the Middle
East, and Australia.
Fulcrum BioEnergy, headquartered in Pleasanton, CA, has as its
mission to create a clean, low-cost and sustainable source of domestic
transportation fuel that is produced from an abundant and renewable
feedstock: municipal solid waste--in other words, trash. Using advanced
but proven thermochemical technology to convert municipal solid waste
into ethanol, Fulcrum is leading the next generation of cellulosic
ethanol production.
Like SolarReserve, Fulcrum has an application pending with the DOE
Loan Guarantee Program to support the construction of its first
commercial plant. Like SolarReserve, that plant would provide much-
needed jobs for a community where those are in short supply. And like
SolarReserve, with that plant built and operating Fulcrum would be in a
position to access commercial lending markets to build additional
projects. Fulcrum already has a development program to produce more
than 1 billion gallons of biofuels from projects in 20 different states
around the U.S. Collectively, the projects would represent over $8
billion of private capital investment in the U.S. economy, and account
for more that 36,000 jobs. Moreover, by converting waste into biofuels,
Fulcrum would afford large and medium sized communities in the U.S. the
opportunity to turn their own garbage into transportation fuel and
reduce their reliance on imported petroleum to drive their cars.
SolarReserve and Fulcrum BioEnergy are but two companies among many
here in the U.S. that are on the front lines of commercializing clean
energy. With the support of DOE loan guarantees, though, these two
companies alone have the potential to produce over 8,000 gigawatt hours
of clean renewable electricity, more than1 billion gallons of renewable
fuels, over $20 billion in new investments supporting 115,000 green
economy jobs, and leadership in global renewable energy markets. This
is the real promise of the clean energy economy that the DOE Loan
Guarantee Program has the potential to bring about for our country.
STRENGTHENING THE DOE LOAN GUARANTEE PROGRAM
Mr. Chairman, as you have stated previously, the DOE loan guarantee
program is a powerful tool for meeting our energy security needs,
especially in the area of commercial clean and renewable energy
projects. It is a tool, however, that has been hampered by the Office
of Management and Budget and $3.5 billion in rescissions. Clearly, the
program should have its funding returned, the role of OMB clarified,
and the Program's mission extended.
As this committee is well aware, DOE's loan guarantee program,
especially the Sec. 1705 program included as part of American Recovery
and Reinvestment Act of 2009, not only got off to a very slow start,
but has been hurt by delays in making loan guarantee decisions. I
believe in giving credit where due, though. Over the last year, my firm
has seen a major transition in the operation of the DOE Loan Guarantee
Program under Jonathan Silver, including the much-needed addition of
seasoned project finance professionals with extensive energy financing
experience.
The proof of that change is striking. Not too long ago, we would
have expected to wait at least three months for approval by DOE of a
``Part I'' loan guarantee application. Last month, our most recent Part
I application was reviewed and approved in only six working days. That
is progress you can measure. Our experience is consistent with the
conclusions of the Government Accountability Office which last July
issued a report detailing shortcomings of DOE's management of the
program, but also noted that DOE has ``increased the Loan Guarantee
Program's staff, expedited procurement of external reviews, and
developed procedures for deciding which projects should receive loan
guarantees.''
THE ROLE OF THE OFFICE OF MANAGEMENT AND BUDGET
This is not to say that the program has worked well since the
beginning, when there was insufficient staff and capacity to allocate
funds quickly and effectively. On February 19, 2009, in the midst of a
financial crisis that had essentially paralyzed the financial markets
needed to support renewable energy development, we were encouraged when
Secretary Steven Chu announced in a press release that the Department
of Energy would be taking bold new steps to expedite the deployment of
ARRA funds--especially loan guarantees. In his statement, Secretary Chu
anticipated moving quickly to finalize guidelines for providing loan
guarantees by summer of 2009. By March, the Department of Energy had
drafted and provided to the Office of Management and Budget a set of
much-anticipated and much-needed proposed modified regulations to
govern the loan program. Then, for the next six months, we and others
in our industry watched in consternation and frustration as DOE and OMB
failed to reach agreement and the proposed streamlining of the program
failed.
Beyond OMB's involvement in DOE loan guarantee regulations, loan
guarantee applicants must wait for OMB approval to finalize their
application and receive a term sheet, although the role of the OMB in
these reviews is not clear. Renewable energy trade associations and
members of Congress are still seeking to fully understand OMB's role in
evaluating these applications and why OMB appears to be a major cause
of delay in issuing these guarantees. OMB's level of involvement and
review times appear to exceed that of other federal loan guarantee
programs.
Further, we are concerned that decisions which appear to have been
initiated by the Office of Management and Budget have seriously
undermined the financial capacity of the program through rescissions
totaling $3.5 billion--$2 billion which was used to fund the
Administration's ``cash for clunkers'' program and more recently $1.5
billion used to help fund legislation to aid states and localities.
These rescissions have reduced the available loan authority to less
than $25 billion, even as DOE receives more requests for loans in
excess of its lending authority. The total amount of subsidy costs that
DOE stated in the solicitations of $4.75 billion exceeds the $2.5
billion of subsidy cost now allocated to the program by $2.25 billion.
It is our understanding that as of August, DOE had 81 separate
renewable energy infrastructure and transmission projects either in its
final ``due diligence'' phase of review or in its Part II review. Of
these 81 projects, there were 26 in the final ``due diligence'' phase
that were applying for $12 billion in loans. Doing the math, if these
loan requests were to be completed at the Department's pledged rate of
four per month, those loan requests will likely use up all funding for
this program by February--nearly seven months before this program's
September 2011 expiration.
According to DOE the remaining 55 renewable energy projects, which
are seeking $15 billion in guaranteed loans, have completed the first
phase of the loan review process and are in Part II. These projects
have been under review at DOE for many months, and applicants have in
many cases paid multi-million dollar fees. Tens of billions of dollars
in additional investment proposed by applicants in Part I have almost
no hope of receiving a loan guarantee at this time.
RECOMMENDATIONS
To address these problems and strengthen the DOE Loan Guarantee
Program, we urge Congress to do the following:
1. Replace the $3.5 billion in funding that has been diverted
from the DOE Loan Guarantee Program.
At a minimum, Congress should immediately replace the $1.5
billion that was most recently rescinded from the program. To
that end, we strongly support the provisions in the most recent
version of the so-called Tax Extenders bill announced by
Chairman Baucus that would refund $1.5 billion to DOE's Sec.
1703 Loan Guarantee Program, and make important changes to that
program--and, as appropriate, to the Sec. 1705 program--to
provide needed additional flexibility, including:
Defray credit subsidy costs. Allow appropriated funds or
private capital to be used to defray credit subsidy costs for
federal loan guarantees under Sec. 1703;
Allow multiple projects/sites. Eliminate the restriction on
project developers of one loan guarantee per applicant, per
innovative technology. Instead, allow a project developer to
submit multiple applications for multiple projects employing
the same technology, and/or permit an applicant to submit a
single application for a qualifying projects on multiple,
noncontiguous sites;
Provide flexible hiring authority. Grant ``Direct Hire
Authority'' to the DOE Loan Guarantee Program for consultants
and temporary employees, enabling DOE to maintain the personnel
resources needed to quickly and efficiently process loan
guarantee applications;
Eliminate credit rating requirement for small projects.
Allow the Secretary of Energy to exempt loans smaller than $100
million from the requirement that the projects receive a credit
rating; and
Limit administrative fees.
Refunding the $1.5 billion to Sec. 1703, together with the
changes in authorities discussed above for that program and/or
for Sec. 1705--many of which were originally included in S.
3746 introduced by Chairman Bingaman and cosponsored by
Senators Shaheen, Boxer, and Feinstein--would address important
shortcomings of the Sec. 1703 Loan Guarantee Program and allow
it to serve as a vehicle for ongoing support for financing
renewable energy projects beyond the expiration dates that were
incorporated into ARRA.
In strengthening the Sec. 1703 program, Congress should
also make clear that the program may be used to support
projects that use commercial technologies rather than limiting
the program to emerging innovative technologies. To avoid
unnecessary delays in financing projects, Congress should make
it clear that the Sec. 1703 Loan Guarantee Program is
authorized to continue extending loan guarantees under the
terms of solicitations previously issued under through the Sec.
1705 program. Of particular importance in our view is the
Financial Institutions Partnership Program (FIPP) solicitation
which allows DOE to issue loan guarantees for commercial
projects which are backed by private lenders--thus encouraging
and leveraging private capital rather than relying solely on
government funding through the Federal Financing Bank. Put
another way, uniquely under the FIPP model, DOE's Loan
Guarantee Program is serving to catalyze the capital markets to
increase investments in renewable energy projects. And with the
evolution of a secondary market in DOE-backed securities, we
are seeing the creation of an on-ramp for long-term investors
to enter into the renewable markets--an especially critical
development for smaller/medium sized renewable energy projects.
2. Extend the ``Commence Construction'' date for the current
Sec. 1705 DOE Loan Guarantee Program by two years.
In our opinion, the DOE Loan Guarantee Program (Sec. 1705)
and the Treasury Grant Program (Sec. 1603) are currently the
two most important mechanisms for U.S. government support of
renewable energy deployment--and both programs are scheduled to
expire in the relatively near future. Both of these programs
should be extended to provide much needed certainty for project
developers and financiers, as well as spurring clean energy
jobs.
3. Limit OMB review of DOE loan guarantees.
We believe that DOE has taken great strides to strengthen
their ability to assess and process loan guarantee applications
in a timely way based on commercial terms and risk analysis.
That progress will be lost, however, if DOE loan guarantee
recommendations are subject to what is essentially a second
underwriting process at the Office of Management and Budget--
adding unnecessary time delays and uncertainty. Mr. Chairman,
we would support the provisions of your bill S. 3759 which
would limit OMB's time to comment on any application the
Secretary of Energy submits for review to 30 days. We believe
this is a necessary change.
4. Support small business lending through the DOE Loan
Guarantee Program.
Smaller renewable energy projects are potentially an
important engine for economic growth, jobs, and building a
clean energy infrastructure in many regions of the country--
especially in those regions which may not be able to support
large utility-scale energy projects due to limited solar
resources, wind resources, fuels feedstocks, etc. However
developers of small renewable energy projects have faced a
particularly challenging financing environment during the
recent economic downturn.
DOE's Loan Guarantee program--particularly the FIPP--is in
a position to offer much needed assistance to small renewable
energy project developers. The FIPP could and should be a
particularly useful mechanism for attracting private capital to
provide lending to smaller energy projects. The challenge is
that smaller developers often may not be in a position to
invest the resources--both financial and personnel--that it has
typically required to navigate the federal loan guarantee
process. I would like to take this opportunity to commend the
leadership of Jonathan Silver and his staff at Department of
Energy for their focus--and real accomplishments--with respect
to improving the accessibility of DOE's Loan Guarantee Program
for small renewable energy projects. His team at DOE has made
huge progress in streamlining the application process to
encourage private lenders to finance those smaller projects.
Even with the impressive progress made by DOE to support
lending to small renewable energy projects, many smaller
borrowers remain concerned about both the time frames and cost
of the federal loan guarantee process. Additional steps
Congress should consider to improve access to the program for
small developers include:
Streamline NEPA requirements for small projects. NEPA
remains the most significant barrier in terms of time delays
for small projects. We would recommend the Congress consider
limiting NEPA's application for projects smaller than $200MM,
or to clarify and/or expand the categorical exemptions for
projects such as rooftop solar or ground mount solar
installations below a certain size.
Eliminate the need for credit ratings for projects under
$100mm. The minimum cost for rating agencies to provide ratings
is $175,000 which is a high cost for a small project. Given the
relatively smaller risk footprint of smaller projects within
DOE's loan guarantee portfolio, it would seem reasonable to
eliminate that requirement. We wholeheartedly endorse the
Chairman's previous legislative support for this needed change.
Reduce administrative, diligence, and loan costs for small
energy projects. DOE could eliminate or reduce the DOE
application fee and the 50 bp facility fee for small projects
without significantly impacting the cost to the government of
the loan program. DOE could also mitigate duplicative diligence
costs by using common counsel and consultants with the lender
applicant. Standardizing contract terms--not just form of
guaranty but also acceptable security documents, tax equity
intercreditor terms etc.--could also significantly reduce costs
and speed processing times.
Consider exempting smaller projects from Davis Bacon
requirements. It would seem reasonable to set a size threshold
for applying Davis Bacon requirements to renewable energy
projects seeking loan guarantees. A small business exemption in
this area would have a meaningful impact for smaller projects,
without significantly affecting labor markets.
5. Provide for a permanent renewable energy financing
mechanism to support US leadership in renewable energy.
While there are venture capitalists to assist start-ups and
there are private equity firms like ours to help finance
commercial projects, there is often little to bridge the divide
between development of clean technologies and commercial
deployment. At its best, that is the role that DOE's Loan
Guarantee Program was designed to fulfill, albeit temporarily.
I applaud the Chairman and this Committee for your leadership
in proposing the establishment of a permanent Clean Energy
Deployment Administration (CEDA) to support the development and
commercial deployment of new clean energy technologies. From
the perspective of the renewable energy investment community,
establishing CEDA is a no brainer.
This past July, the Clean Energy Group published a report,
Accelerating Climate Technologies: Innovative Market Strategies
to Overcome Barriers to Scale Up, which concluded ``(1) the
barriers to rapid diffusion of new climate technologies are too
great for the private sector alone to surmount and (2) targeted
public sector interventions are needed all along the technology
development pathway to overcome specific technical, financial,
and market barriers.'' In other words, establish CEDA.
Another important reason to establish CEDA is international
competitiveness. Our major competitors in Asia--China, Japan
and South Korea--and in Europe--Germany and Spain--recognize
the long-term importance of investing in clean energy
technology. While the United States remains the world leader in
developing advanced clean energy technologies, we are falling
behind as these nations continue to invest public funds to
support research, development and commercialization of clean
and renewable technologies. CEDA is a critical component of the
kind of clean energy competitiveness strategy that the United
States must have to compete with other nations moving
aggressively to capture global clean tech market share.
questions for consideration
In addition to the recommendations above, there are some additional
areas of inquiry that I would recommend to the Committee. These
questions include:
A. Does the DOE LGP benchmark its financing terms against
those that might otherwise be available from the commercial
market?
For example, does DOE LGPO explicitly consider commercially
available loan terms for debt-to-equity ratios, repayment terms
``tail'' (the buffer between the maturity of the loan and the
revenue-generating contract maturity), cash-sweeps (if
applicable for contracted revenue projects), or distribution
restrictions? Many other US government lending agencies that
support project finance transactions adhere to an explicit
``prudent lender'' threshold to offer terms not more aggressive
(or conservative) than the commercial market, unless those
terms relate specifically to program guidelines (e.g., OECD
Consensus Rules in the case of US Ex-Im Bank).
B. How does the DOE LGP approach the structural integration
of Congressionally authorized incentives for renewable energy
projects with its loan guarantee structures, specifically in
the case of Investment Tax Credits or MACRS accelerated
depreciation?
USRG understands that a number of applicants have been
informed that the DOE LGP discourages capital structures--
commonly deployed in commercial finance for renewable and other
tax-incentivized energy projects--that would permit an
application with no or limited federal tax capacity from taking
advantage of ITC benefits not otherwise addressed in the 1603
ITC Cash Grant program (currently set to expire for projects
that have not commenced construction before Dec. 31, 2010) and
of MACRS accelerated depreciation. The rationale for this
advice from the DOE LGP to applicants is claimed to be the
complexity of marshaling such capital structures through the
DOE LGP approval process. This would seem to put innovative
energy projects seeking support through the DOE LGP at a
significant disadvantage in maximizing the incentives
authorized by Congress for such projects.
C. Is the intention of Congress in authorizing the DOE LGP
through Sec. 1703 and amended by Sec. 1705 being frustrated by
an excessively complex and lengthy approval process?
Currently, the Program does not feature any explicit
approval timeline requirements. The advice from the DOE Loan
Guarantee Program office to applicants is that approvals to the
Conditional Commitment stage should be expected to take a
minimum of six months. This lengthy approval cycle reflects
multiple levels of approvals within DOE and includes additional
reviews by OMB with input from other Federal agencies or
departments. Does this approval process negatively affect the
DOE Loan Guarantee Program's ability to offer ``prudent
lender'' terms and to incorporate tax efficient capital
structures?
D. Should Congress clarify the relative importance of DOE
extending loan guarantees to truly innovative technologies?
The way in which Congress structured the LGP created a
paradoxical situation. On the one hand, Congress has
established the Loan Guarantee Program to incentivize
innovative technologies. On the other hand, it requires a
``reasonable prospect of repayment'', a goal that seems
reasonable but that in practice seems to be interpreted by OMB
in such a way as to require very low risk projects and near-
certain cash flows. This has created confusion throughout the
industry and within DOE as to the proper way to extend loan
guarantees to the best innovative projects.
Mr. Chairman, this concludes my testimony on the Department
of Energy's Loan Guarantee program. I appreciate the
opportunity to appear before the Committee, and would welcome
the chance to address any questions that you or members of the
Committee may have.
The Chairman. Thank you very much. Mr. Meyerhoff, please go
right ahead.
STATEMENT OF JENS MEYERHOFF, PRESIDENT, UTILITY SYSTEMS
BUSINESS, FIRST SOLAR, TEMPE, AZ
Mr. Meyerhoff. Thank you very much, Mr. Chairman and
committee members for the opportunity to talk about the DOE
Loan Guarantee Program today.
The program is of significant important to the industry and
to First Solar as the largest PV manufacturer in particular as
it provides significant liquidity to finance large scale solar
photovoltaic infrastructure investment.
As it provides lending terms commensurate with the useful
life of these generation assets.
As it provides cost of capital that allow renewable energy
electricity cost to scale toward grid parity.
No. 4 as it provides a very important migration vehicle in
order for our industry to scale into institutional life
infrastructure financing.
My name is Jens Meyerhoff. I'm the CEO of First Solar and
the President of First Solar Utility Systems Business Group.
First Solar is the world's largest manufacturer of
photovoltaic panels.
First Solar was built on a proprietary U.S. developed thin
film technology that has afforded the clear cost leadership in
the global U.S.--in the global photovoltaic market.
We have grown our company over the past 5 years from less
than $100 million profitably to over $2 billion in 2009. Today
we employ over 5,000 people of which 1,500 associates work here
in the United States. Next to being the largest manufacturer of
PV solar panels, we've also become the largest developer of
photovoltaic generation assets with a pipeline of over 2.2
gigawatt of contracted projects in the United States alone.
This pipeline represents an infrastructure investment need of
over $6 billion. This pipeline also represents 10,000 man years
of employment, construction work and manufacturing work.
Out of this pipeline we today have 4 projects representing
about 1.6 gigawatts in the application processes for both the
1703 and 1705 programs. Let me allow you to give a little bit
of an overview of how we view and try to utilize these
programs.
The 1703 program obviously designed to commercialize
innovative technologies. For us innovation happens
predominately around a grid friendliness and energy yield
driven out of our already commercialized module technology. To
give you an idea, in Europe alone we have over 2 gigawatt of an
installed base that represents about $8 billion of
infrastructure investment to date. So under the 1703 program as
it requires involvement of technical advisors which was earlier
discussed as it requires already participation of rating
agencies, we see this as an important learning and incubation
vehicle and as a first step toward commercialization of
institutional financing for solar PV.
Then as you look at the 1705 program, the 1705 program for
us takes it to the next step as it requires already a
commercial lender to underwrite the loan.
As it creates a bifurcate of capital structure with 2
tranches. One being guaranteed through the DOE Loan Guarantee
Program. The other being a free floating commercial tranche.
This allows us in a controlled way now to access
institutional markets with investment grade rated photovoltaic
power plant investment opportunities and drives important
cycles of learning that ultimately will increase liquidity to
finance these systems in totality. I would encourage members of
this committee to also maybe look at Europe because in Europe
this was done the same way. Both the German Reconstruction Bank
and the European Investment Bank provided similar financing
aids in the early stages which today has grown to a very
efficient commercial lending and infrastructure financing
market for products in that part of the world.
Our experience overall in the DOE Loan Program I would say
generally has been--we have been moving forward. We really
appreciate the support of the DOE staff and Mr. Silver's
leadership. But we've also seen, I think, our fair amount of
challenges.
It took a long time, especially for all the 1705 program to
be articulated and to be clearly understood how the program
would actually work. The negotiations between the DOE and the
commercial lenders that ultimately would be underwriters were
lengthy and essentially delayed the implementation of the
program probably by over a year which obviously took critical
time out of the program. The program's transparency is not very
high and I think we talked about this already in this room this
morning. But more importantly the program is not extremely
predictable.
If you think about an application under 1703 or 1705 can
cost a company anywhere between $2 and $5 million. Now First
Solar is a very well capitalized company. For us $2 to 5
million is an investment that is easily taken.
However for younger emerging companies this is a very
significant amount of money. The money effectively is put at
risk. It is put at risk with respect to the credit decision
which would be a risk I think appropriate.
But it has also put at risk from a timing point of view
because the 1705 program has an expiration date. So unless
funding--there's a funding deadline of September 2011, so which
means that the overall timeline including the permitting of a
project for example, the conditions precedent as were earlier
stated, these are not highly predictable for any type of power
plant development. So for a company you can lose it all.
So the question was earlier made with respect to well why
would people go and opt for other programs like Eximbank
financing, for example was mentioned. These programs are
predictable. They're returnable. They don't have a sunset date
to them.
Another challenge in the programs has been the aspect of
commercial negotiation. They're very clear lending standards
established in Europe and a very clear credit assessment has
been established around photovoltaic generation assets that
have lent to high leverage ratios. Those leverage ratios at
times are 80 to 85 percent. Debt service coverage ratios of 1.2
to 1.25 are being tolerated.
What we're seeing in the process here is a fairly lengthy
commercial negotiations and we're nowhere near a 1.2 or 1.25
ratios. We're operating north of 1.4 which provides obviously
additional credit resilience. But it's not exactly clear how
those decisions are being made.
I heard earlier the mentioning of a portfolio approach. I
believe it is very difficult to implement a portfolio approach
in project finance because project finance is about financing a
specific project. So for us if there's a portfolio approach of
multiple projects behind our own project that would make it
very difficult, I think, to be predictable.
So the other challenge that we obviously seen is the
removal of funds, the rescission of funds from the program.
Obviously has created a significant ripple wave. Just to give
you an idea as those decisions are made they create a lot of
cycles within a company like First Solar because we have to
determine what it means to our application. We have to
determine and assess a risk of the overall financing of these
very large programs. So that's been very, very disruptive to
the process.
So now as we look forward I would also like to state that
we have seen definite improvement in our application progress.
I'd like to commend Mr. Silver for a lot of the hard work that
has been done. I would say we've definitely seen more traction
in the last few months. So which would state that a lot of the
challenges we've been having or part of the challenges have
been based on cycles of learning. We're doing something new
here. I think it's an exchange, an open exchange. I think a lot
of mutual learning cycles have been achieved.
Now as we look forward in order for these programs, I
think, to truly fulfill their capabilities similar to what we
have seen--what we've seen in Europe we would recommend A,
either an extension of the 1705 program because we've lost a
lot of time in the front. So receiving some of the time back
would be very important. We would like to consider whether we
would move away from the funding deadline to an application
deadline because that way programs that have passed through the
application gates are predictable and can be executed and don't
battle in addition to substance, right, battle just with the
heart with a heart timeline.
So to give you an idea maybe of one more time about the
pipeline and it's if we were about to apply, file an
application and that application was on a project based on
private land somewhere in California we would have all
environmental permits completed within the State of California.
Filing those applications would require us a redundant effort
of getting a full NEPA environmental permit that takes very
extensive time. So the answer likely would be today that we
would not be filing that application because we would likely
miss that September 2011 timeline.
So we would like the program's funds to be restored like
Mr. Newell, I think made the same statement.
We'd like to consider the calculation of the subsidy cost
to be at least revisited. I would tell you I mention just for a
solar loan has financed about $8 billion worth of solar PV
renewable infrastructure in Europe. I am not aware today of a
single default in any of those financings. Again, those
financings were executed at significantly higher leverage
ratios.
So the risk profile around these generation assets is well
understood in Europe. I encourage us to take learning. We don't
have to reinvent the wheel. We can take a lot of learning out
of that market and transfer it over.
I think the last comment I wanted to make deals with the
1603 Treasury Grant. It was earlier my written testimony was
cited in an earlier question. I want to clarify the point we
want to--we were about to make.
A. The 1603 program, the grant program in lieu of the
investment tax credit provides the equity component to the
project financing. If that equity component doesn't work
effectively due to not enough tax appetite by the investor
we're constraining the build out of renewable energy on the
equity side regardless of how well the lending side has been
optimized. So we need to think about both programs being in
place because they're highly synergistic.
In addition as it relates to the economic benefits and this
is where I think we not only have to drive term but we also
have to align the economics. Under the grant program the
cashflows flow through the project entity. Under the ITC the
cashflows flow through the corporation, invisible to the
project.
We have seen the DOE taking the stands that if the
cashflows flow through the project entity they in part will be
reclaimed to repay the DOE guaranteed debt effectively reducing
the leverage and debt quantum. So effectively one project
cannibalizes to some degree the other program and we would like
that to be reconsidered and to be thought through whether that
that is actually in the spirit of the 2 programs in harmony.
That concludes my remarks.
[The prepared statement of Mr. Meyerhoff follows:]
Prepared Statement of Jens Meyerhoff, President, Utility Systems
Business, First Solar, Tempe, AZ
Chairman Bingaman and members of the committee, thank you for the
opportunity to appear today before the Committee to offer my
perspective on the U.S. Department of Energy's Loan Guarantee Program.
Before I begin, however, Mr. Chairman, please let me acknowledge and
thank you for your leadership in bringing federal resources to bear in
helping develop solar power in the U.S.
INTRODUCTION
I am Jens Meyerhoff, President of the Utilities Systems Business
group and CFO of First Solar. First Solar is the world's largest
manufacturer of thin film photovoltaic (PV) solar modules. In addition,
First Solar is North America's largest developer of utility-scale PV
solar power plants. First Solar's mission is to deliver clean,
affordable and sustainable energy by continuously improving efficiency
and lowering costs.
First Solar welcomes the opportunity to discuss the importance of
the Department of Energy (DOE) loan guarantee program in enabling
deployment of renewable energy, as it provides:
Liquidity to an emerging infrastructure asset class,
enabling early stage large-scale solar deployment;
Financing terms commensurate with the long lived nature of a
solar PV power plant;
Cost advantages that allow renewable energy sources to scale
faster towards grid parity; and
An important bridge vehicle to open institutional capital
markets not yet available to solar PV generation assets through
both the Section 1703 and 1705 Loan Programs.
I'll begin by offering a brief background on First Solar. I will
then discuss the pivotal role that loan guarantees can play in
financing renewable energy projects, followed by First Solar's
experience with the DOE loan guarantee program. Finally, I will offer a
few suggestions for further enhancing the programs going forward.
FIRST SOLAR BACKGROUND
First Solar is traded on the Nasdaq exchange and is today the only
renewable energy company included in the S&P 500 Index. First Solar's
net sales grew from $48 million in 2005 to $2.1 billion in 2009. Our
company is headquartered in Tempe, Arizona, and manufactures PV modules
in Perrysburg Ohio, as well as Germany and Malaysia. With 5,500
employees worldwide, First Solar employs and some1,500 associates in
the U.S.
Between 2005 and 2009, First Solar scaled its annual solar module
production capacity from 20 to over 1,100 megawatts. First Solar has
invested in excess of $1 billion in its proprietary thinfilm technology
and manufacturing capacity. This has afforded us a highly
differentiated market position as the lowest cost producer in the
industry. As a result, First Solar is capable of providing solar
electricity at a cost between $0.12 and $0.16 per kilowatt-hour.
First Solar recently passed a milestone of 2,500 MW of installed
generating capacity worldwide, representing infrastructure investments
of over $8 billion. Most of this generating capacity is located in
Europe, due in large part, to progressive policies favoring the
deployment of renewable energy technologies, including government-
backed financing programs and long-term price subsidies. In 2009, over
90 percent of First Solar's modules were sold outside of the United
States. However, over the past two years, First Solar has been
aggressively turning its attention to U.S. markets for renewable
energy. First Solar has invested approximately $750 million in the U.S.
to acquire multiple solar project development portfolios. First Solar
now has a 2,200 MW pipeline of advanced stage, utility-scale solar
projects in North America, driving infrastructure investments in excess
of $6 billion.
These are advanced projects, with long-term Power Purchase
Agreements (PPAs) with creditworthy investor owned utilities. Most are
in the late stages of permitting, or have already received their
environmental permits. For example, First Solar's 290 MW Agua Caliente
project, located in Yuma County, Arizona, has already started early
stages of construction. Most projects in the portfolio will start
construction between late 2010 and 2012. A list of First Solar U.S.
projects is attached as Appendix A.*
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
These projects are beneficial to the environment, to their utility
power purchasers, and to the local economy. To offer an example, once
completed, the 230 MW Antelope Valley Solar Ranch One project, located
in northern Los Angeles County, will produce enough clean energy to
meet the annual consumption needs of approximately 750,000 local homes.
A project of this scale will offset approximately 3.5 million metric
tons of CO2 over the 25 year term of the PPA with Pacific Gas &
Electric Company, the equivalent of taking 75,000 cars off the road
over 25 years.
Each of First Solar's large advanced stage projects in development
will employ between 250 and 450 construction workers over a period of
about 2-3 years. That's more than 1,500 jobs over the next four years
associated with our advanced stage project pipeline. These projects
will also create local tax revenues and substantial secondary economic
benefits, providing a much needed boost for the communities in which
they are located.
ROLE OF THE LOAN GUARANTEE PROGRAM IN TRANSITIONING TO SUSTAINABLE
SOLAR FINANCING
The Department of Energy Loan Guarantee Program can play a key role
in supporting industry growth by reducing financing costs, providing
liquidity and longer debt terms and fostering the development of robust
private capital markets to finance large solar projects, the same way
that similar programs have shown effectiveness in Germany and Europe
through debt programs guaranteed or directly financed by their
development banks.
The DOE Loan Guarantee Program provides some important benefits to
allow the solar PV industry to migrate towards institutional capital
markets:
The innovative 1703 program allows the deployment of new
technologies with less operating history. Such technologies
usually are unable to obtain investment grade ratings and
therefore are subject to higher debt cost, limited liquidity
and shorter debt tenures. The 1703 program effectively offsets
these shortfalls through direct lending by the Federal Finance
Bank. Since the 1703 program still requires a rating, it
fosters the early engagement and learning by the rating
agencies and independent technical advisors.
The 1705 program provides the next step in the migration
process as it creates a hybrid of government guaranteed debt
and a commercially underwritten loans. It requires the
applicant to raise capital in the public markets, but in a
controlled and supported way. The two tranches of capital allow
for broad market access and liquidity, the lower cost of the
government guaranteed tranche allows for enhancement of the
overall credit through more conservative leverage ratios at the
total project level, providing access to the institutional bond
market. The program incubates the dialog and marketing of solar
PV bonds to the classical infrastructure investor and lender,
creating important cycles of learning around a new asset class.
As multiple projects and technologies have passed through this
stepped approach, capital markets will be opening up and allowing for
liquidity flow to solar PV generation assets similar to the way
traditional generation assets are being financed today.
OBSERVATIONS AND OPPORTUNITIES FOR IMPROVEMENT
We are pleased to inform you that we are working with the DOE to
finance an unprecedented construction volume of utility-scale PV
projects. To date, we have submitted applications for four U.S.
projects to the DOE's Loan Guarantee Programs for innovative and
commercial technologies, amounting to over 1,600 MW. These are very
large projects located in the U.S. Southwest. Each one in itself is
larger than any other solar PV project that exists in the world today.
Although the projects are economically and environmentally viable,
we believe that these DOE programs are a necessary financing bridge
until the financial markets in the U.S. are prepared to fund solar
projects at this scale without risk-sharing with the DOE. First Solar
has financed over $8 billion in projects worldwide, and we have found
that markets in Europe have been similarly enabled by government
programs.
This is a global industry in which technologies are evolving
rapidly. First Solar is trying to utilize the DOE's innovative program
to enable combinations of innovative solar technologies to better
integrate solar power into the utility grid.
While our experience in working with the DOE Loan Guarantee Program
staff has been positive, we are concerned about the following:
Despite significant efforts of DOE staff and decision
makers, the program has been slow to start. The alignment
process between the DOE and commercial underwriters was lengthy
and created a great deal of confusion.
The time consuming process required to conduct environmental
reviews under NEPA in connection with DOE's loan guarantee
commitments has slowed the projects, especially those being
developed on private land, and threatens to delay the
construction start for many projects beyond the September 30,
2011 qualification deadline.
Commercial negotiations with the DOE appear lengthy and the
DOE takes at times positions that are frankly more conservative
than what we are used to seeing from commercial lenders. We
recognize that some of this is due to a learning curve and,
based on recent trends, we are hopeful of further improvement
and an ultimate standardization of terms.
The roles and responsibilities of all participants in the
application process seem to be undefined are not transparent to
applicants.
Industry confidence was shaken a few weeks ago when $1.5
billion was rescinded from the program raising questions about
whether there will be adequate funding for existing
applications and future solicitations. In fact, in a letter
dated August 26, 2010, to Senate Majority Leader Reid and
Appropriations Committee Chairman Senator Inouye, Senators
Feinstein and Boxer noted that an additional 81 applications
are in the pipeline for processing requesting approximately $27
billion in loans. The Senators expressed their concern that
DOE's loan authority will likely be exhausted by February 2011.
We support legislation introduced by Senator Baucus as part of
the so-called ``Tax Extenders'' effort. The Baucus provision
would restore credit subsidy funding of $1.5 billion to the
Section 1703 program.
Under the 1705 program, projects that cannot close loans
before September 2011 are not eligible. This time-based
approach controls eligibility at the back end of the
application process after time and money have been spent rather
than at the front end.
Based on our experience the predictability, efficiency and value of
these programs could be further improved by:
Considering an extension of the 1705 program, so it has time
to fulfill its potential for opening long-term scalable capital
markets of large scale solar PV. The current expiration date of
September 2011, when combined with the lengthy implementation
period creates significant realization risk to projects.
The cost of a DOE application under both 1703 and 1705
programs range between $2.0 and $5.0 million. These are
significant commitments, especially for smaller emerging
companies. Revise the concept of a funding deadline to an
application deadline, so projects in the application process
are grandfathered and the application cost are not at risk due
to timing, but only subject to project substance.
Continue to strive for commercially acceptable terms as they
relate to credit risk and cash flow usage.
Establish clear accountability through the application
process for all participants in terms of execution timelines
during the process and measure compliance. Senator Bingaman has
introduced legislation (S. 3759) to limit OMB's time to comment
on any application the Secretary of Energy submits for review
to 30 days. Such firm timelines throughout the entire process
would greatly enhance predictability of the program.
Restore the full funding of the program.
Integration of the treasury grant program and the DOE loan
programs in terms of availability and economics.
To summarize, based on our experience: (1) the predictability,
efficiency and value of these programs could be significantly improved
by grandfathering projects in the application queue and/or extending
the program so that it has time to fulfill its potential; (2) continue
to strive for commercially acceptable terms; establish clear
accountability throughout the application process; (3) restore full
program funding; and (4) align the Treasury Grant Program and the DOE
Loan Program in terms of availability and economics.
EXTEND EXPIRING TREASURY GRANT PROGRAM
While it is not part of the DOE Loan Guarantee Program, we want to
take this opportunity to highlight our industry's need for extension of
the Treasury's important 1603 Cash Grant program.
The Section 1603 Treasury Grant Program represents the equity side
of our industry's liquidity challenge. The current tax code makes it
impossible for certain investors to participate, and the securitization
of equity is impossible. The Treasury Grant Program reduces these
constraints enough to significantly broaden the capital base for large
scale solar PV programs. However, enabling large scale financial
investors such as mutual funds, insurance companies and pension funds
to participate requires a certain lead time. In our mind the DOE Loan
Guarantee Program and the Treasury Grant Program are synergistic and
rely to a certain degree on each other.
The importance of the Treasury Grant Program can be summarized in
three key points:
Liquidity in the equity markets is increased, which makes
projects like ours viable.
The cost of capital is reduced and--therefore cost of
renewable energy--by creating competing capital classes with
differing return requirements.
The program provides the equity component of project finance
on a cash return basis.
A recently published white paper produced by US PREF analyzed the
state of the tax equity markets and determined that tax equity remains
severely constrained. A copy of the white paper* is attached as
Appendix B.
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
First Solar joins others in our industry, small and large, to
extend our thanks to Congress for establishing this program. However,
the Treasury Grant Program will expire at the end of this year, just as
it is critically needed to bring projects on line and attract investors
for new development projects. It is vital that this important program
be extended though December 31, 2012.
CONCLUSION
The benefits of the DOE loan program can be summarized as follows:
Significant increase in debt liquidity.
Important financing bridge, until the U.S. financing markets
fully develop for utility-scale solar projects.
Encourages development of innovative renewable technologies,
including those which help utilities to integrate solar power
projects into their grids.
Reduces the cost of capital, which indirectly reduces the
cost of renewable power.
A strong US solar industry is critical to our energy security and
economic recovery. The Federal government should provide transitional
incentives of sufficient duration and impact to ensure that those jobs
are created in the United States.
We encourage Congress to act now to extend vital programs scheduled
to expire and to remain committed to longer-term programs necessary to
attract the global capital and investment required to sustain a growing
renewable energy sector.
We look forward to working with Congress to craft solutions to
create jobs and reestablish America's leadership in solar manufacturing
and deployment.
The Chairman. Thank you very much. Thank you.
Mr. Scott.
STATEMENT OF MICHAEL D. SCOTT, MANAGING DIRECTOR, MILLER
BUCKFIRE & COMPANY, LLC, NEW YORK, NY
Mr. Scott. Thank you. Mr. Chairman, members of the
committee, thank you for the opportunity to testify today. My
name is Michael Scott and I head the U.S. Government investment
banking business at Miller Buckfire in New York. I'm pleased to
provide my views on the title XVII Loan Guarantee Program, the
significant implementation obstacles that title XVII has faced
and solutions to these obstacles.
The road map that I lay out is one that the President can
act on and allows title XVII to be implemented to achieve its
original purposes as well as the policies and priorities of the
President, Congress and the American people. Title XVII is a
very powerful policy tool that is unique and important in the
current economic environment especially with the U.S.
Government facing the stresses and difficult choices involved
with our significant budget deficits. Thoughtful implementation
of title XVII can drive economic growth through the development
of private sector, clean energy infrastructure projects that
are built and fully paid for by the private sector.
Provide significant short term and long term jobs in
construction, manufacturing and operations.
Drive significant new investment in our domestic supply
chain, manufacturing base and supporting industries such as
iron and steel.
Develop environmentally clean and secure domestic energy
capacity.
Correct the private market failure to finance clean,
innovative energy technologies.
Provide well qualified project sponsors with confidence
that credible projects can receive a Federal loan guarantee
through a reasonable and predictable process.
Create and foster America's leadership and development in
the deployment of clean energy technologies.
The failure of title XVII to become a meaningful Federal
credit program is directly related to the decisions of the past
Administration in OMB in establishing the process, procedures
and rules that govern the program today. While DOE is the
program agency for title XVII OMB's role and responsibility for
Federal credit places it at the center of success or failure of
title XVII or any other Federal credit program. To be clear,
OMB owns Federal credit.
They are responsible for implementing the Federal Credit
Reform Act which includes the calculation of the Federal credit
subsidy.
They have significant input and final say on the rules and
regulations implementing any Federal credit program.
They have tremendous influence on and responsibility for an
agency's budget.
They have significant influence on the tools that can be
helpful in executing Federal credit programs such as the use of
the Federal Financing Bank.
The impediments to a fully functional title XVII rests
largely with administrative decisions of the past. The
President and his team can correct these problems by providing
specific leadership and direction to the agencies whose
responsibilities impact the successful execution of title XVII.
I would summarize the key solutions that the President can
deliver administratively as implementing the Federal Credit
Reform Act in a manner that is literally faithful to the
language of the statute particularly involving the calculation
of the Federal Credit Subsidy payment required from the
borrower under section 1702(b)(2).
Amending the final rule to correct provisions that are
inconsistent with the statute, Congressional intent, the
Federal Credit Reform Act and OMB circulars pertaining to
Federal credit programs, eliminating maximum loan guarantee
authorization levels in their inclusion in appropriation acts
as this approach is inconsistent with the borrower pay
provision of section 1702(b)(2).
Establishing a contractual credit subsidy downgrade fee as
a way to address CBO's concerns that the credit subsidy
calculation will underestimate the long term costs to the
taxpayer and therefore require the CBO scoring convention that
directs a taxpayer funded appropriation of 1 percent of the
loan guarantee authorization level sought.
Finally issuing an executive order pertaining to title XVII
to provide unambiguous direction to the agencies responsible
for its implementation. This also serves to provide credible
project sponsors, investors and the supply chain confidence
that title XVII will be a reasonable, predictable and available
Federal credit program.
All of these actions including amending the final rule are
within the President's authority and can take place reasonably
quickly.
I am pleased to answer any questions that you may have.
[The prepared statement of Mr. Scott follows:]
Prepared Statement of Michael D. Scott, Managing Director, Miller
Buckfire & Company, LLC, New York, NY
1Chairman Bingaman, Ranking Member Murkowski, Members of the
Committee, thank you for the opportunity to testify today. My name is
Michael Scott and I head the U.S. Government investment banking
business at Miller Buckfire.
I appear before you today to provide my views on subjects related
to the Department of Energy's (``DOE'') Title XVII loan guarantee
program. In this testimony, I will cover background on the history and
operation of Federal loan guarantees, the role of the Federal Financing
Bank and the unique innovative clean energy infrastructure loan
guarantee program that the Energy Policy Act of 2005 created in Title
XVII. I will also provide my thoughts on the ability of the Federal
Credit Reform Act of 1990 to protect the taxpayer from financial loss,
the significant implementation obstacles that Title XVII has faced
since passage of the Energy Policy Act of 2005, solutions to these
obstacles as well as the implications of operationalizing Title XVII
for the priorities of President Obama, Congress and the American people
pertaining to jobs, the economy, clean and secure domestic energy
capacity, and the environment.
I served for almost five years as a Senior Advisor at the
Department of the Treasury where I was responsible for, among other
things, Federal credit policy, the evaluation, negotiation, and
execution of Federal loan guarantees and direct loans as well as the
management and oversight of the Federal Financing Bank. In my prior
role at Treasury, I was one of the principal people who decided how and
in what manner the large one-off Federal credit programs (such as the
Air Transportation Stabilization Board, the Rural Economic Development
Loan and Grant Program in the 2002 Farm Bill, the Alaska Natural Gas
Pipeline Loan Guarantee Program and Title XVII of the Energy Policy Act
of 2005) were executed during the September 2001 to July 2006 time
period. This required me to be deeply involved with OMB on Federal
Credit Reform Act issues pertaining to the individual Federal credit
programs as well as the Federal Financing Bank. In conjunction with
OMB, Treasury plays a significant role in new programs as it has policy
interests in Federal credit and debt management and because of the fact
that the Federal Financing Bank is often used to finance Federal loan
guarantees, including those related to Title XVII. I was as often
ensuring that deals got done as ensuring that deals did not. Contrary
to the perception that Federal credit is similar to private sector
financings and that all that is needed is enabling legislation, new
Federal credit programs are complicated, rely on a knowledgeable and
willing Executive Branch for execution, and face many institutional
obstacles from both OMB and Treasury. Most Federal credit is
concentrated in long-established and/or entitlement type programs that
do not require the proactive input of the agencies' senior policy
officials. The new one-off Federal credit programs are rare enough that
very few senior officials ever have the chance or need to understand
the full range of applicable statutes or the tools and issues that
impact their execution. As we have seen in the implementation of Title
XVII since late 2006, the President and his Administration can be ill-
served by this asymmetrical knowledge of Federal credit between the
institutional organs of government and the elected and appointed
officials.
BACKGROUND ON FEDERAL LOAN GUARANTEES
The U.S. Government generally establishes Federal credit programs
(loan guarantees and direct loans) for one of several reasons. The most
common is to correct a private market failure to extend adequate or
reasonable access to credit and then to provide a path forward to
correct the market failure. This is the fundamental rationale and
structure of the Title XVII loan guarantee program. The other reasons
include targeted efforts to support national priorities or national
emergencies. Setting aside the credit or capital programs provided
under the Housing and Economic Recovery Act of 2008, the Emergency
Economic Stabilization Act of 2008, or the various programs established
under Federal Reserve authorities to address the financial market
crisis, the vast majority of pre-crisis Federal credit is concentrated
in housing, education, rural development and small business. It is
typically the case that these programs have been in existence for
decades or generations and are generally characterized by a large
number of homogeneous transactions involving relatively small dollar
amounts per loan. In all of these Federal credit programs, with the
sole exception of Sec. 1703 projects under Title XVII, the U.S.
Government pays for the ``credit subsidy costs'' by appropriating those
amounts required as calculated by the Federal Credit Reform Act of
1990.
Prior to the Federal Credit Reform Act of 1990, the costs of
Federal credit programs were only evaluated and appropriated at the
time of default. This approach did not provide legislators or
policymakers with the true budget impact of a Federal credit program
and was inconsistent with the budgeting process in the non-credit
spending programs of the U.S. Government. Since enactment of the
Federal Credit Reform Act of 1990, the U.S. Government has calculated
the net present value of the long-term costs (also known as the
``credit subsidy costs'') of Federal credit (loan guarantees or direct
loans). In addition to the obvious cash flows of a transaction and the
timing of those cash flows adjusted for the probability of default and
recovery amounts, the credit subsidy calculation also considers the
contractual and structural protections of the transaction. These
protections may include, among others, parent or third-party
guarantees, access to take-or-pay contracts or State PUC rate recovery
mechanisms, or subordinated structures.
In those instances where the Federal Financing Bank is providing
the financing pursuant to an agencies loan guarantee, the resulting
transaction is considered a direct loan. This requires the credit
subsidy calculation under the Federal Credit Reform Act of 1990 to be
performed under the requirements for a direct loan. The most
significant difference between the calculations of the credit subsidy
cost of a loan guarantee as compared with that of a direct loan is that
the cash flows derived from the interest rate spread above the Federal
Financing Bank's costs of funds (which is the Treasury rate for a given
maturity) is generally considered an inflow to the U.S. Government.
This inflow serves to reduce the overall credit subsidy costs that need
to be appropriated. In the case of the Title XVII program where the
borrower is paying the full cost of the obligation under
Sec. 1702(b)(2), this inflow would serve to lower the credit subsidy
amount that the borrower is required to pay to the Department of the
Treasury.
THE ROLE OF THE FEDERAL FINANCING BANK
The Federal Financing Bank Act of 1973 created an instrumentality
of the U.S. Government under the general supervision of the Secretary
of the Treasury. It was established to coordinate agency borrowings and
the Federal credit and debt management policies of the U.S. Government.
By statute, it is authorized to purchase or sell any obligation issued,
sold or guaranteed by a Federal agency. In practice, the Federal
Financing Bank finances agencies such as the U.S. Postal Service, the
FDIC, the NCUA, as well as the loans guaranteed by DOE, the Department
of Education's HBCU program, and the USDA's Rural Utilities Service.
The Federal Financing Bank has often been used as an instrument of
Federal credit policy by Treasury and OMB to constrain program agencies
and insert additional controls on Federal credit programs. At other
times, OMB has objected to the availability of the Federal Financing
Bank in Federal credit programs and barred its use by limiting the
definition of eligible lender in legislation to ``non-Federal''
entities.
As mentioned previously, one of the most significant benefits to
using the Federal Financing Bank to finance guaranteed loans (whether
for the U.S. Government in those Federal credit programs where the
taxpayer is funding the appropriation or in the case of Sec. 1703
projects where the borrower is paying the full cost of the credit
subsidy) is that the credit subsidy amount will be lower as a result of
the cash inflow to the U.S. Government from the interest spread that
the Federal Financing Bank earns above its cost of funds. Use of the
Federal Financing Bank will marginally lower the net credit risk
exposure of the U.S. Government because loan guarantees that are
financed by the private sector are financed at a higher interest rate
than the Federal Financing Bank and therefore the U.S. Government is
guaranteeing that higher interest rate.
The Federal Financing Bank also provides certainty of transaction
execution in all market conditions, which is an important benefit for
both the borrower and the U.S. Government. During the recent financial
market crisis, we saw significant periods where entire classes of loans
guaranteed by the U.S. Government either could not trade or could not
be traded at levels that one would expect of an obligation guaranteed
by the U.S. Government. Dislocations in the private markets for U.S.
Government guaranteed loans or securities backed by these loans provide
counterproductive signals to market participants, can significantly
impede the objectives of the underlying Federal credit programs, and
can potentially have implications in the markets for Treasury's debt
issuances.
TITLE XVII HISTORY, CONGRESSIONAL INTENT AND PROGRAM EXECUTION (2005-
2010)
It is important to consider the original purposes of Title XVII and
how Congress structured the section to achieve these purposes. In Title
XVII, Congress recognized that there was a private market failure to
finance innovative clean energy technologies that reduce greenhouse gas
emissions and that this market failure encompassed a broad range of
technologies. Congress also recognized the importance of getting these
innovative clean energy technologies constructed and into operation,
however, given the costs of the various technologies, the U.S.
Government was unlikely to have the budget dollars necessary to
appropriate to this program in amounts sufficient to achieve the
purposes of the program. In Title XVII, Congress provided a path to
finance enough projects to get a technology into ``general use'', at
which point the market failure is presumed to be corrected. The
definition of ``general use'' in the Final Rule is three commercial
projects of a particular technology in the same general application as
the proposed project, each operating for five years.
Congress provided two options to pay for the cost of the loan
guarantees under Sec. 1702(b) which reads:
``(b) Specific Appropriation or Contribution.--No guarantee
shall be made unless--
(1) an appropriation for the cost has been made; or
(2) the Secretary has received from the borrower a payment in
full for the cost of the obligation and deposited the payment
into the Treasury.''
Sec. 1702(b)(1) is the traditional approach to Federal credit where
the U.S. Government pays for the cost of the loan guarantee through an
appropriation with the cost of the loan guarantee being measured in
accordance with the Federal Credit Reform Act of 1990.
Sec. 1702(b)(2) is the ``borrower pay'' alternative where the
borrower pays the full cost of the loan guarantee with the cost of the
loan guarantee being measured in accordance with the Federal Credit
Reform Act of 1990.
Given the budget constraints of the U.S. Government, both the prior
and current Administration have opted for the Sec. 1702(b)(2)
``borrower-pay'' option for the credit subsidy costs to fund Sec. 1703
projects. In providing the ``borrower pay'' option in Sec. 1702(b)(2)
as a substitute for a taxpayer funded appropriation, and requiring that
the ``cost of the obligation'' be measured by the standards in the
Federal Credit Reform Act, Congress was structuring a program that
would not impact the Federal budget, would fully compensate the U.S.
Government for the risks that it was assuming, and would be of
sufficient size to get clean energy technologies into general use.
The American Recovery and Reinvestment Act of 2009 amended Title
XVII to add a temporary loan guarantee program under Sec. 1705 for
renewable energy and power transmission projects. These ``shovel
ready'' projects must commence construction by September 30, 2011. The
credit subsidy costs for projects under Sec. 1705 are paid for by the
U.S. Government through appropriations.
Since the passage of the Energy Policy Act of 2005 that provided
the Title XVII loan guarantee program, we saw the effects of an
unwilling Executive Branch that published a flawed Final Rule in 2007
and that operationally executed the program in a manner that was
inconsistent with the relevant statutes as well as the Congressional
intent of the program. President Obama and his team are burdened with
this operational legacy from the prior Administration.
To understand the potential size of the Title XVII program, from
August 2006 through August 9, 2010, DOE issued eight solicitations for
various eligible technologies. According to a July 2010 report from
GAO, these solicitations generated requests for $174.7 billion in loan
guarantees. Given that the DOE cannot guarantee more than 80% of the
project costs, and in fact is frequently directing borrowers to even
lower percentages, the applications represented an estimated $250
billion in total project costs. As of August 12th, DOE has closed on
$695 million of guarantees, all of which have been through the
Sec. 1705 portion of the program that was created under ARRA. As
previously mentioned, the credit subsidy costs of Sec. 1705 projects
are paid for with U.S. Government appropriations.
FEDERAL LOAN GUARANTEES FOR SEC. 1703 PROJECTS
Sec. 1703 provides ten broad categories of eligible clean energy
technology projects that must avoid, reduce, or sequester greenhouse
gases and employ new or significantly improved technologies. The
variety of technologies and the purposes for which they are used,
necessarily result in differing business models, financial
requirements, contributions to the statutory objectives, technology
risks and financial prospects. However, Title XVII provides the ability
to execute the program in a technology neutral manner. This can occur
by implementing the program under the borrower pay provisions of
Sec. 1702(b)(2), where the only statutory limit on loan guarantees is
driven by the amount of time that it takes to get a technology into
``general use'' and the borrowers willingness to pay the credit subsidy
and administrative costs. Whereas if Title XVII is executed under the
requirements of Sec. 1702(b)(1) and the U.S. Government needs to
appropriate taxpayer dollars, decisions on the allocation of maximum
loan guarantee levels for each technology become necessary.
Regardless of the mechanism used to pay for the credit subsidy
costs of the program, each project is subjected to the same statutory
and rule requirements that protect the taxpayer and fully price the
risk that would be assumed for projects that receive a loan guarantee.
For example, the statute requires the project sponsor to have at least
20% ``skin in the game'' as DOE cannot guarantee more than 80% of the
project costs. Each application is subjected to an extensive due
diligence process by the U.S. Government, a rating agency as well as by
the project sponsor. The terms and conditions of the individual
projects are supposed to be fully reflected in the calculation of the
credit subsidy under the Federal Credit Reform Act of 1990. These
calculations have been employed for a wide variety of Federal credit
programs and when employed on a project basis, as opposed to a
portfolio basis, ensure that all relevant factors of the individual
projects are considered. On June 22, 2007, then CBO Director Orzag sent
Chairman Obey a letter that commented on the ability of the Rural
Utilities Service to implement a loan guarantee program that would be
designed to result in ``no net cost'' to the U.S. Government. CBO
expressed concerns that programs that utilized a single average rate
would be very difficult to manage to the ``no net cost'' to the U.S.
Government and then proceeded to lay out the structure and process of a
program that could achieve the objective of ``no net cost.'' The most
significant recommendation is to establish the credit subsidy fee based
on each individual project.
It is important to understand the issues and process that one
undergoes with DOE which applies to all technologies. After an
extensive review process of the technology and business plan of a
project sponsor, that includes an initial project rating by a rating
agency (for those projects exceeding $25 million) as well as a full
evaluation by the U.S. Government, DOE decides whether or not to offer
a ``term sheet'' to a prospective project sponsor. Once the ``term
sheet'' is agreed to by both the DOE and the project sponsor, a
``conditional commitment'' is issued. During this phase of the process,
the DOE and OMB will provide the project sponsor with a nonbinding
estimate of the credit subsidy costs that they will be required to pay
at closing. The ``conditional commitment'' will detail the conditions
precedent required for closing, which include all contractual,
statutory and regulatory requirements. In addition to these
requirements, at a time no later than 30 days prior to the fulfillment
of the conditions precedent and scheduled closing, the final project
business plan will have been evaluated by a rating agency to determine
the actual rating for the project, and the project sponsor will submit
all of this to DOE and OMB for evaluation, compliance with the
conditional commitment, as well as the calculation of the actual credit
subsidy costs.
The time period between the ``conditional commitment'' and the
period just before the financial closing provides uncertainty for those
costs that have not been contractually set. However, these costs will
be substantially confirmed prior to closing and the development of the
final business plan will ensure that the full costs of the project are
used to determine the actual credit subsidy costs. For the project
sponsor and its investors, who will have invested significant sums of
their own before any financial closing on a Federal loan guarantee, the
final business plan will either confirm the financial viability of the
project or the need to cancel the project and therefore not close on
the Federal loan guarantee. As it relates to post-closing cost
overruns, prior Title XVII commitments required that any post-closing
cost overruns be paid for with new equity from the project sponsor.
For a variety of reasons, the actual closing on the conditional
commitment will be a very complicated process. It will be complicated
because satisfaction of the conditions precedent is often only
achievable with the passage of significant time. However, this interim
period will provide better and up-to-date information (that may be
neutral, favorable or unfavorable) that will drive the final business
plan and the rating agency process that will ultimately factor into the
calculation of the actual credit subsidy costs. While there are some
Final Rule based issues that add ambiguity into the actual closing that
are neither normal nor customary in either the private markets or in
Federal credit programs, the broad process contributes significant
protections to the taxpayer.
Labor has an important role in Title XVII projects and has taken
proactive steps to provide cost certainty, work quality, and the
availability of a highly skilled workforce for these important
projects. For example, the Building and Construction Trades Department
of the AFL-CIO has entered into Project Labor Agreements with a number
of Title XVII project sponsors selected for due diligence by DOE. These
agreements will help project sponsors control the labor and quality
costs of the projects and focus all participants on bringing high
quality projects in on-time and on-budget. This will also materially
contribute to reducing the overall risk of the projects to the U.S.
Government.
The detailed Project Labor Agreements are designed to supply the
highly skilled and trained workforce needed for these complex and
crucial clean energy infrastructure projects. They include the
establishment of multi-craft training centers located near or on the
new sites, rearranging traditional apprenticeship parameters so that
apprentices arrive on the job with productive skills from the first
day, the development of special training partnerships with vendors and
suppliers to certify all workers on the installation of their
particular components, and the development of programs to train a local
workforce for careers in the construction, operation and maintenance of
these new clean energy facilities.
PROTECTING THE TAXPAYER AND THE FEDERAL CREDIT REFORM ACT OF 1990
Historically, the U.S. Government pays for the cost of credit
subsidy directly with appropriations of taxpayer funds. The one
significant exception to this is in Title XVII where Congress
specifically authorized the borrower to pay ``in full for the cost of
the obligation'' in lieu of a taxpayer funded appropriation. As
previously discussed, the vast majority of pre-crisis Federal credit is
extended in homogeneous transactions characterized by high volumes and
relatively low dollar amounts, concentrated in housing, education,
rural development and small business. Because the U.S. Government pays
for the credit subsidy costs of these transactions, the mechanics of
the calculation and the underlying assumptions used by OMB are of less
import to the borrower. As a result, OMB makes a number of simplifying
assumptions which may be appropriate for the U.S. Government when
broadly seeking to implement the purposes of Federal Credit Reform Act.
However, this approach can be quite costly to the borrower when the
transactions themselves are highly customized and part of a unique
self-pay program. As a result, it is very important that in
implementing the Federal Credit Reform Act, OMB and DOE do so in a
manner that is literally faithful to the language of the statute and
that recognize the highly customized and unique nature of each project.
One concern in executing any Federal credit program is whether or
not the Federal Credit Reform Act of 1990 provides an accurate
calculation of the net present value of the long-term costs to the U.S.
Government of extending the credit. In considering the accuracy of the
calculation of credit subsidy across those special one-off Federal
credit programs such as Title XVII, experience generally shows that the
initial credit subsidy cost, calculated either by OMB or CBO, are more
conservative than the actual history of the program. The Air
Transportation Stabilization Board (``ATSB''), the $10 billion loan
guarantee program for airlines after the September 11th attacks was
originally expected to produce a positive credit subsidy in the 30% to
35% range (a positive credit subsidy ``costs'' the U.S. Government, a
negative credit subsidy ``makes money'' for the U.S. Government.) The
ATSB made six loan guarantees, three of which subsequently filed for
Chapter 11 bankruptcy protection. Even with one $20 million loss due to
the post-loan guarantee bankruptcy of ATA, the ATSB netted
approximately $300 million through fees and the exercise of warrants
after issuing $1.6 billion in Federal loan guarantees, resulting in a
negative credit subsidy of over 18% for the overall program. In
considering the credit subsidy costs of the TARP program, Table 4-8 on
page 41 of the Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2011 (http://www.whitehouse.gov/omb/budget/
fy2011/assets/econ_analyses.pdf) provides a further example of this.
This is not to say that the credit subsidy calculation cannot be wrong,
but it is to say that the Federal Credit Reform Act is a very good tool
to measure the net present value of the long-term cost to the U.S.
Government of any Federal credit program, has a good reputation over
the 20-years since enactment, and absent extreme carelessness on the
part of the program agency and OMB, is going to properly protect the
taxpayer.
As it relates to the calculation of the credit subsidy costs, I
would offer that single point estimates in either the minimum or
maximum forms are not supportable suppositions. To follow such a
directed outcome would reject the relevance and reliability of the
Federal Credit Reform Act in calculating the credit subsidy costs and
put the U.S. Government in the untenable position of calculating the
credit subsidy costs outside of the statutorily required calculation
under Sec. 1701(2) of Title XVII.
Properly and faithfully implemented, the Federal Credit Reform Act
considers all of the cash flows over the entire lifetime of the loan
including fees, defaults, recoveries and contractual and structural
protections. This analysis over the entire lifetime of the loan is
important as the maximum term of a loan guarantee under Sec. 1702(f) is
the lesser of 30 years or 90 percent of the useful life of the projects
assets. The ``entire lifetime of the loan'' analysis that is required
under the Federal Credit Reform Act is substantially different from the
scoring of non-credit spending programs of the U.S. Government. In
these non-credit spending programs, there is no attempt to analyze,
measure or otherwise calculate the costs beyond the 10-year budget
window. To the extent that the spending program continues beyond the
10-year budget window, the taxpayer is fully exposed to those costs and
liabilities.
THE TITLE XVII OPPORTUNITY
The President and Congress have a very powerful policy tool in
Title XVII that is unique and important in the current economic
environment, especially with the U.S. Government facing the stresses
and difficult choices involved with our significant budget deficits.
Thoughtful implementation of Title XVII can:
1. drive economic growth through the development of private
sector clean energy infrastructure projects that are built and
fully paid for by the private sector;
2. provide significant short-term and long-term jobs in
construction, manufacturing and operations;
3. drive significant new investment in our domestic supply
chain manufacturing base in supporting industries such as iron
and steel;
4. develop environmentally clean and secure domestic energy
supply capacity;
5. correct the private market failure to finance clean,
innovative energy technologies;
6. provide well qualified project sponsors with confidence
that credible projects can receive a Federal loan guarantee
through a reasonable and predictable process; and,
7. create and foster America's leadership in the development
and deployment of clean energy technologies.
The reason that Title XVII is so powerful lies in the fact that the
President does not need new legislative authority or new appropriations
to make the program work. The legislation for Title XVII provides all
of the authority that the Executive Branch needs to execute the
program. Unlike all other Federal credit programs where the U.S.
Government pays for the credit subsidy and administrative costs of the
programs, Title XVII provides that the credit subsidy (Sec. 1702(b)(2))
and the administrative (Sec. 1702(h)) costs are fully paid for by the
borrower and substitutes the borrower payments for the appropriations.
This means that the Federal budget is not affected by the issuance of
the loan guarantees under Sec. 1703 and that the level of risk assumed
by the U.S. Government is fully compensated for as measured by the
Federal Credit Reform Act. The calculation for this risk is completed
in the same manner as if this was a traditional Federal credit program
where the U.S. Government paid the credit subsidy costs.
what are the key impediments to a fully functional title xvii?
The failure of Title XVII to become a meaningful Federal credit
program is directly related to the decisions of the prior
Administration and OMB in establishing the process, procedures and
rules that govern the program today. While DOE is the program agency
for Title XVII, OMB's role and responsibility for Federal credit places
it at the center of success or failure of Title XVII or any other
Federal credit program. To be clear, OMB owns Federal credit. They are
responsible for implementing the Federal Credit Reform Act, which
includes the calculation of the Federal credit subsidy, they have
significant input and final say on the rules and regulations
implementing any Federal credit program, they have tremendous influence
and responsibility for an agency's budget, and they have significant
influence on the tools that can be helpful in successfully executing
Federal credit programs, such as the use of the Federal Financing Bank.
The impediments to a fully functional Title XVII rest largely with
administrative decisions of the past. The President and his team can
correct these problems by providing specific leadership and direction
to the agency's whose responsibilities impact the successful execution
of Title XVII. The President can correct the impediments by:
1. Implementing the Federal Credit Reform Act in a manner
that is literally faithful to the language of the statute,
particularly involving the calculation of the Federal credit
subsidy payment required from a borrower under Sec. 1702(b)(2);
2. Amending the Final Rule to correct rules that are
inconsistent with the statute, congressional intent, the
Federal Credit Reform Act, and OMB Circulars pertaining to
Federal credit programs;
3. Eliminating maximum loan guarantee authorization levels
and their inclusion in Appropriation Acts as this approach is
inconsistent with the ``borrower pay'' provision of
Sec. 1702(b)(2);
4. Discontinuing the Financial Institution Partnership
Program (``FIPP'') whose function is inconsistent with Title
XVII and negatively impacts the targeted technologies and
sponsors;
5. Establishing a contractual ``credit subsidy downgrade
fee'' as a way to address CBO's concerns that the credit
subsidy calculation will underestimate the long term costs to
the taxpayers and therefore require the CBO scoring convention
that requires a taxpayer funded appropriation of 1% of the loan
guarantee authorization levels sought; and
6. Issuing an Executive Order pertaining to Title XVII to
provide unambiguous direction to the agencies responsible for
its implementation. This also serves to provide credible
project sponsors, investors and the supply chain confidence
that Title XVII will be a reasonable, predictable and available
Federal credit program.
Each of these issues is addressed separately below.
FAITHFUL IMPLEMENTATION OF THE FEDERAL CREDIT REFORM ACT AND
CALCULATING THE BORROWER PAID CREDIT SUBSIDY FEE
Key Concerns in Properly Calculating Federal Credit Subsidy
For the U.S. Government, an accurate calculation of the credit
subsidy fee is important because:
1. It is required under the Federal Credit Reform Act of
1990;
2. It is a requirement of Sec. 1701(2) and Sec. 1702(b)(2) of
Title XVII;
3. It ensures that the U.S. taxpayer is compensated for the
risks that they are assuming in providing for a loan guarantee;
4. It ensures that the Administration is properly protected
through a thoughtful and statutorily rigorous methodology; and,
5. An accurate calculation will provide project sponsors, the
Administration, Congress and the American people with the full
potential of the Title XVII loan guarantee program to achieve
the economic, environmental and domestic energy objectives and
policies of the President and Congress.
For the borrower, an accurate calculation of the credit subsidy fee
is important because the borrower is required to pay upfront for the
full cost of the obligation as calculated by the Federal Credit Reform
Act and therefore it should be done so in a manner that is faithful to
the relevant statutes, rules, regulations, OMB Circulars, and
transaction specific facts. The credit subsidy affects the overall
costs of the investment and borrower's need to have confidence that
whatever the final outcome, the amount that they would be charged
reflects the statute and their particular project.
Critical Definitions and Requirements of the Federal Credit Reform Act
There are several critical definitions and requirements that impact
the credit subsidy calculation and therefore are important to be aware
of. Specifically:
1. Sec. 502(5)(A) defines the term ``cost'' as meaning ``the
estimated long-term cost to the Government of a direct loan or
loan guarantee or modification thereof, calculated on a net
present value basis, excluding administrative costs and any
incidental effects on governmental receipts or outlays.''
2. The term ``direct loan'' is relevant here as a Federal
Financing Bank financing converts a ``Loan Guarantee'' into a
``Direct Loan'' and therefore triggers the calculation of the
credit subsidy cost under the provisions of Sec. 502(5)(B)
which reads: ``The cost of a direct loan shall be the net
present value, at the time when the direct loan is disbursed,
of the following estimated cash flows: (i) loan disbursements;
(ii) repayments of principal; and (iii) payments of interest
and other payments by or to the Government over the life of the
loan after adjusting for estimated defaults, prepayments, fees,
penalties, and other recoveries; including the effects of
changes in loan terms resulting from the exercise by the
borrower of an option included in the loan contract.
3. The discount rates used to calculate the net present value
is established in statute. Sec. 502(5)(E) reads ``In estimating
net present values, the discount rate shall be the average
interest rate on marketable Treasury securities of similar
maturity to the cash flows of the direct loan or loan guarantee
for which the estimate is being made.''
Important Differences between Title XVII and other Federal Credit
Programs
As previously discussed, most Federal credit programs involve
longstanding programs characterized by a large number of transactions,
relatively small dollar amounts per transaction, and the U.S. taxpayer
being responsible for paying the Federal credit subsidy as calculated
under the Federal Credit Reform Act through an appropriation. Because
the U.S. Government pays for the credit subsidy costs of these
transactions, the mechanics of the calculation and the underlying
assumptions used by OMB are of less import to the borrower. As a result
of the nature of these programs, certain calculation shortcuts that are
perfectly acceptable from a broad portfolio perspective and that are
administratively more efficient are certainly reasonable, particularly
when the U.S. Government is responsible for the Federal credit subsidy
appropriation. However, this approach can be quite costly to the
borrower when the transactions themselves are highly customized and
part of a unique self-pay program.
Title XVII provided that the Federal credit subsidy appropriation
required could be funded by U.S. Government provided (taxpayer)
appropriations as it is in all other Federal credit programs through
Sec. 1702(b)(1), or alternatively could be funded by the borrower
paying the same amount upfront through Sec. 1702(b)(2). Congress
established the alternative approach of Sec. 1702(b)(2) because it
understood that the limited budget dollars available for a new Federal
credit program would not be sufficient to achieve the statutory
objectives of Title XVII given the number and types of technologies
eligible under Sec. 1703. Importantly, by enacting a later and more
specific law, the provisions of Title XVII supersede conflicting
provisions of previously enacted laws, most relevant in the instant
case, the Federal Credit Reform Act.
Implementing under the borrower pay provisions of Sec. 1702(b)(2)
inherently requires the recognition of the unique characteristics of
each project. This requires a literally faithful interpretation of the
Federal Credit Reform Act.
concerns about omb's approach to calculating federal credit subsidy
There are a variety of concerns about whether OMB is calculating
the Federal credit subsidy in a manner that is literally faithful to
statute. There are a lot of inputs and assumptions that are required to
be made in the modeling of the spreadsheet that feeds OMB's Credit
Subsidy Calculator. While the following are not a complete listing of
the issues, they do represent significant concerns that are
particularly important in a statutorily faithful calculation.
1. The cash flows to the U.S. Government from project
sponsors are not fully incorporated into the model that OMB is
using for Title XVII. These concerns center on several areas:
a. The interest spread above the Federal Financing Bank's
cost of funds (which is the Treasury rate for a given maturity)
should be treated as a cash flow to the U.S. Government;
b. Fees collected from the borrower that are not
specifically cost based should be treated as a cash flow to the
U.S. Government;
c. Recovery values should be fully analyzed, valued and
treated as a cash flow to the U.S. Government. This represents
a significant issue because:
i. As outlined in the DOE/OMB Report to the
Committees on Appropriations entitled ``Credit Subsidy
Methodology'', OMB established a ``base recovery rate''
that could be notched up or down according to a
``number of factors'';
ii. In practice, OMB has adopted a base recovery rate
of 55% for all projects, regardless of individual
project-specific factors;
iii. Recovery values will vary on a project-by-
project basis. This is due to the technology, nature
and structure of the project, the project sponsors,
contractual differences, as well as other factors.
Recovery values need to be considered in a project-
specific context as there are likely to be multiple
sources of recoveries for any particular project.
Examples of different sources of recovery include:
1. From the sale of the underlying asset serving as
the collateral;
2. From sponsor commitments to inject new equity
based on contractual commitments;
3. From commitments from the project's technology
and/or EPC contractors to cover certain obligations,
such as cost overruns or other contingencies;
4. From other collateral provided to the U.S.
Government, such as cash collateral accounts; and,
5. From other contractual or structural protections
agreed to by the project sponsor.
One concrete example of multiple sources of recovery occurred
during the execution of the ATSB. The Board hired a variety of
valuation experts to provide opinions on a range of collateral that the
ATSB ultimately became contractually entitled to. These experts opined
on items that would generate recovery cash flows to the U.S. Government
such as aircraft, real estate, simulators, equipment, gates, routes,
slots, warrants and contractual provisions. The retention of these
experts and use of their valuations provided the ATSB with a sound and
supportable basis to make recovery valuation estimates and incorporate
the data into the credit subsidy calculation.
2. The discount rates used in OMB's Credit Subsidy Calculator
model reflect the assumptions used in the President's Budget
and not the actual ``average interest rate on marketable
Treasury securities of similar maturity to the cash flows of
the direct loan or loan guarantee for which the estimate is
being made'' as directed in Sec. 502(5)(E). This is
particularly meaningful as the loan guarantees are being
financed by the Federal Financing Bank based on the Treasury
rate for a given maturity at the date of disbursement.
As OMB recognized in a March 11, 1998 letter to GAO
pertaining to a GAO report on credit reform (GAO/AIMD-98-14),
``subsidy rates are highly dependent on the interest rate that
is used to discount the cash flows. A change in the discount
rate will cause the subsidy rate to change, even if the cash
flows are unaffected.''
Recognizing the importance of the discount rates and the
statutory language and intent that the Federal Credit Reform
Act provides, it is critical that this component be faithfully
executed. In the instant case of Title XVII, this is especially
important because the Federal Financing Bank is the required
lender where the U.S. Government is guaranteeing 100% of the
guaranteed obligation (see Final Rule at Sec. 609.10(d)(4(i)).
The importance is clear as the Federal Financing Bank is
providing financing based on the Treasury rate for a given
maturity at the time of disbursement. A faithful interpretation
of the discount rate required under the Federal Credit Reform
Act would suggest that the discount rate employed would be
equal to the base Treasury rate that the Federal Financing Bank
is using in its financing to the borrower. Utilizing the
Treasury rate assumptions in the President's budget would
generally be acceptable as long as the borrower's interest
payment cash flows to the U.S. Government are modeled off the
same Treasury rate assumptions.
3. OMB is providing guidance and direction to DOE (and
indirectly to applicants) that is inconsistent with the
underlying statutes and rules. Specifically, the Final Rule and
the relevant solicitations provide for a non-binding estimate
of the Federal credit subsidy costs of a proposed project but
recognize that the final Federal credit subsidy amount can only
be determined near the date of financial closing and
disbursement. Common language in the solicitations says ``The
final Credit Subsidy Cost determination must be made at or
prior to the closing on the Loan Guarantee Agreement and may
differ from the preliminary estimate of the Credit Subsidy
Cost, depending on project-specific and other relevant factors
including final structure, the terms and conditions of the debt
supported by the Title XVII guarantee and risk characteristics
of the project.'' This is consistent with the requirements of
the Federal Credit Reform Act of 1990, Title XVII, the Final
Rule and the relevant solicitations. However, OMB has suggested
that the non-binding estimate of the Federal credit subsidy is
actually an amount that the final credit subsidy required will
not be below. This is problematic for four reasons:
a. It is not consistent with the Federal Credit Reform Act
requirement that the credit subsidy cost be determined at the
``date of disbursement'';
b. It suggests that changes in the final business plan,
project rating or transaction structure (whether positive,
negative or neutral) are not relevant to the final credit
subsidy cost calculation;
c. The existing assumptions and inputs to used to calculate
the Federal credit subsidy estimates have not been faithful to
the Federal Credit Reform Act; and,
d. It is important for project sponsors and other
stakeholders to know that there is a statutory and fact-based
framework that will be followed with respect to the calculation
of the credit subsidy payment required and that positive or
negative factors that arise after the term sheet but before
financial closing will be fully considered in accordance with
the law.
The faithful implementation of the Federal Credit Reform Act is a
very time sensitive and critical issue, particularly for those project
sponsors in the due diligence queue at DOE. The reason is that the non-
binding Federal credit subsidy cost estimates that OMB and DOE provide
project sponsors, gives the sponsor its first look at the expected
check that the U.S. Government will seek, and this informs their
investment decision. If the number provided is at a particular level
that makes the project uneconomic, principally because the calculation
was not faithful to the statute, and this drives a project sponsor and
its investors to abandon a project that would otherwise have been
viable, then not only have the purposes of Title XVII been frustrated,
but the loss to everyone is irreplaceable.
AMENDING THE FINAL RULE
The Final Rule needs to be amended to address rules that are
inconsistent with the statute, congressional intent, the Federal Credit
Reform Act, and OMB Circulars pertaining to Federal credit programs.
The Final Rule was originally issued in October 2007. Under Secretary
Chu's leadership, DOE reviewed the Bush Administration's Final Rule and
issued a Notice of Proposed Rulemaking in August 2009 to correct what
it viewed as statutory misinterpretations on several narrow issues.
While it was clear that DOE was correct to pursue the proposed changes,
there are in fact other areas where the Final Rule is inconsistent with
the underlying statute and Congressional intent of Title XVII,
inconsistent with other applicable statutes, inconsistent with OMB
Circular's pertaining to Federal credit programs and which impede the
ability of Title XVII to achieve its purposes.
The specific items include:
1. Elimination of the partial guarantee in the Final Rule
(Sec. 609.10(d)(4)(ii) and (iii) and in the Sec. 609.2
definition of ``Guaranteed Obligation''. Partial guarantees are
inconsistent with the statutory definition of ``Full Faith and
Credit'' provided in Sec. 1702(j) and impede execution of Title
XVII.
In providing for a partial guarantee in the Final Rule, OMB
and DOE have usurped the power that the Constitution gave
solely to Congress under Article I, Section 8; the power to
pledge the credit of the United States.
Institutionally, both OMB and Treasury have had a
preference for partial guarantees and for which OMB provides
guidance under OMB Circular A-129 (Appendix A (II) (3) (a)).
The principal rationale for this position pertains to the need
for the beneficiary of the loan guarantee to have ``skin in the
game''. This particular view fails to recognize that Congress
ensured that the project sponsor had ``skin in the game'' by
limiting the guarantee to 80% of the project cost in
Sec. 1702(c). Regardless of an agencies institutional position,
it cannot be imposed in a manner that is inconsistent with the
Constitution and the statute, which the current Final Rule is.
Beyond the Constitutional issues, Congress and the
Executive should be concerned whenever rules or regulations
cast doubt on the meaning of the U.S. Government's pledge of
its full faith and credit as it is detrimental to the U.S.
Government's interest in the financial markets. It also creates
uncertainty with project sponsors, eligible lenders, financial
partners and other stakeholders, all of which impede the
execution of Federal credit programs and their general
purposes, including correcting a private market failure for
credit availability.
While this particular issue originated in the 2007 Final
Rule, in October 2009, DOE created the Financial Institution
Partnership Program to implement a partial guarantee program
under Sec. 1705. For the reasons discussed herein, this is
inconsistent with the statutory language of Title XVII and the
Executive and Congress should be very concerned about the
implications for both Title XVII and future Federal credit
programs.
The inclusion of Sec. 609.10(d)(4)(ii) and (iii) and the
Sec. 609.2 definition of ``Guaranteed Obligation'' are of
particular concern. As it relates to the definition, the
inclusion of the words ``or any part of'' is troubling as these
words are used by Congress when they seek to provide the
Executive with discretion to provide less than a full faith and
credit obligation; however these words were not included in
Title XVII and are inconsistent with the underlying statutory
meaning and congressional intent of the words ``Full Faith and
Credit'' used in Title XVII.
Sec. 1702(j) reads: ``FULL FAITH AND CREDIT.--The
full faith and credit of the United States is pledged
to the payment of all guarantees issued under this
section with respect to principal and interest.''
The concept of full faith and credit is well established in
the Constitution, in statute and in U.S. Attorney General
Opinions. After a long history of agencies seeking the formal
opinion of the Attorney General as to whether the full faith
and credit of the United States is pledged to a particular
obligation, Attorney General Elliott L. Richardson issued a
Memorandum to the Heads of Executive Departments dated October
10, 1973 in which he memorializes the Attorney General's
opinion on the meaning of ``full faith and credit of the United
States''. The third sentence reads, ``More frequently, however,
the pledge of full faith and credit is not in doubt and may
well be specified in the statute itself.'' This is the fact in
the instant case.
In 6 U.S. Op. Off. Legal Counsel 233, 1982 WL 170692
(O.L.C.), the Attorney General opinion on a full faith a credit
question recalls an earlier Attorney General opinion in which
he says ``. . .If there is statutory authority for the
guaranties, absent specific language to the contrary such
guaranties would constitute obligations of the United States as
fully backed by its faith and credit as would be the case were
those terms actually used.''
In 6 U.S. Op. Off. Legal Counsel 262, 1982 WL 170697
(O.L.C.), the Attorney General says ``It has long been the
position of the Attorney General that when Congress authorizes
a federal agency or officer to incur obligations, those
obligations are supported by the full faith and credit of the
United States, unless the authorizing statute specifically
provides otherwise.''
An example of where Congress expressly provided discretion
to limit the guarantee can be seen in P.L. 107-42 (Air
Transportation Safety and System Stabilization Act).
Sec. 107 (2) reads ``FEDRAL CREDIT INSTRUMENT--The
term ``Federal credit instrument'' means any guarantee
or other pledge by the Board issued under section
101(a)(1) to pledge the full faith and credit of the
United States to pay all or part of any of the
principal of and interest on a loan or other debt
obligation issued by an obligor and funded by a
lender.''
In establishing the regulations for ATSB, the Board used
the discretion that Congress provided under Sec. 107 (2) to
limit guarantees to less than 100% of the principal and
interest (see 14 CFR Sec. 1300.14).
There seems to be very little ambiguity in the statutory
understanding of ``full faith and credit'' either by Congress
or by the Attorney General. To suggest that the specific
statutory language of Sec. 1702(j) referencing ``full faith and
credit'' with respect to principal and interest can be further
limited beyond the specific limiting statutory language of
Sec. 1702(c) seems entirely inconsistent with the historical
use and understanding of this language. In fact, this would
require one to assume that an agency or officer, authorized by
Congress to incur an obligation, has the independent authority
to determine the quality or quantity of the guarantee different
from any specific limiting language. This presumption has been
rejected by the Attorney General and was cited in U.S. Op. Off.
Legal Counsel 262, 1982 WL 170697 (O.L.C).
2. Elimination of the unilateral right of the Secretary to
terminate a Conditional Commitment as currently provided in the
Final Rule definition of ``Conditional Commitment''
(Sec. 609.2). This provision is inconsistent with Sec. 502(4)
of the Federal Credit Reform Act, the standards of the private
financial markets for debt and equity conditional commitments
and impede execution of Title XVII.
The Final Rule definition of ``Conditional Commitment''
(Sec. 609.2) contains the provision that ``Provided that the
Secretary may terminate a Conditional Commitment for any reason
at any time prior to the execution of the Loan Guarantee
Agreement; and Provided further that the Secretary may not
delegate this authority to terminate a Conditional
Commitment.''
In Federal credit programs, and in the private financial
markets for debt and equity, fulfillment of agreed upon
conditions precedent is the legal standard for removing any
conditionality to an agreement. Sec. 502(4) of the Federal
Credit Reform Act reads:
The term ``loan guarantee commitment'' means a
binding agreement by a Federal agency to make a loan
guarantee when specified conditions are fulfilled by
the borrower, the lender, or any other party to the
guarantee agreement.
While it might be argued that absent language providing the
Secretary with the unilateral right to terminate the
conditional commitment, the borrower would be required to pay
the full amount of the credit subsidy upon the issuance of the
conditional commitment, this fails to distinguish between
implementing the program under Sec. 1702(b)(1) and
Sec. 1702(b)(2) where the guarantee is also conditioned on the
borrower paying the full cost of the obligation at closing.
Further, the idea that the borrower should pay the credit
subsidy at the time of the conditional commitment in order to
remove Secretary's unilateral right to terminate conditional
commitment exposes the taxpayer to unnecessary risk that they
should not face given the time lag between conditional
commitment and the satisfaction of the conditions precedent.
Providing the Secretary with the unconditional right to
terminate a commitment after fulfillment of the conditions
precedent introduces a very high level of uncertainty that is
detrimental to the interests of the U.S. Government. This
negatively impacts the perception of Federal guarantees in the
financial markets not only for Title XVII, but in other
programs as well. It also provides project sponsors with the
unhelpful signal that despite fulfilling the conditions
precedent, they may never close on the loan guarantee. This
type of language discourages project sponsors from advancing
eligible projects. The Executive and Congress should each be
concerned about setting new standards and precedents that
adversely impact their ability to execute statutes and their
priorities.
3. Elimination of the solicitation requirement in Sec. 609.3
of the Final Rule. This requirement is inconsistent with a
program where the borrower is responsible for paying the full
cost of the credit subsidy and administrative fees as they are
for Sec. 1703 technologies and the intent of Title XVII to get
technologies into general use. Conforming changes are needed in
Sec. 602.2 definition of ``Application'' and ``Pre-
Application'', Sec. 609.3(a) and (b), Sec. 609.4, Sec. 609.5,
Sec. 609.6, and Sec. 609.7.
The solicitation approach creates a greater likelihood of
suboptimal applications as applicants/sponsors are forced into
submitting an application at the time and choosing of DOE as
opposed to when they, their partners and the financial markets
are in the best position to do so. A new ``as-ready'' approach
for applicants/sponsors to submit applications should replace
the current solicitation process. Applications should then be
subject to a simple approval or denial consistent with the
statute, rules, regulations, and policies.
4. Elimination of the competitive evaluation requirement in
Sec. 609.7 of the Final Rule. The competitive evaluation
requirement is inconsistent with a program where the borrower
is responsible for paying the full cost of the credit subsidy
and administrative fees as they are for Sec. 1703 technologies
and the intent of Title XVII to get technologies into general
use.
It is helpful to frame this issue in the context of all
other Federal credit programs, where the U.S. Government is
directly paying for the appropriation of the credit subsidy
with taxpayer funds. Under the traditional approach, there is a
finite amount of monies available to support the credit subsidy
and administrative expenses of the program and therefore a
finite amount of loan guarantee authority. In this traditional
approach to Federal credit programs, where the appropriations
are made with U.S. Government funds and specifically limited,
it is entirely appropriate to establish the solicitation and
competitive evaluation process as a way of allocating scarce
resources.
The ``borrower pay'' mechanisms in Sec. 1702(b)(2) and
Sec. 1702(h) statutorily provide the appropriations necessary
for both the credit subsidy and the administrative expenses
required to evaluate and execute the program subject to the
time limitation that a technology is considered in ``general
use'' and the project sponsor's willingness to pay for the
credit subsidy and therefore the competitive evaluation process
only serves to impede the statutory objective of Title XVII.
5. Elimination of the one project, per technology, per
sponsor limitation in Sec. 609.3(a) of the Final Rule. This
requirement is inconsistent with a program where the borrower
is responsible for paying the full cost of the credit subsidy
and administrative fees as they are for Sec. 1703 technologies
and the intent of Title XVII to get technologies into general
use.
The limitation on a sponsor to one project per technology
is also inconsistent with the statutory purposes of Title XVII
which are to commercialize clean energy technologies that
reduce greenhouse gas emissions. Title XVII recognizes that the
private sector will not fund the targeted technologies on its
own and therefore it is in the U.S. Government's interest to
participate in its funding until the market failure is
corrected. Some of the technologies supported by Title XVII
require very large capital commitments and involve a limited
number of uniquely and highly qualified operators that are
subject to a high degree of regulation. The current prohibition
is inconsistent with the statutory and congressional intent of
Title XVII, impedes a technology from becoming a commercial
technology in general use, and may result in the highest
quality sponsors limited to one project with a given technology
or proposing multiple technologies for their generation fleet
that add complexity and costs unnecessarily, and in ways that
are reminiscent of acknowledged mistakes from the past.
6. Remove the ban on Federal entities in the definition of
``Applicants'' included in Sec. 609.2. Federal power agencies
that are directed to the private markets for borrowings and
that were not statutorily excluded from the Title XVII program
should not be excluded by rule. This is inconsistent with the
intent Title XVII to get innovative clean energy technologies
into general use.
7. Include in the definition of ``Credit Subsidy Cost'' in
Sec. 609.2, the definition of the ``cost of a direct loan'' as
provided in Sec. 502(5)(B) of the Federal Credit Reform Act for
those instances where the Federal Financing Bank is providing
the financing pursuant to the DOE guarantee.
8. Assuming implementation under the borrower pay provision
of Sec. 1702(b)(2), elimination of the requirement under
Sec. 609.9(c)(1) for receipt of authority in an appropriation
act as the specific authority is provided by Sec. 1702(b)(2).
eliminating maximum loan guarantee authorization levels
Historical Context
Prior to the Federal Credit Reform Act of 1990, the costs of
Federal credit programs were only evaluated, and appropriated for, at
the time of default. Over the years, this approach was the subject of
significant criticism from OMB, CBO, Congress and GAO. During these
pre-credit reform days, GAO strongly encouraged the imposition of
limits on the total dollar amount of loans or loan guarantees to be
issued and OMB often agreed.
Since enactment of the Federal Credit Reform Act of 1990, the
standard operating procedure for Federal credit programs has been to
insert maximum volume authorization levels. This is provided in OMB
Circular A-129 (prior version Appendix A (II)(3)(e), current version on
OMB website Appendix A (II)(3)(5)) which reads:
Maximum amounts of direct loan obligations and loan
guarantee commitments should be specifically authorized
in advance in annual appropriations acts, except for
mandatory programs exempt from the appropriations
requirements under Section 504(c) of the Federal Credit
Reform Act of 1990.
As a practical matter, the post-FCRA era establishes maximum
authorization levels for those programs subject to the FCRA. GAO's
Principles of Federal Appropriations Law, Volume II, Chapter 11, page
11-23 notes:
As a result of FCRA, guarantee programs are no longer
unrestricted. Even if the applicable appropriation act
does not explicitly set a maximum program level, the
program level that can be supported by the enacted cost
appropriation, reinforced by the Antideficiency Act,
constitutes an effective ceiling.
Title XVII's Unique Structure--Borrower-Pays In Lieu of an
Appropriation
In providing the ``borrower pay'' option in Sec. 1702(b)(2) as a
substitute for a taxpayer funded appropriation, and requiring that the
``cost of the obligation'' be measured by the standards in the Federal
Credit Reform Act, Congress was structuring a program that would not
impact the Federal budget, would fully compensate the U.S. Government
for the risks that it was assuming, and would be of sufficient size to
get clean energy technologies into general use.
On April 20, 2007, GAO issued its Opinion B-308715 where it
concluded that Sec. 1702(b)(2) confers upon DOE independent authority
to make loan guarantees, notwithstanding the FCRA requirements. GAO
said:
The language of section 1702(b) makes clear that
Congress contemplated two possible paths for making
loan guarantees under title XVII. DOE, consistent with
FCRA (2 U.S.C. Sec. 661c(b)), could issue loan
guarantees pursuant to appropriations for that purpose
(EPACT, Sec. 1702(b)(1)); or DOE could issue loan
guarantees if it receives payments by borrowers of the
``full cost of the obligation'' (EPACT, Sec.
1702(b)(2)). To read section 1702(b) as subjecting
title XVII loan guarantees to the requirements of FCRA
would read subsection (b)(2) out of the law, and we
cannot do that; we have to give meaning to all of the
enacted language. E.g., 70 Comp. Gen. 351, 354 (1991);
29 Comp. Gen. 124, 126 (1949). See also 2A Sutherland,
Statutory Construction, Sec. 46:06 at 193--94 (6th ed.
2000). Section 1702(b)(2) is clearly inconsistent with
FCRA, and it is a later enacted, more specific law. It
is well established that a later enacted, specific
statute will typically supersede a conflicting
previously enacted, general statute to the extent of
the inconsistency. E.g., Smith v. Robinson, 468 U.S.
992, 1024 (1984); B-255979, Oct. 30, 1995. For these
reasons, we conclude that EPACT section 1702(b)(2)
allows DOE to issue loan guarantees if the borrowers
pay the ``full cost of the obligation.'' The
alternative path clearly represents authority to make
loan guarantees independent of and notwithstanding the
earlier, more general FCRA requirements.
Given our answer to the first part of this question,
we need not address the second part which asks whether,
in the alternative, section 1702(b)(2) constitutes new
budget authority for the purposes of FCRA. Suffice it
to say that section 1702(b)(2) provides DOE authority
to make loan guarantees independent of FCRA.
Future Approach
The Administration should eliminate the current approach of
establishing arbitrary dollar limits for loan guarantees on different
technologies. The current approach is not only inconsistent with the
``borrower pay'' appropriation model and the statutory intent to get
commercial technologies into ``general use'', it harms the U.S.
Government's ability to incent sponsors and third-party providers of
capital to invest in new technologies when they consider the cost of
each technology, the number of projects needed for a given technology
to become a commercial technology as defined, and the amount of loan
guarantee authority arbitrarily allocated in the current approach.
The U.S. Government should acknowledge that under the ``borrower
pay'' mechanism authorized in Title XVII and implemented for the loan
guarantee program, the total amount of potential loan guarantees will
be dependent on:
1. the amount of time before a technology becomes a
commercial technology in ``general use'';
2. the number and quality of applications/applicants and the
applicants willingness to pay the required credit subsidy and
application fees;
3. the ability of the applicants to meet the statutory
requirements and rules established under Title XVII; and,
4. the success of the program in achieving the policy
objectives of the U.S. Government.
This is not to say that every project will or should be approved,
as thoughtful implementation of Title XVII still subjects each
application to a rigorous process and those projects that are not
credible should be rejected. However, thoughtful implementation that
removes improper rule based impediments and arbitrary limits will
advance a program that is consistent with the underlying statutes and
Congressional intent. It will also enhance Title XVII's credibility
with the private sector and should bring highly qualified project
sponsors and their projects to the U.S. Government for reasonable
consideration.
This approach is consistent with the statute and Congressional
intent of Title XVII as well as GAO's opinion on DOE's authority. It
also provides applicants, sponsors, investors, contractors, third
parties that provide other financial or risk support, and other
stakeholders with clarity that does not exist today. This clarity will
incent sponsors to commit to spending the substantial dollars necessary
to bring projects to a financial closing and provide supply chain
partners with the business visibility that is necessary for them to
make new U.S. based investment in manufacturing and operations to
support their partner's projects.
Congress Appropriation Control
Congressional concerns over control should be considered through
agreed-upon formal reporting mechanisms that provide transparency and
confidence that the program is being implemented thoughtfully and that
the individual loan guarantees are being structured to achieve the
objectives of Title XVII, including the long-term protection of the
taxpayer.
discontinuation of the financial institution partnership program
Discontinue the Financial Institution Partnership Program
(``FIPP''). First, the execution of a partial guarantee program is
inconsistent with the Full Faith and Credit provided under Sec. 1702(j)
as discussed earlier. Second, the financing execution provided under
FIPP is inferior to that of the Federal Financing Bank and
significantly more costly to the U.S. Government and the borrower, all
of which impedes the program, particularly Sec. 1705 projects. This
will have significant positive impacts on the implementation and
execution of Sec. 1705 projects, addressing a major source of
unnecessary friction with key constituents.
addressing cbo's credit subsidy concerns and scoring convention
Establishment of a ``credit subsidy downgrade fee'' as a way to
address CBO's concerns that the credit subsidy calculation will
underestimate the long term costs to the taxpayers. CBO's scoring
convention currently requires a separate 1% credit subsidy
appropriation for Title XVII loan guarantees (over and above the
borrower paid credit subsidy fee).
The ``credit subsidy downgrade fee'' would be a contractual
provision that addresses CBO concerns that principally result from
``project downgrade risk''. Operationally, DOE would require every term
sheet, conditional commitment and final documentation, to include the
credit downgrade trigger that would require the borrower to pay 25
basis points in additional interest rate spread for each two notch
downgrade up to a maximum of 50 basis points (``credit subsidy
downgrade fee''). This contractual provision would be in lieu of the
current CBO requirement of a 1% credit subsidy appropriation. The
credit downgrade trigger would be activated upon the downgrade by one
or more of the rating agencies and would remain in effect as long as
the downgrade persists. Subsequent upgrades that return the project
rating to the original rating will reduce the credit subsidy downgrade
fee up to the 50 basis points maximum.
This approach saves the U.S. Government from having to use scarce
budget dollars for the CBO 1% credit subsidy appropriation, yet
provides the U.S. taxpayer with the protection from the downgrade risk
that CBO is seeking. All of this is accomplished through a borrower
paid contingency fee, maintaining the statutory intent of
Sec. 1702(b)(2).
ISSUING AN EXECUTIVE ORDER ON TITLE XVII
Issuance of an Executive Order pertaining to Title XVII, the Final
Rule issues to be addressed, the operational execution of maximum loan
guarantee authority issues and calculation of the Federal credit
subsidy, appropriation issues as well as Administration policy and
objectives pertaining to jobs, clean energy infrastructure development,
domestic energy supply, the environment and domestic manufacturing
priorities.
This approach provides the Executive Branch agencies with the
unambiguous Presidential leadership and direction necessary to
establish a fully functional Title XVII. It also provides the private
sector with an equally clear message that Title XVII will be a
reasonable, predictable and available Federal credit program.
SUMMARY
In summary, Title XVII is a very powerful policy tool that provides
a means to achieve the priorities and policies of the President and
Congress pertaining to jobs, the economy, clean and secure domestic
energy capacity, and the environment. It does so through a clean energy
infrastructure build that is fully funded by the private sector. This
build will also be the engine of growth in the investments that develop
our domestic supply chain manufacturing base in supporting industries
such as iron and steel. The key to all of this is a fully functional
Title XVII. The President and his Administration can accomplish these
critical objectives by exercising their discretion to amend the Final
Rule and to provide direction to OMB, DOE and Treasury on the
operational execution of this Federal credit program as well as his
policies and priorities. I am pleased to answer any questions that you
may have.
The Chairman. Thank you very much.
Mr. Fertel, we're glad to have you here. Go right ahead.
STATEMENT OF MARVIN S. FERTEL, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NUCLEAR ENERGY INSTITUTE
Mr. Fertel. Thank you, Mr. Chairman and thank you, members
of the committee for holding this important hearing today.
The nuclear industry is encouraged by the award of
conditional commitments to the Vogtle nuclear power project and
the Eagle Rock uranium enrichment facility and the fact that 3
other nuclear power projects and one additional uranium
enrichment project are well advanced in due diligence process.
We are also encouraged by the Administration's willingness to
address challenges associated with implementing this program
including the President's proposal to authorize an additional
$36 billion in loan guarantee volume in Fiscal Year 2011 and
the revision to the final rule governing the program to allow
sharing of collateral with other lenders.
However despite this progress the Title XVII Loan Guarantee
Program faces significant challenges. For the nuclear industry
one of the most significant challenges involves determining the
credit subsidy cost of the title XVII loan guarantees. Since
borrowers receiving loan guarantees for nuclear projects are
expected to pay the cost associated with those guarantees the
industry has a legitimate interest in the assumptions and
methodology used to calculate the credit subsidy cost.
Credit subsidy cost are calculated using a credit subsidy
calculator developed by the Office of Management and Budget. Of
the major inputs to the calculator 2 of them the fall
probability and recovery rate in the event of the default have
the greatest impact on the results. It is our understanding
that the Executive branch employs a recovery rate of 55 percent
across the board for all energy technologies and projects being
considered for loan guarantees.
Using a standardized recovery rate does not satisfy the
requirements of the Federal Credit Reform Act. In addition a
recovery rate chosen of 55 percent does not, based on our
research, have any basis in actual market experience with
financial structures like those being proposed under title
XVII. Consistent with FCRA, NEI believes that the most accurate
and equitable process for calculating credit subsidy cost is a
detailed, project specific assessment.
FCRA requires the government to consider all the cashflows
from the terms of the loan including fees, defaults and
recoveries. For large customized transactions like those
authorized for the Energy Policy Act of 2005 accurate estimates
of a recovery can only be derived from project specific
analysis. Even if it were acceptable to use standardized ``one
size fits all'' assumptions the 55 percent recovery rate now
used is well below the recovery rates observed historically for
regulated utility debt and project finance debt.
According to historical data recovery rates for these types
of debt typically range from approximately 85 percent to 100
percent. NEI has developed the White Paper* that provides
historical perspective on these issues. I ask permission to
have that White Paper be included in the record of this
hearing.
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
The Chairman. We'll be glad to have that as part of the
record.
Mr. Fertel. Thank you.
It is vitally important that the credit subsidy cost be
calculated accurately. If current practices continue the
Executive branch will continue to produce inflated credit
subsidy costs. Project sponsors in turn will simply abandon
otherwise credit worthy, in our case nuclear projects and the
Nation will forgo the carbon free energy and tens of thousands
of well paying jobs represented by these facilities.
The difficulties in implementing the Title XVII Loan
Guarantee Program cannot be laid entirely at the Department of
Energy's doorstep. Other Executive branch agencies, as we've
already heard, including the Office of Management and Budget
play a very significant role, often governing, in determining
the rules and protocols up for this program. In our experience
the Department of Energy staff working on loan guarantees from
senior leadership to program management, from loan offices to
legal, financial and market advice as on the due diligence
teams are experienced, highly trained professionals. They're
committed to trying to make this program work.
Mr. Chairman, we have reviewed the 2 pieces of legislation
you introduced, S. 3746 and S. 3759 which make a number of
changes to the underlying statute to address some of the
difficulties that have arisen during the implementation. Many
of these changes are designed to address issues encountered by
the renewable energy community and not nuclear energy projects.
However we fully support them and I would also say I fully
support what my colleagues have said about extending the time
line on 1705, even though nuclear has no role in 1705 program.
NEI believes all these programs must operate efficiently
and effectively for all clean energy technologies. We have
identified a few additional statutory changes largely designed
to address the defects in the current process for developing
credit subsidy costs. Among these are these:
Require the Executive branch to use project specific
analysis in developing recovery rates and other inputs to the
credit subsidy calculator.
Allow project sponsors to pay the credit subsidy cost
annually based on the next years anticipated draw.
Address the lack of transparency that characterizes the
current process for determining the credit subsidy fee.
We would say the final authority in determining credit
subsidy costs with the Secretary of Energy.
Mr. Chairman, we would appreciate the opportunity to work
with the committee staff in developing these proposals further.
We hope you and other members of the committee would support
such an initiative.
One other challenge deserves mention. The success of the
Clean Energy Loan Guarantee Program has been hampered by a lack
of certainty over loan volume. Project developers must have
clear lines of sight that financing will be available if we
expect them to continue spending millions of dollars or in the
case of new nuclear projects and fuel supply facilities,
billions of dollars, necessary to maintain project schedules.
In this regard, Mr. Chairman, let me commend this committee
for having recognized long ago that the scale of the energy and
environmental challenges facing our nation requires an
effective, long term financing platform to accelerate
deployment of clean energy technologies. For this reason NEI
continues to support creation of the Clean Energy Deployment
Administration as envisioned in S. 1462, the American Clean
Energy Leadership Act which was approved by the committee in
June 2009.
Thank you, Mr. Chairman. I would be pleased to answer any
questions you and the committee have.
[The prepared statement of Mr. Fertel follows:]
Prepared Statement of Marvin S. Fertel, President and Chief Executive
Officer, Nuclear Energy Institute
Chairman Bingaman and members of the committee, thank you for your
interest in the loan guarantee program authorized by Title XVII of the
2005 Energy Policy Act, and your commitment to address the issues and
challenges that have arisen in the course of implementing this
important program.
My name is Marvin Fertel. I am the President and Chief Executive
Officer of the Nuclear Energy Institute (NEI). NEI is responsible for
establishing unified nuclear industry policy on regulatory, financial,
technical and legislative issues affecting the industry. NEI members
include all companies licensed to operate commercial nuclear power
plants in the United States, nuclear plant designers, major architect/
engineering firms, fuel fabrication facilities, materials licensees,
labor organizations, universities and other organizations and
individuals involved in the nuclear energy industry.
NEI recognizes the challenges associated with establishing a
financing program of this magnitude. The nuclear energy industry is
encouraged by the award of conditional commitments to the Vogtle
nuclear power project and the Eagle Rock uranium enrichment facility,
and the fact that three other nuclear power projects and one additional
uranium enrichment project are well-advanced in the due diligence
process. These projects, and many more like them, are essential if our
nation is to meet our goals for clean energy and job creation.
Since taking office, the Obama Administration has demonstrated a
willingness to address major challenges associated with implementing
this program, including the president's proposal to authorize an
additional $36 billion in loan guarantee volume in fiscal year 2011,
and the revision to the final rule governing this program to allow
sharing of collateral with other lenders, without which the program
simply would not function.
Despite this progress, however, the Title XVII loan guarantee
program faces significant challenges that will limit its effectiveness.
For the nuclear energy industry, one of the most significant challenges
involves determining the credit subsidy cost of Title XVII loan
guarantees. Since borrowers receiving loan guarantees for nuclear
energy projects are expected to pay the cost associated with those
guarantees, the industry has a legitimate interest in the assumptions
and methodology used to calculate credit subsidy cost.
Credit subsidy costs for the Department of Energy's loan guarantee
program are calculated using a credit subsidy calculator developed by
the Office of Management and Budget. Of the major inputs to the
calculator, two of them (default probability and recovery rate in the
event of default) have the greatest impact on results.
For the purposes of Title XVII, it is our understanding that the
Executive Branch employs a recovery rate of 55 percent across the board
for all energy technologies and projects being considered for Title
XVII loan guarantees. The 55-percent recovery rate was set during the
administration of President George W. Bush, prior to the submission
deadline for detailed Part II loan guarantee applications . The use of
a standardized recovery rate does not satisfy the requirements of the
Federal Credit Reform Act (FCRA) of 1990. In addition, the recovery
rate chosen--55 percent--is an arbitrary number and has no basis in
actual market experience with financial structures like those supported
under Title XVII. Nor did the decision to set an arbitrary 55 percent
recovery rate have the benefit of the project-specific recovery
information provided in the Part II applications for nuclear power loan
guarantees.
We believe the methodology used by the Executive Branch inflates
the credit subsidy cost well beyond the level required to compensate
the federal government for the risk taken in providing the loan
guarantee. At least one nuclear power project was quoted an
unrealistically high credit subsidy cost, which ignored the project's
strong credit metrics and the robust lender protections built into the
transaction, and limited the estimate of recovery rate to 55 percent,
significantly lower than the recovery estimate in the credit assessment
of the project by an independent rating agency.
Consistent with FCRA, NEI believes that the most accurate and
equitable process for calculating credit subsidy costs is a detailed,
project-specific assessment. The current approach, which relies on
standard assumptions applied to all technologies, with limited project-
specific flexibility, cannot produce accurate results, and will not
serve the loan guarantee program's objectives--to support deployment of
clean energy technologies in such a manner that the risk to the federal
government is fully offset by fees paid by the borrower.
In fact, a project-specific approach is explicitly required by the
Federal Credit Reform Act (FCRA). FCRA requires the government to
consider all of the cash flows over the term of the loan, including
fees, defaults, recoveries and contractual and structural
protections.\1\ For large, customized transactions like those
authorized by the Energy Policy Act of 2005, accurate estimates of
recovery can only be derived from detailed project-specific analysis.
Recovery values will vary from project to project, depending on the
technology, nature and structure of the project, the project sponsors,
contractual issues, and many other factors.
---------------------------------------------------------------------------
\1\ Section 502(5)(B) of the Federal Credit Reform Act of 1990
provides:
``The cost of a direct loan shall be the net present value, at
the time when the direct loan is disbursed, of the following estimated
cash flows:
(i) loan disbursements;
(ii) repayments of principal; and
(iii) payments of interest and other payments by or to the
Government over the life of the loan after adjusting for estimated
defaults, prepayments, fees, penalties, and other recoveries; including
the effects of changes in loan terms resulting from the exercise by the
borrower of an option included in the loan contract.''
---------------------------------------------------------------------------
The vast majority of federal credit programs are characterized by
high volumes and relatively low dollar amounts, concentrated in
housing, education, rural development and small business. In
calculating credit subsidy costs for these program, the Executive
Branch makes a number of simplifying assumptions and, because the
federal government pays for the credit subsidy costs of these
transactions, borrowers are generally indifferent to the methodology by
which credit subsidy costs are calculated. These simplifying
assumptions should not be used in lieu of project-specific assessments
in the case of a program involving multi-billion-dollar transactions,
in which the borrower pays the credit subsidy cost.
Even if it were acceptable to use standardized, ``one-size-fits-
all'' assumptions, the 55-percent recovery rate now used is well below
the recovery rates observed historically for regulated utility debt and
project finance debt. According to historical data from Moody's
Investors Service and Standard and Poor's, ultimate recovery rates for
regulated utility debt range from 87 percent to 99 percent. Recovery
rates for project finance debt are comparable, in the range of 90
percent to 100 percent, because project finance transactions employ
structural features designed specifically to maximize recoveries in the
event of default. NEI has developed a detailed white paper that
provides historical perspective on these issues, and I ask permission
to have that white paper included in the record of this hearing.
It is vitally important that credit subsidy costs be calculated
accurately. If current practices continue, the Executive Branch will
continue to produce inflated credit subsidy costs. Project sponsors, in
turn, will simply abandon otherwise creditworthy nuclear energy
projects, and the nation will forego the clean energy and thousands of
well-paying jobs represented by these facilities.
The difficulties encountered by the nuclear energy industry and the
renewable energy community in implementing the Title XVII loan
guarantee program cannot be laid entirely at the Department of Energy's
doorstep. Other Executive Branch agencies and offices--including the
Office of Management and Budget--play a significant, often governing,
role in determining the rules and protocols governing this program. In
our experience, the Department of Energy staff working on loan
guarantees--from senior leadership to program management, from loan
officers to the legal, financial and market advisers on the due
diligence teams--are experienced, highly trained professionals
committed to making the program work.
Mr. Chairman, we have reviewed the two pieces of legislation you
introduced--S. 3746 and S. 3759--which make a number of changes to the
underlying statute to address some of the difficulties that have arisen
during implementation. Although many of these changes are designed to
address issues encountered by the renewable energy community, we fully
support them. NEI believes this program must operate efficiently and
effectively for all clean energy technologies that are eligible, not
just a few.
We have identified a few additional statutory changes, largely
designed to address the defects in the current process for developing
credit subsidy costs. Among other items, these changes would:
require the Executive Branch to use project-specific
analysis in developing recovery values and other inputs to the
credit subsidy calculator;
allow project sponsors to pay the credit subsidy cost
annually, based on the next year's anticipated draw;
address the lack of transparency that characterizes the
current process for determining credit subsidy cost, and
vest final authority in determining credit subsidy cost with
the Secretary of Energy, since it is the Department of Energy
that is responsible and accountable for implementing the loan
guarantee program, and since DOE is equipped with the corporate
and project finance expertise necessary to make those
determinations.
Mr. Chairman, we would appreciate the opportunity to work with
committee staff in developing these proposals further, and we hope that
you and other members of the committee would support such an
initiative.
One other challenge deserves mention. The success of the clean
energy loan guarantee program has been hampered by lack of certainty
over loan volume. Project developers must have clear line of sight that
financing will be available, if we expect them to continue spending
millions of dollars--or, in the case of new nuclear power and fuel
supply facilities, billions of dollars--necessary to maintain project
schedules. If Congress chooses to impose limitations on loan volume--
and we are not persuaded that such limitations are necessary in a
program where project sponsors pay the credit subsidy cost--then those
limitations should be commensurate with the size, number and financing
needs of the projects. In the case of nuclear power, $18.5 billion is
not sufficient. NEI continues to support the President's request for an
additional $36 billion in loan volume.
Finally, Mr. Chairman, let me commend this committee for having
recognized long ago that the scale of the energy and environmental
challenges facing our nation--large-scale deployment of clean energy
technologies, modernizing the U.S. electric power supply and delivery
system, and reducing carbon emissions--requires a broader financing
platform than the program envisioned by Title XVII. An effective, long-
term financing platform is necessary to ensure deployment of clean
energy technologies in the numbers required, and to accelerate the flow
of private capital to clean technology deployment. For this reason, NEI
continues to support creation of a Clean Energy Deployment
Administration, as envisioned by S. 1462, the American Clean Energy
Leadership Act, which was approved by this Committee in June 2009.
Thank you, Mr. Chairman. I would be pleased to answer questions.
The Chairman. Thank you very much. Thank you all for your
excellent testimony. We have 3 members who've arrived and have
not yet had a chance to ask questions. Let me call first on
Senator Dorgan, then Senator Risch, then Senator Cantwell and
then Senator Shaheen and I will follow up with questions that
occur to us.
Senator Risch. I'm going to pass. Thank you.
The Chairman. Alright. Senator Dorgan, start.
Senator Dorgan. Mr. Chairman, thank you very much. Thanks
to the witnesses. I was at a panel discussion and missed the
first part of this testimony at the hearing.
I ask whether Mr. Silver was in any way critical of OMB
because I notice that some of you have referred to OMB. The
answer is of course not because I don't think that would be the
proper role for him to come to this table and be critical of
OMB. But I think it is the case and it's a fair point some of
you have made that trying to move things through OMB is a
little like walking through wet cement. I mean, it's really
hard to get through it.
We passed in EPAC in 2007 some legislation that provided
title XVII loan guarantees. We were really excited about that.
We also have now written legislation that is not yet enacted
that has the Clean Energy Development Act, CEDA.
You know going back, Senator Bingaman and Senator Domenici,
I think, have provided great leadership to this committee. I,
as chairman of the Appropriations Subcommittee, have provided,
as a result of the authorization, $49 billion in loan
guarantees. So all of us have been very excited about, I think,
an unparalleled amount of investment capability in clean energy
that is available through loan guarantees.
But we also in addition to being excited have been
enormously frustrated. As the years passed and the months
passed that the money doesn't seem to get where it's needed to
go in order to see projects built and completed and people put
to work and clean energy moving across the wire. So this has
been both a time to be excited about the ability to offer
something and then frustrated about the pace of that offering.
I note that in the Department of Agriculture they have the
capability to offer loan guarantees in renewable fuels
projects. They're moving money out. Projects are getting built.
I'm wondering if it's so different to provide loan guarantees
for fuel than it is to provide loan guarantees for electricity
or something to put on the wire out there.
So I think, having said all that, let me ask the witnesses
about the Office of Management and Budget. I think some of you
have referred to it directly, some obliquely. But do you see
that as the major problem?
I think Secretary Chu came in and said, look, DOE didn't
have much experience in this. You've provided a lot of
capability. It's been slow. We understand that. But Secretary
Chu came in and said, I'm going to try to change that.
So tell us the record here.
Mr. Meyerhoff.
Mr. Meyerhoff. Ok. I'm happy to start. So I will tell you,
Senator, that we don't have necessarily direct line of sight as
an applicant into what the OMB does, right? So our primary
interface is the DOE and there may be a process then in the
background, right, that then through the DOE of which results
are being brought back to us through the DOE.
I believe that we have been through cycles of learning. I
understand your disappointment. I think we're getting actually
now more traction. I mean, I would tell you is that the trend
is toward goodness.
Having said that I think there would be a fairly simple set
of rules I think we could institutionalize that would drive
accountabilities throughout the process. I don't want to single
out OMB here.
Senator Dorgan. No.
Mr. Meyerhoff. I would apply that actually to all
participants.
Senator Dorgan. You say the trend is positive. So if we're
not galloping along at least do you think, most of you think,
we're at least trotting along to make some progress here?
Mr. Meyerhoff. So I would say for our own experience. It's
hard for me to speak for everybody else, but from our
experience right now we're moving forward. We're hopeful to see
funding for a fully shovel ready project hopefully in the first
quarter of next year.
Senator Dorgan. Mr. Fertel.
Mr. Fertel. Senator, I would say we're walking along, I
think. Mr. Silver, I think explained how they're going through
growing pains which we appreciate. We think he's doing a very
good job.
I would agree with Jens that more transparency. We can't
see. It's very opaque what happens within the group.
Also I think clarity on who's responsible for making the
decisions. Senator Burr asked a number of questions about who
does make the final decision. I think Mr. Silver did what he
had to do in answering the question.
Senator Dorgan. Witnesses have to be circumspect in terms
of looking out for their own interest at that table. Let me ask
a question about whether aside from the potential delivery of
CEDA and the future, I hope, and loan guarantees now?
Aside from that where are we with respect to our comparison
with other countries in the ability to produce projects that
have competitive pricing because of subsidies and so on? Are we
somewhere in the ballpark of what other countries are doing in
this area?
Mr. Meyerhoff. So maybe I take the first shot because First
Solar operates in these markets very actively. I would say the
U.S. market with a lot of support coming out of the government
is now emerging as the fastest growing solar PV market in the
world. We're very grateful for that.
A lot of things have been done that has enabled us, we as a
company have responded with just about a billion dollar
investment around development assets and manufacturing capacity
alone for that growth outlook. So if you think about deficiency
and what we're talking about today on the financing side.
However I would tell you that a large scale European solar PV
project will turnkey finance with the full funding commitment
and financial close and probably about 4 to maximum 5 months
today for us.
So if you compare that to where we're at today our
applications have been in the process anywhere from 9 months to
an excess of over a year without having funded yet. So I
believe we need to assign, again very clear, accountability set
time lines with respect to how much time is spent in each part
of the process to have more predictability around that part.
But I would say we're moving in the right direction. I would
say there are good pieces of evidence and learning that can be
found just out of what has been done in Europe.
Senator Dorgan. My time has expired. I actually have to be
at another hearing as well. But Mr. Chairman, I think the
testimony, I've read some of it previously. I think it's really
helpful to have had this hearing to keep pressure and pushing
and try to understand how do we make this user friendly.
How can we get it out? How can we have this program
accomplish what we intended to accomplish? Thank you, Mr.
Chairman.
The Chairman. Thank you.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman. I too, want to
add my thanks for having this hearing today. I do recognize the
important and critical role this loan program plays on large
scale energy projects. I do believe we should replace the money
that has been taken from this program.
Like my colleague who just mentioned the word, the
discussion of transparency and urgency, I think those need to
be the 2 mantras for this program. But I would also like to get
the panel's feedback on, I think my colleague from Colorado may
have brought this up in the previous panel. But about the 1603
program and how it fits with this whether you think it fits
with this or how you view that reauthorization of that program
in getting projects.
To me, I look at the numbers and they're quite staggering.
55,000 jobs created since 2009 in wind and geothermal as a
result of the program, that is the Treasury Grant Program.
17,000 solar jobs since 2009 and estimation of 6,500 additional
jobs in that industry if we could get this program
reauthorized.
Then also, another concept in the chairman's renewable
energy standard legislation that was just introduced is a
provision on a low interest, clean energy fund. So if I could
get comments on those 2 concepts as they relate to the
Treasury--I'm sorry, as they relate to the loan program that
we're talking about this morning. How you see them fitting
together and how you see this issue of capital and different
ways of getting capital infusion into the marketplace.
So Mr. Newell or Mr. Meyerhoff, if you had any comments
about that?
Mr. Newell. The 1603 program has been a very successful
program and we think is a critical program in order to continue
to attract investments and to be able to bring renewable energy
projects, specifically, to financial close to get them built.
Right now we're seeing a flurry of activity as companies try to
meet the deadlines under the current 1603 with the expiration
coming up on that. It is affecting how the loan guarantee
program works because it is really affecting what applications
can go in and not go in because for many of these companies if
they believe they're not going to be able to get the loan
application through the process in time enough to be able to
qualify and bring down the 1603 Treasury Grant.
Then they won't go through the process on the loan
application. It is difficult at this point in the process to be
able to look forward. There's just not transparency to be able
to look forward and know that you're going to be able to get
through in that amount of time that we have left not knowing
whether the 1603 will be extended.
1603 is important now because there is a real lack of tax
equity available in the marketplace. For better or for worse
the system that the U.S. uses primarily to incentivize
renewable energy production is a system of tax credits. In a
time now when many companies have less appetite because of
their financial conditions for tax affected investments it has
really taken a lot of the wind out of that market. You've seen
a lot of the players leave that market.
There was a----
Senator Cantwell. No pun intended. Yes.
Mr. Newell. Yes.
There's a recent study by the American Council on Renewable
Energy that showed that we were about--that the impact of 1603
being center verses not was really the difference of a risk of
about 100,000 jobs moving forward. It seems like a pretty
straight forward calculation to make right now. There is a
question about how the Loan Guarantee Program is structuring
some of its loans with respect to the use of tax affected
structures.
There are reports of applicants being advised that they
should not use tax affected structures aggressively because
those loans may have a harder time being approved through the
process. I think that's something that needs to be made much
more transparent. To the extent that the tax credits are the
mechanism that we use to incentivize construction of renewable
energy projects and other kinds of energy projects than it's
important for the companies who are promoting those projects to
be able to aggressively use those incentives that have been
provided by Congress to the maximum extent possible.
One of the areas of inquiry that we suggest for the
committees to look at how the loan program is operating with
respect to those tax structures. We'd recommend that. I would
add, Senator Cantwell, to your list of transparency and
urgency, I would add consistency to what we need.
Because in some ways more than we need to have a maximum
volume of supporting any of these is what we really to be able
to do the long term financings. To make long term investments
in these is we really need consistency whether it be on 1603.
Knowing it's going to be there and moving along or a permanent
financing structure or an extension of the Loan Guarantee
Program or refinancing of the Loan Guarantee Program through
1703 that doesn't have a deadline. Any of those structures can
work for us.
But that consistency is really crucial for us.
Senator Cantwell. I don't know it's up to the chairman. I'd
love to hear from you, Mr. Meyerhoff. Is that? I know my time
is expired.
The Chairman. Go right ahead and respond.
Mr. Meyerhoff. I will make it just quick. I echo everything
that has just been said but I want to reemphasize that the
different programs that are in place are not harmonized. They
cannibalize each other. So the 1603 grant which is extremely
important to this industry. There are enough studies that show
there's not enough tax appetite available to realize all the
projects out of different renewable resources.
However the 1603 program has a cashflow through the project
entity reduces right now through the DOE Loan Guarantee Program
and reduces the amount of debt available. So we're taking
liquidity from one part and we're moving it to the other end.
We're reducing the overall economic potency that the 2 programs
would have individually on paper. So I think it is important to
harmonize those.
There's a third aspect which is also tax driven which is
the accelerated depreciation. So we have the grant in lieu
program. We have the DOE loan program, but the accelerated
depreciation is another key economic driver.
So now you have cash on cash returns but you still have a
tax component. We're still, if you really want to optimize the
structure, you're still requiring tax appetite. I think if you
look at everything available I think it would be worthwhile to
analyze how to harmonize these programs to their full
efficiency.
Senator Cantwell. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman. I just have 2
quick questions.
Mr. Newell, in your list of recommendations of things that
you thought could be done, one of the things that you mentioned
was provide increased access to--I forget exactly how you
phrased it, but I translated it into small companies that may
not have the capacity to keep up with what's going on in the
Federal Government. How do you suggest that be done? Do you
recommendations?
Mr. Newell. We do have some recommendations. I would like
to say, Senator, that this is an area which I would
particularly want to commend Mr. Silver and the program.
Because we have been working with them over the past 6 months
to a year on that issue specifically and they have made really
great strides and have devoted a significant amount of
resources within the program to easing the way for smaller
developers. They're to be commended for that.
There are some significant issues that affect smaller
developers some of which are--have to do with the requirements
of the program.
One is NEPA. While we're very supportive of the NEPA
process and work through it. I think that for the smaller
developers, I think there could be focus on streamlining the
NEPA requirements.
I think you should consider limiting NEPA's applications
for project that are smaller than $200 million or to clarify
the categorizations for projects such as rooftop solar or
ground mount solar installations where the length of time you
go through relative to the actual benefit you're getting from
that process. So there's a miss match between those 2 things.
Second is I think that you could reasonably eliminate the
need for credit ratings below--for projects below a certain
size. The costs of getting those credit ratings. There's a
floor on the cost of getting a credit rating and that cost
becomes prohibitive the smaller you go down the scale.
Again, relative to the amount of risk that the government
is taking that the being able to eliminate that need is a--
would seem to be a reasonable step forward. That scenario where
I know it has been proposed in legislation that we would
strongly support that.
Reducing the administrative and diligence in loan costs for
small energy projects could be done without significantly
impacted the financial burden on the overall program because it
had to be small programs, small projects, as well as mitigating
duplicative diligence cost by using things like common council
and common consultants there. There's just some very straight--
--
Senator Shaheen. Sure.
Mr. Newell. Common sense things you could do.
Senator Shaheen. These are all part of your written
testimony? I haven't seen your written testimony.
Mr. Newell. They are. They are in the written testimony.
I think that in this case you--I would recommend that the
Department or the committee consider guidance in which some
amount of the financing is in some way guided toward small
developers because otherwise it is just the natural course of
process that when you have a whole series of applications
sitting at your desk. Five of them are for a billion, a billion
to a billion 2, a billion 3 each, important as they are. Then 6
of them are for $37 million for a solar developer in New
Hampshire or----
Senator Shaheen. Right.
Mr. Newell. A biofuels developer, it just tends to be that
those applications because in some sense that they take the
same amount of work because you're going to do the others. They
just end up getting put to the side or the bottom of the pile.
It really takes keeping an eye on those.
Because those small developers are a really important part
of our ecosystem. They allow us to put the energy projects in
place and the other ones wouldn't go.
Senator Shaheen. Certainly in New Hampshire, that's the
case. So, thank you.
Mr. Fertel, you were talking about the credit subsidy
analysis. I missed--you had a list of things. I missed the
second one. I wonder if you could elaborate a little bit on
that as you were talking about looking at future years?
Mr. Fertel. Yes, the second one, Senator, was to allow the
project sponsor to pay the credit subsidy fee cost annually as
they draw. Right now as soon as you basically are given the
thing, you get assessed the whole thing. If I'm going to draw
it out over 2 years, 3 years or 4 years.
We're saying is just allow them to pay it----
Senator Shaheen. Ok.
Mr. Fertel. Proportionately over that period of time.
Senator Shaheen. Great. Thank you. Thank you.
The Chairman. Thank you.
Let me ask, Mr. Meyerhoff. You described what you referred
to as the higher leverage ratios that are applicable for
projects in Europe, I believe. That's one of the disadvantages
that we're operating under now is, as compared to Europe.
Could you go over that ground again and explain how you
believe we need to get that fixed?
Mr. Meyerhoff. So I would say obviously the leverage ratio
or the debt service coverage ratio is a key component of the
credit worthiness of a project. What I was alluding to is that
if we think about credit risk and as we think about subsidy
cost in Europe you see that even at much higher leverage ratios
the default rates have been very low. Obviously a higher
leverage gives better economics to the project which ultimately
means lower electricity cost to the ratepayer.
So I think as we're driving through the cycles of loaning
we should be open minded. But we have seen that in the DOE
process absence of 80 percent leverage ratios. Let's talk about
maybe more U.S. market ratios of even 70 percent.
We've seen a lot of debate around this. It may be in part
due to the portfolio approach discussed in the earlier panel
where other decisions or other dimensions seemed to come into
the credit evaluation and into the debt quantum of the
projects. So I think we should try to find balance where we're
saying ok, if the solar PV project or the wind project or
whatever gets supplied for usually there's a range of debt
service coverage ratios of x and y.
As we get more experience and more understanding that the
credit quality of these projects and their actual behavior
becomes better and better than obviously we can increase the
leverage. That is what we've seen in Europe. Europe started
with a less aggressive leverage ratios too, but increasingly
has grown more comfortable with the high credit quality of
these generation assets.
The Chairman. So you think that we are, to a point, to
where we should also move to higher credit quality assumptions
with regard to these types of projects?
Mr. Meyerhoff. What I would say, I would urge us to take
the learning out of the European market and apply those
learnings. I would urge us for consistent application by
generation asset of certain ranges of debt service coverage
ratios and not necessarily discriminate the project based on
other factors. Such as, for example, the corporate strength of
the corporation building the project because generally a
company like us was financially fairly strong but will sell
that asset independently off independent of our corporate
strength.
So the project has to be viewed in isolation and receive--
achieve the desired debt service coverage ratio and debt
quantum based on its own cashflows.
The Chairman. Ok. Anyone else have a comment on this issue?
Mr. Fertel.
Mr. Fertel. From a nuclear standpoint our merchant
generators look at a much higher debt to equity ratio,
generally 80/20 or 70/30 than the regulated utilities who would
probably be in the 50/50 range. From the impact on customers,
on consumers, or our economy doing that, looking at an 80/20
versus 50/50 for a nuclear plant roughly decreases the cost of
electricity from that nuclear plant on the order of 4 cents a
kilowatt/hour for the reasons you heard because the return on
debt is lower than the return on equity. The loan guarantees,
to be honest, provide the ability to get a lot more debt and a
lot more leverage.
So it reduces your cost of capital which helps. But its big
thing is that the return on your debt is so much better than
the return on your equity that it does have a very measurable
impact on the cost of the electricity coming into the economy.
So I would support what was said as something that should
certainly be looked at as a positive public policy move.
The Chairman. Alright. Yes.
Mr. Newell. This is related to the discussion of the
recovery rates earlier because to the extent that you're using
recovery rate assumptions that are too conservative than it's
going to lead you to assume that you have to have lower ratios.
I think if you really go back and look at what the recovery
rates really are in the commercial markets for these types of
projects they are very high. It is very rare to not recover
fully any debt that you put into these projects.
That the idea that you need to then keep conservative
coverage ratios seems at odds with the very long history of
financings in this market.
The Chairman. Yes, Mr. Fertel.
Mr. Fertel. Just to the point that Mr. Newell made. Right
now in our country if the credit subsidy fee cost goes the way
they look like they're going now by holding this 55 percent
recovery rate. You probably will preclude, probably preclude
merchant nuclear generators and probably any merchant large
generation source from getting a loan guarantee to help them
because it just makes it too expensive.
So it actually has a direct impact on whether projects will
go forward on whether they can go forward without a loan
guarantee, I think for merchants, becomes very, very difficult.
The Chairman. Alright.
Senator Cantwell, did you have additional questions?
Senator Cantwell. Yes. Thank you, Mr. Chairman. I want to
go back to Mr. Meyerhoff's point about cannibalization or the
distinction between these programs because I think it's
critically important that we focus on the difference between
the 1703 program and its, you know, 1705 whatever you want to
call that. I don't want to say mutation, but, you know, its
continuation into that program.
That's about risk. That's about first commercialization and
scalability as Mr. Fertel was saying that you can't get in the
market. But then there's another issue which is really about
proven technology that we believe, particularly from the RES
perspective of renewable energy that isn't as much about risk.
But we have a capital market that basically blew up. There's no
more capital.
Even though we wanted to get the credit program on at least
a level playing field with the incentives that were given to
the fossil fuel industry. So thereby 6, you know, 3. Now we
know it's been hugely successful.
But what about the, you know, the idea of low interest
capital to renewable energy, clean energy projects at very low
interest with a revenue stream basically as a protector because
you're having the value of electricity being produced. So now
we're taking the risk out of the equation. Why that's important
is because if you're talking to DOE and you're giving DOE a
program that is all about risk I guarantee you they're going to
take a long time to make up their minds about things.
But if you get a streamline turnkey approach that is about
less risk and it's about getting capital to the market at low
interest. Then you're going to literally get these projects
moving. So I'd like some comment or feedback if I'm on the
right track about that distinction.
Mr. Meyerhoff. Yes, so I mean I couldn't agree more with
the statement. I mean we're looking at, as I mentioned, the
1703 program. That obviously allows innovation that is not
quite bankable, to be bankable through the program. It's a very
important incubator, right, to drive further the cycles of
innovation to keep R and D in this country and to motivate it.
There's a lot of opportunity, obviously, in our sector to do
that.
Under 1705 then, as you mentioned, we're taking
commercially proven technologies and we're financing them.
We're financing them through not only because the capital
markets are still struggling out of a crisis. But also solar,
in particular solar PV, has never issued an institutional bond.
We're about through the 1705 program in a controlled way to
issue the first solar bonds probably within the next 6 to 9
months. The 1705 program plays a very important role in
actually opening that market educating classic institutional
debt investors around the high credit quality of that
generation asset. We can do so because the institutional
tranche under the 1705 program is small enough that we can do
this in a controlled way which then means every time that we do
this a few times we can open the institutional capital markets
with an asset class. So these programs actually in our mind,
have a certain harmony to them and allows that migration path.
Now the 1603 program obviously as I mentioned before it
represents the equity side of it. So this stop and go on the
equity side impairs possibly all the great efforts being put in
place on the debt financing because if we don't find efficient
equity to invest into these projects we're back to square one.
So the 1603 program has been extremely important.
It has been extremely important also to the smaller
companies and to the smaller rooftop installations that are
really, I think, predominately have been executed through that
program. Now what we've encountered is--and as we're bringing
now our shovel ready projects into the market for equity
investors. We've actually seen through the treatment under the
DOE program that leads us to prefer tax capable equity
investors over an investor that would go with a grant for the
simple reason that I'm deleveraging the project in the DOE Loan
Program by getting the grant through the project.
So again, this is where they cannibalization. The
cannibalization is not between 1703 and 1705. It's between 1603
and the DOE Loan Guarantee Program. That's where I think we can
harvest some efficiency.
Senator Cantwell. I think, Mr. Chairman, if we're talking
about jobs today and clearly we are talking about a lot of jobs
that were created in 2009, then it's about getting the equity
into the marketplace through the easiest turnkey process that
we can establish for capital.
Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Shaheen, did you have additional
questions?
Thank you all very much. It's been very useful testimony. I
think we can take your suggestions both oral and written and
try to make progress with them.
Thank you very much.
[Whereupon, at 11:35 a.m. the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Jonathan Silver to Questions From Senator Bingaman
Question 1. In previous hearings we've heard testimony about how
government agencies such as the Overseas Private Investment
Corporation, Ex-Im Bank, and USDA seem to manage risk, similar to
private sector investors, on a portfolio rather than transaction-by-
transaction basis--and are assessed by OMB on that basis, rather than
examining every transaction independently. Do you understand this to be
the case, and is there some statutory difference that would lead to
this different treatment? Is there anything in the current laws
governing the loan guarantee program that would preclude the assessment
of risks on a portfolio basis rather than a transaction-by-transaction
basis?
Answer. As with all other federal credit programs, OMB's
responsibility for determining the credit subsidy cost associated with
DOE's loan guarantees is found in Section 503 of the Federal Credit
Reform Act of 1990, which states that the Director of OMB is
responsible for credit subsidy cost estimates. Under the oversight
authority in Section 503, OMB delegates the modeling of credit subsidy
costs to agencies, and issues implementing guidance to ensure
consistent and accurate estimates of cost. For new programs or programs
where actual experience is not available, such as the Title XVII
program, OMB works closely with agencies to create or revise credit
subsidy models. DOE has worked with OMB to develop the credit subsidy
estimation methodology used for the Loan Programs, and OMB approved
DOE's credit subsidy cost model in 2008. Title XVII loan guarantees
generally support large and diverse investments with a wide variety of
underlying projects, risks, and contract terms. These loan guarantees
are scored on a loan-by-loan basis, as are those of other similar
federal credit programs.
Question 2. You mention in your testimony that deals are presented
to OMB and Treasury for review prior to presentation to the CRB or the
Secretary ``consistent with statutory requirements.'' Title 17 requires
consultation with the Treasury Secretary before a loan can be issued,
which I read as final close of the transaction, and the Federal Credit
Reform Act charges OMB with ``coordinating'' cost estimates, which also
seems to implicate final close--is there some additional statutory
requirement that requires OMB and Treasury involvement so much earlier
in the process?
Answer. The authorizing statute governing the Title XVII Loan
Guarantee Program is silent on exactly when in the review process
either Treasury or OMB must be involved. The statutory basis for
Treasury's consultative role is found in Section 1702 (a) of Title XVII
of the EPAct of 2005, which authorizes the Secretary of Energy ``to
make guarantees . . . for projects on such terms and conditions as the
Secretary determines, after consultation with the Secretary of the
Treasury.'' (Sec. 1702(a)). The Final Rule governing the Section 1703
of the Title XVII loan guarantee program provides for Treasury
involvement before a conditional commitment is issued. Specifically, 10
C.F.R 609.7(a) states that, concurrent with the review process that
precedes issuance of a conditional commitment, ``DOE will consult with
the Secretary of the Treasury regarding the terms and conditions of the
potential loan guarantee.''
OMB's authority is derived from Section 503 of the Federal Credit
Reform Act (FCRA), which provides: ``For the Executive Branch, the
Director [of OMB] shall be responsible for coordinating the estimates
required by this title. ``Under this authority, the director of OMB
delegates the authority to agencies to make estimates, while OMB
reviews and must approve credit subsidy costs for all programs. The
Title XVII implementing regulations provide that OMB must review and
approve DOE's calculation of credit subsidy costs, consistent with the
FCRA. Under the program's Final Rule, OMB must review and approve DOE's
calculation of the credit subsidy cost prior to issuance of a loan
guarantee.
Question 3. At what point in the process does DOE submit an
estimated subsidy cost for a given project for review by OMB? At what
point does OMB finalize a subsidy cost estimate? Please answer for both
subsidized (1705) and ``self-pay'' transactions.
Answer. For both of the Title 17 loan guarantee programs, DOE
currently submits each proposed transaction--including a preliminary
credit subsidy cost estimate--to OMB for review at the end of the
initial due diligence phase, prior to the issuance of a conditional
commitment. Following conditional commitment, after all conditions have
been met by the borrower and 30 days prior to financial closing, DOE
submits a final credit cost estimate to OMB for its review and
approval. Consistent with statutory requirements, the credit subsidy
cost is finalized at closing, and reflects the final contractual terms
and conditions and all available information.
Question 4. I understand that DOE requires biofuels projects to
have an off-take agreement, something that makes a lot more sense for
an electricity project than a fuels project. The RFS mandate that
requires consumption of those fuels apparently does not qualify as an
off-take agreement, and the fact that we have a law requiring the use
of renewable fuel is not factored into DOE's decision-making process in
any way. I think you're aware that the RFS waiver for cellulosic
biofuel basically only requires oil companies to purchase fuels that
are available in the marketplace. If DOE is saying that it will only
help those fuels become available in the market place if the oil
companies sign up to buy it, it seems to me we are giving all the cards
to the oil companies. Am I missing something here? How do we fix this
problem?
Answer. The Department is committed to promoting biofuels and has
led in this area through investments under the Recovery Act, our work
on Ely testing, and much more. The loan guarantee program welcome
biofuels projects as they can help diversify our transportation fuel
supply. Biomass loan guarantee applications present a number of
challenges including, but not limited to, significant technology,
production, and commodity price risk. These risks present challenges in
structuring projects that comply with the Title XVII requirement that
the Secretary determine that there is a ``reasonable prospect of
repayment'' of each loan guaranteed under Title XVII. That being said,
the DOE does not require offtake agreements for biofuels projects,
though they are desirable and enhance a project's creditworthiness. Nor
do we ignore the existence of RFS-2 in our analysis; in fact, it is an
important part of our credit analysis of each project. Despite the
challenges presented by biofuels projects, the loan programs currently
have several biofuels projects in due diligence, and DOE hopes to be
able to issue a conditional commitment to a biofuels applicant in the
near future. The Loan Guarantee Program is one of several incentives
that developers of biofuels can potentially use. As you know, DOE
invests heavily in energy research and development and demonstration
programs for biofuels, including numerous cost-shared grants, and there
are significant tax advantages included in the tax code. Additionally,
DOE, USDA and EPA have formed a joint working group, which is
investigating ways to support the industry.
Question 5. Has DOE submitted new solicitations or proposed
modifications to existing rules to OMB for approval? How long has OMB
review been for submitted solicitations? Do you anticipate producing
any more solicitations under the program?
Answer. The Department has not submitted any new solicitations or
proposed modifications to existing rules that are pending approval at
OMB. Our most recent solicitation--Federal Loan Guarantees for Projects
that Manufacture Commercial Technology Renewable Energy Systems and
Components--was published August 10, 2010. In light of the 2011 sunset
date for Section 1705 authority, and the available Section 1703
authority, DOE has no current plans to issue new solicitations. New
solicitations will depend on future programmatic authorities and
appropriations.
Question 6. You mention in your testimony the significant
experience in financial transactions possessed by the members of the
DOE team. Can you elaborate on that a bit? Is this experience
particularly unique or are there other areas within the government
where similar experience can be gained?
Answer. The Loan Programs Office has assembled a world-class team
of federal employees and expert contractors with specialized expertise
in both domestic and international project finance. The federal
employees on our origination team, alone, have well over 300 years of
energy-related project finance experience. Our professionals have
worked at an array of sophisticated public and private sector finance
entities. We have similar levels of experience and expertise among our
legal, technical, and other staff members, and the consultants engaged
to support them in their work.
Question 7. Most applicants have indicated that, in order for the
program to be effective, they need a predictable process that can
result in at least a conditional commitment (or a much more timely
rejection) within 6 months of application. Assuming an adequate
application is submitted, does DOE have sufficient resources in place
to meet this timeline?
Answer. The Department is committed to ensuring that the Loan
Programs have the resources needed to process and review applications
as efficiently and effectively as possible. To that end, the Loan
Programs have made a number of improvements over the last 18 months,
including a significant increase in qualified personnel. We are now
well-positioned to process transactions at a rate that meets the
business needs of our applicants, while ensuring that taxpayer monies
are properly safeguarded.
Question 8. Has DOE reviewed the CEDA legislation contained in S.
1462? Can you share any views on how we might see that implemented
differently than the current loan guarantee program?
Answer. While the Administration has not taken a position on this
particular piece of legislation, we would work to leverage the lessons
learned, including through the Loan Programs Office and build on the
programmatic improvements we have made to date. The Administration also
believes that the taxpayer protections in the Federal Credit Reform Act
are necessary for any credit program underwritten by the taxpayers.
Question 9. How are other benefits conveyed by the federal
government, such as tax credits or ``1603 grants,'' viewed when
constructing the terms of a deal? Does the presence of such other
benefits affect the subsidy cost calculation or the amount of equity
required of an applicant?
Answer. In assessing each transaction, the total amount of federal
subsidy is an important. factor in the review to ensure the most
efficient use of taxpayer dollars; appropriate risk sharing, including
sufficient 'skin-in-the-game' for project sponsors; and accurate cost
estimates that reflect the total cost to government, consistent with
program regulations and solicitation requirements. Other federal
government benefits are taken into account in a number of ways. For
example, the impact of cash received by the sponsor from a 1603 grant
is analyzed in terms of a sponsor's continuing commitment to the
transaction.
Question 10. Have OMB or Treasury submitted questions on, or
requested the adjustment of, terms of a transaction for such things as
returns to investors, stock option terms, or other ``operational''
aspects of an applicants business? Have negotiations related to such
questions or terms extended the time to issuance of a conditional
commitment or led to any
Answer. The model and methodology used to calculate the credit
subsidy cost for any given transaction incorporates an array of inputs
and information about the underlying project and its sponsors--
including many that would be considered ``operational.'' OMB's review
of a given credit subsidy cost necessarily incorporates these elements,
and questions often arise about deal terms and structure that affect
the cash flows to and from the government. Similarly, the Treasury
consultation relates broadly to the ``terms and conditions'' of a
proposed loan guarantee, so it also gives rise to such questions. The
Department works closely with OMB and Treasury to address these issues.
Responses of Jonathan Silver to Questions From Senator Murkowski
BUDGETING
A total of $3.5 billion has now been taken away from the temporary
Section 1705 program created by the 2009 stimulus bill. $2 billion was
taken for Cash for Clunkers, and $1.5 billion was taken for the state
bailout bill. That leaves just $2.5 billion of the original $6 billion
for loan guarantees for renewable, transmission, and biofuel projects.
Question 1a. Does the Department or the Administration intend to
request a ``refill'' for part or all of the funding that has been taken
from the Section 1705 program?
Answer. The Administration strongly supports the DOE loan guarantee
programs, as evidenced by the President's FY11 budget request for
additional credit subsidy for Title XVII loans. The Administration is
monitoring the programs and will continue to seek appropriate funding
levels to ensure they can achieve their objectives. In the meantime,
the DOE Loan Programs Office is committed to utilizing the funds it has
in the 1705 program to fund solid projects to achieve the program's
statutory objectives. As you know, the Administration has supported an
array of incentives for the renewable energy industry. In addition to
the additional credit subsidy appropriations for the Title XVII
programs, the FY11 budget includes $5 billion in Section 48C renewable
energy manufacturing tax credits and over $700 million in research
development and demonstration funding in the Energy Efficiency and
Renewable Energy Account. Also, the Administration has supported
extension of the 1603 grant program.
Question 1b. Given the types of projects involved in the program,
and the length of time it takes for new applications to be considered,
do you believe that such appropriations should qualify as ``emergency''
funding? Do you believe it would be acceptable to include such funding
in a supplemental appropriations bill?
Answer. The Administration believes that honest budgeting is a key
to fiscal discipline and that the bar for emergency funding
designations should be a high one. The Administration also believes
that the projects that have received financing through the Loan
Programs Office will have an important and positive impact on our clean
energy economy, in terms of job creation, economic competitiveness,
energy security, and our environmental legacy, and continues to support
clean energy through the regular budget process. The Administration is
monitoring the Loan Guarantee Program and will continue to seek
appropriate funding levels to ensure the program can achieve its
objectives. The Administration has a broad array of support for the
renewable energy industry. The FY2011 budget request included $5
billion in Section 48C renewable energy manufacturing tax credits, over
$700 million in research development and demonstration funding in the
Energy Efficiency and Renewable Energy account, $500 million in credit
subsidy in the Loan Guarantee program for renewable energy and energy
efficiency projects, and $36 billion in loan authority for nuclear
power facilities. In addition, the Administration has supported
extension of the 1603 grant program.
JOB CREATION
In July, GAO issued a report stating that the Department's
``performance goals are too few to reflect the full range of policy
goals for the LGP. For example, there is no measurable performance goal
for job creation.'' In your testimony, you discussed a number of
metrics by which performance can be judged, but with regard to job
creation.
Question 2a. Can you provide the number of actual, private-sector
jobs--not a projection of them--that have been created as a result of
the Loan Guarantee Program as of today? And how does that compare to
the number of government and contracting jobs created at the Department
itself to administer the Loan Programs?
Answer. The sponsors of the projects that have received conditional
commitments to date under the Title XVII loan programs estimate that
their projects will create over 4100 permanent jobs and over 14,000
temporary construction jobs. Construction has already begun on most of
these projects, and several are either complete or scheduled to be
completed in 2011. As of November 1, the LPO had approximately 70 full-
time federal staff, supported by approximately 60 full-time contractors
and 45 part-time contractors.
Question 2b. Under the 1705 program created by the stimulus bill,
DOE pays applicants' credit subsidy cost with taxpayer money. If we
assume those credit subsidy costs to be 10 percent of loan value for
renewable projects, and divide that share by the number of permanent
jobs that are supposed to be created, the results are a little
concerning. For example, a solar project in California works out to
$1.6 million for each of the 86 permanent jobs that are supposed to be
created. Is that representative of how much each job costs in the
Section 1705 Program?
Answer. The 1705 program has a number of goals, including the
creation of permanent and temporary jobs (and saving jobs). It is also
intended to encourage commercial development and adoption of new or
significantly improved energy technologies, which reduce greenhouse gas
emissions, contribute to our national energy security and economic
growth, and improve the environment. Furthermore, the program funds a
broad portfolio of technologies and projects with different mixes of
labor and capital intensity that diversify our supply chain, which can
lower prices through competition and reduce system vulnerability to
shocks and disruptions. The calculation underlying the question does
not account for achievements related to any of these other goals; nor
does it address the many construction jobs that have been created.
Thus, it fails to reflect the full value of the program.
CREDIT SUBSIDY COST TRANSPARENCY
It appears to be the case that applicants spend a great deal of
time calculating and negotiating with DOE the credit subsidy costs
associated with their individual applications. Those figures then go to
the Office of Management and Budget and are apparently re-worked in
some way.
Question 3a. As a general matter, does the estimated credit subsidy
cost tend to increase after OMB review, decrease, or remain the same?
Answer. As a general matter, the estimated credit cost at the time
of conditional commitment does not tend to vary greatly from the
estimate initially submitted by DOE to OMB. DOE and OMB work closely to
ensure that the agreed-upon methodology for calculating credit subsidy
costs is applied appropriately, that cost estimates reflect all project
characteristics and other factors, and that cost estimates are
consistent with all applicable statutory and regulatory requirements.
Question 3b. Do applicants get to participate in the OMB's portion
of the review process at all, or at least to the same extent they are
able to interact with DOE earlier in the process?
Answer. While the Department certainly has extensive interactions
with applicants during the due diligence and negotiation phases, it
would be inaccurate to say that applicants are involved in
``calculating and negotiating with DOE the credit subsidy costs
associated with their individual applications.'' The Department
actively negotiates deal terms with applicants, and those terms have an
impact on the ultimate credit subsidy cost; but the cost itself is not
negotiated or calculated with applicants. Consistent with statutory
requirements and good stewardship of taxpayer resources, the cost is
calculated by the Department, and reviewed and ultimately approved by
OMB, using an agreed-upon methodology and model. The Department is
responsible for selecting projects and negotiating deal terms. OMB is
responsible for approving the credit subsidy cost, and, OMB personnel
do not have direct negotiations with applicants.
Question 3c. Are the OMB models and methodologies for analysis and
calculation of credit subsidy cost publicly available?
Answer. The Department is responsible for, and maintains the
methodologies and models for calculating credit subsidy costs. OMB
reviews and approves the model and cost estimates for each Title XVII
loan guarantee, as it does for other, similar federal credit programs.
The exact models and methodologies are not publicly available, since
they contain proprietary and business confidential information. The
Department calculates the estimated credit subsidy cost based on the
agreed upon term sheet between the applicant and DOE, using a
methodology approved by OMB. As part of this analysis, the Loan
Programs Office credit staff reviews and scores every aspect of the
transaction, including, but not limited to: pledged collateral, market
risk, technology risk, regulatory risk, contractual foundation,
operational risk, and recovery profile. The result is a credit subsidy
range that incorporates all available information regarding the project
and financing at the time. The approach to determining the credit
subsidy is based on transaction risk analysis which is similar to that
conducted by private sector lenders.
Question 3d. Why is the DOE review of credit subsidy cost conducted
separate and apart from OMB's? Is there a way to integrate the two
processes so that applicants have a more definitive answer once they've
incurred the expenses and expended the effort necessary to get through
the process?
Answer. Fundamentally, it is the Department's obligation to conduct
due diligence on a project, negotiate the terms of a transaction and to
calculate the credit subsidy cost based on those terms. The role of OMB
is to review and approve DOE's calculation. The Department and OMB are
committed to ensuring that the interagency processes associated with
the Loan Programs Office are conducted as efficiently and effectively
as possible, and in a manner that is consistent with our mandate to
safeguard the taxpayers' money.
ACCOUNTABILITY FOR PERFORMANCE
As Executive Director of the Loan Programs Office, presumably you
report to Secretary Chu. In terms of White House involvement though,
there seems to be some level of confusion about who is monitoring not
only the Department's activities, but also the involvement of the
Office of Management and Budget. Just as the Environmental Protection
Agency interacts with the President's Council on Environmental Quality
and Carol Browner, I assume a similar construct exists for the Loan
Programs Office.
Question 4. What individual or entity at the White House, and more
directly engaged with the President, is responsible for oversight of
the Loan Programs Office?
Answer. As you stated, as Executive Director of the Loan Programs
Office, I report directly to Secretary Chu, who is responsible for
carrying out Administration policies within the Department of Energy,
and has statutory authority to administer the Loan Programs. In
carrying out these activities for the Loan Programs, the Department
coordinates with appropriate offices throughout the Administration, to
ensure the programs are executed in a manner consistent with the
governing statutes, regulations, and Administration policies.
GAO REPORT
The July 2010 GAO report found that the Department has ``treated
applicants inconsistently ... in at least five of the ten cases in
which DOE made conditional commitments, it did so before obtaining all
of the final reports from external reviewers, allowing these applicants
to receive conditional commitments before incurring expenses that other
applicants were required to pay.''
Question 5a. Please provide the Department's perspective on the
statement above.
Answer. The Department takes very seriously the analysis and
recommendations put forth by GAO. We disagree, however, with GAO's
assessment that we treat applicants unfairly. The Loan Programs are
solicitation-based--meaning that we accept applications only in
response to specific solicitations that we issue, each of which is
tailored to a specific category or categories of technologies or
project types.
Each solicitation clearly lays out the criteria that are used to
analyze applications submitted in response to that solicitation--and
DOE is committed to applying them on a consistent basis within each
category.
Question 5b. Why were some conditional commitments made before DOE
received the final reports from external reviewers?
Answer. The issue of whether DOE will require external reviews is
based on DOE's review of the application and the specific
characteristics of a project. Where DOE has required an external report
to be prepared in connection with a project, DOE requires a final
report prior to closing of the loan guarantee. The Department believes
that LGP staff can prudently draw conclusions and make recommendations
based on near final draft reports. Receipt of a final report is often a
condition precedent to closing but is not needed to make a conditional
commitment. This is a standard business practice in the project finance
industry. The federal government is not legally obligated until the
closing of the loan guarantee, and any necessary actions can be taken
to address material changes identified in the final report prior to
closing of the loan guarantee.
Question 5c. Pages 12 and 13 of the GAO report contain four
recommended actions for the Secretary of Energy. Has the Department
taken, or intend to take, action on any of those items?
Answer. We take all recommendations seriously and are either
actively taking steps to make these improvements or have completed
them, or disagree with the recommendations and believe that we already
have the necessary actions in place. In reference to the four
recommended actions on pages 12 and 13, the Department takes the
following positions:
1. The Department agrees that it is important for the Loan
Guarantee Program to accurately track its progress and the
impacts that the projects it supports are having. It has long
tracked important metrics for our projects--including
greenhouse gas emissions avoided, power generated, and
individual loan performance. We believe that these are
important measures of the effectiveness of our program. In
addition, we continue to work to improve our methods for
tracking and measuring success in the context of the loan
programs.
2. We disagree with GAO's assessment that we treat applicants
unfairly. The Loan Programs are solicitation-based--meaning
that we accept applications only in response to specific
solicitations that we issue, each of which is tailored to a
specific category or categories of technologies or project
types. Each solicitation clearly lays out the criteria that
will be used to analyze applications submitted in response to
that solicitation--and DOE is vigilant in applying them on a
consistent basis within each category.
3. The Department believes that current process for rejected
applicants is working. Each application receives a full and
fair review by the Program, comparable to the lending process
in the private sector. These reviews consist of highly
sophisticated technical and financial analyses conducted by our
experienced professional staff.
The Department agrees that more transparency was needed and
LGP has worked hard to improve this. To that end, we have
implemented a more proactive communications policy with
applicants. Our intake staff is empowered to reach out to
applicants to ask questions of, seek information from, and work
with applicants to ensure that each application is complete,
and fully and fairly reviewed.
4. The Department agrees with the overall goal to
systematically obtain and address feedback from applicants. The
Loan Guarantee Program talks regularly with stakeholders to
receive feedback. In addition, we recently implemented a
feedback page on our new website that allows stakeholders,
including applicants, to provide feedback anonymously.
Question 6a. Section 1705 Deadline Extension: On August 5, the
Department extended the application deadline for the renewable energy
loan guarantee solicitation by six weeks, to October 5. Secretary Chu
stated that this would allow the Department to ``support additional
projects...''
Has the Department had difficulty attracting applications for this
program?
Answer. No. The loan programs have received over 230 applications
from projects seeking Section 1705 funds. Over 100 of these
applications remain active or have already resulted in a conditional
commitment. Of course, not all of the original applications were
eligible for the program, and not all of the active applications will
result in a loan guarantee.
The Loan Programs Office extended the application deadline not
because of a lack of demand, but because our process improvements
permitted us to give applicants additional time to submit their
applications and to have the best applications possible.
Question 6b. Please share any information you have about the number
of applications that have been submitted so far, the total amount of
funding they request, and the status of those applications.
Answer. The information you have requested is continually changing,
as projects move through the review process. As of January 5, 2011, the
status of loan guarantee requests for projects eligible for the 1705
program, is as follows:
------------------------------------------------------------------------
Total 1705 Loan Request
Application Status Applications (in billions)
------------------------------------------------------------------------
Received (see Note 1) 239 $90
------------------------------------------------------------------------
Rejected/Withdrawn/Inactive 132 $35+
------------------------------------------------------------------------
Active, but Part H Application Not Yet 12 $2
Submitted (See Note 2)
------------------------------------------------------------------------
Projects in Part II Intake Review (See 41 $19
Note 3)
------------------------------------------------------------------------
Due Diligence; Pre-Term Sheet Issuance 19 $11
------------------------------------------------------------------------
Due Diligence; Draft Term Sheet Issued 23 $11
to Applicant
------------------------------------------------------------------------
Conditional Commitment 4 $1.8
------------------------------------------------------------------------
Closed 8 $3.9
------------------------------------------------------------------------
Note 1: There is a difference between the total loan amount requested
by all submitted applications and the cumulative loan request amounts
listed in the various subsets on this chart. This is because, as a
project progresses through the review process, the size of the
proposed guarantee may change from the amount originally requested.
Note 2: The Loan Programs have a two-part application process. Twelve
active projects have not yet submitted their Part II application; they
may do so until the relevant, upcoming deadline. For FIPP projects,
the deadline is January 6, 2011. Under the Manufacturing solicitation,
the deadline is January 31, 2011. Projects that submit their Part II
applications by the appropriate deadline will be put into Part II
Intake review and considered for further due diligence.
Note 3: The majority of these applications were recently submitted on
or immediately prior to the December 31, 2010 final Part II deadline
under the 2009 Energy Efficiency, Renewable Energy and Advanced
Transmission and Distribution Technologies solicitation. They are
currently being reviewed and considered for further due diligence.
ATVM PROGRAM
Question 7a. In June 2009--roughly 15 months ago--Secretary Chu
announced $8 billion in conditional loans to three auto companies. He
stated at the time that, ``Over the next several months, additional
loans will be awarded to large and small auto manufacturers and parts
suppliers up and down the production chain.'' Only one new loan has
been announced since then, however, and it remains conditional almost a
year later. When can we expect to see movement in this program again?
Answer. DOE recently announced another conditional commitment under
the ATVM program. This brings to six the number of conditional
commitments that have been made under the program. Four of these
transactions have already reached financial close, while one recipient
decided not to proceed to financial close. DOE anticipates offering
several more conditional commitments over the next several months.
Question 7b. The administrative budget for the ATVM program was $20
million in FY2010, and the Department has requested another $10 million
for FY2011. With very little public activity taking place in the ATVM
program over the past year, can you explain what these administrative
funds are being used for? How many government personnel and private
consultants are working for the ATVM program?
Answer. The funds cover all of the program's administrative costs
to manage its existing portfolio, in addition to expenses incurred in
reviewing applications and negotiating loan terms. In FY 2010, this
included administrative funding used to close three loans that were
committed in that year, in addition to the costs of 10 full-time
federal employees and one private contractor working for the program.
Additional funding was needed to pay for financial and market
consultants and outside legal advisors who were assisting in the
analysis of projects in the pipeline.
Question 7c. At your briefing with congressional staff on September
21, you noted that a very large loan is in the works and you expect it
to be completed next spring. Can you provide additional details about
who the loan would be for, or, at the very least, whether it is for a
large manufacturer, an OEM, or another part other industry?
Answer. The Department is working on a variety of proposals with
large and small projects but, because of the confidential nature of
these discussions, we cannot release any other details at this time.
Question 7d. The Energy Committee recently reported a substitute
amendment to S. 2843 that would remove the ATVM program's existing loan
cap and expand eligibility to additional classes of vehicles. Does the
Department have a position on these provisions? Please explain DOE's
views on both the loan cap and expanded eligibility.
Answer. DOE is committed to executing the ATVM program consistent
with its statutory requirements and does not have a position on either
of these amendments.
BIOFUELS
A number of biofuels companies have met with Senators to express
their significant dissatisfaction with the Department's loan guarantee
programs. Several have also written letters to Secretary Chu, pleading
for clarification about what, exactly, is required for them to secure a
loan guarantee for their projects.
Question 8a. DOE has not selected any biofuels project to receive
loan guarantees. Please indicate whether the Department believes that
corn starch ethanol, cellulosic, algae, and/or any types of other
biofuel projects qualify for consideration under either the 1703
program or the temporary 1705 program.
Answer. As a general matter, biofuels projects are eligible for
consideration under both programs. However, eligibility decisions are
made on a project-by-project basis, and are dependent on the specific
attributes of a given project.
Question 8b. Are any specific factors preventing DOE from awarding
loan guarantees to the cellulosic biofuel industry?
Answer. The Department is committed to promoting biofuels and has
led in this area through investments under the Recovery Act, our work
on E15 testing, and much more. The Program welcomes biofuels projects
as they can help diversify our transportation fuel supply. However,
biomass applications present a number of challenges including, but not
limited to, significant technology, production, and commodity price
risk. These risks present challenges in structuring projects that
comply with the Title XVII requirement that the Secretary determine
that there is a ``reasonable prospect of repayment'' of each loan
guaranteed under Title XVII. However, we do currently have several
biofuels projects in due diligence, and DOE hopes to be able to issue a
conditional commitment to a biofuels applicant in the near future.
The Loan Guarantee Program is one of several incentives that
developers of biofuels can potentially use. As you know, DOE invests
heavily in energy research and development and demonstration programs
for biofuels, including numerous cost-shared grants, and there are
significant tax advantages included in the tax code. Additionally, DOE,
USDA and EPA have formed a joint working group, which is investigating
ways to support the industry.
CELLULOSIC BIOFUELS
In February 2010, a number of cellulosic biofuel companies wrote to
Secretary Chu to highlight the ``method by which credit evaluation for
next-generation biofuels projects is conducted'' by DOE. According to
the letter, the LGP office is interpreting a provision in the Energy
Policy Act of 2005 as ``requiring long-term, fixed-price offtake
agreements [and] the absence of such agreements as constraining its
ability to make loans to the biofuels sector.'' The cellulosic industry
contends that ``the liquid fuels market does not operating within such
a framework; long-term, fixed-price forward contracting mechanisms,
offering assurance of predictable future revenue streams, simply do not
exist in our target markets.''
Question 9a. Could you please provide DOE's perspective on and
approach towards loan guarantees for the cellulosic biofuel industry?
Answer. The Department is committed to promoting biofuels and has
led in this area through investments under the Recovery Act, our work
on E15 testing, and much more. The Program welcomes biofuels projects
as they can help diversify our transportation fuel supply. However,
biomass applications present a number of challenges including, but not
limited to, significant technology, production, and commodity price
risk. These risks present challenges in structuring projects that
comply with the Title XVII requirement that the Secretary determine
that there is a ``reasonable prospect of repayment'' of each loan
guaranteed under Title XVII. However, we do currently have several
biofuels projects in due diligence, and DOE hopes to be able to issue a
conditional commitment to a biofuels applicant in the near future.
The Loan Guarantee Program is one of several incentives that
developers of biofuels can potentially use. As you know, DOE invests
heavily in energy research and development and demonstration programs
for biofuels, including numerous cost-shared grants, and there are
significant tax advantages included in the tax code. Additionally, DOE,
USDA and EPA have formed a joint working group, which is investigating
ways to support the industry.
Question 9b. Approximately how many loan guarantee applications has
DOE received from companies within the cellulosic biofuel industry?
Answer. As of January 5, 2011, DOE had received a total of 19 Part
II applications for cellulosic biofuels projects.
Question 9c. Have any specific factors prevented DOE from awarding
loan guarantees to cellulosic biofuel projects?
Answer. The most significant impediments to biofuels projects
receiving loan guarantees from the Program include significant
technology, production and commodity price risks.
Question 9d. Are cellulosic biofuel projects eligible for loan
guarantees under the temporary Section 1705 program?
Answer. Yes, leading edge biofuels projects are eligible under 1705
a(3)which states: ``Leading edge biofuel projects that will use
technologies performing at the pilot or demonstration scale that the
Secretary determines are likely to become commercial technologies and
will produce transportation fuels that substantially reduce life-cycle
greenhouse gas emissions compared to other transportation fuels.''
DOE has issued two solicitations under which these projects could
apply: the FY09 Energy Efficiency, Renewable Energy and Advanced
Transmission and Distribution Technologies; and the Financial
Institution Partnership Program--Commercial Technology Renewable Energy
Generation Projects Solicitations. As with all other eligible
technologies, these projects must also meet all of the other
requirements of the Section 1705 program.
Responses of Jonathan Silver to Questions From Senator Dorgan
In the Omnibus Appropriations Act of 2009 (P.L. 111-8) and the
Supplemental Appropriations Act of 2009 (P.L. 111-32) as well as S.
3635, the Fiscal Year 2011 Energy and Water Appropriations bill,
language has been carried at the request of the Congressional Budget
Office (CBO) that prohibits DOE from making loan guarantees to project
applicants if they have already received federal grants and cooperative
agreements. As chairman of the Senate Energy and Water Subcommittee, we
carried these provisions in order to address scoring implications
required by the CBO. This is commonly being referred to as the double
dipping provision.
At the same time, there are concerns that have been raised by some
project applicants that the Department of Energy's (DOE) loan guarantee
program has placed too many conditions on the loan program and made the
process too difficult even for strong projects to get through the
process to close on a loan guarantee commitment. One example of this
problem is that certain projects that have already received a grant
from the federal government, for instance for CCS programs funded by
the DOE, are disqualified from receiving a loan guarantee through your
office. On the one hand, the Energy Committee has authorized such grant
programs to demonstration and commercialization of CCS, and the DOE has
committed serious funds in support of those projects through the ARRA
and appropriations bills through my Energy and Water Development
Appropriations Subcommittee. On the other hand, these same projects are
disqualified from receiving a DOE loan guarantee, a loan that may be
essential to commercialization of the overall project because of the
lack of financing that is available in the capital financial markets.
Furthermore, the Interagency CCS Task Force Report, which the DOE
co-chairs with the Environmental Protection Agency, released its report
on August 12, 2010, and recognized the need to overcome the barriers to
CCS deployment within 10 years with a goal of 5-10 commercial-scale
demonstration projects by 2016. With this goal in mind, many of the
projects in the pipeline today are likely going to need a variety of
incentives to achieve that end.
Question 1. Is the DOE willing to work with Congressional Budget
Office and Office of Management and Budget to find a workable solution
or interpret the provisions in a manner that would recognize the
importance of strong projects and work with some grant recipients
depending upon the difference of loan and grant assistance?
Answer. The Department recognizes the importance of advanced fossil
projects, and we look forward to working with CBO and OMB to address
the issue you have raised.
Question 2a. I understand that DOE requires biofuels projects that
are seeking a loan guarantee to have a dedicated buyer, or ``off-take
agreement.'' For liquid fuels, we can assume that a dedicated buyer
would be a major oil company. While this kind of requirement may make
sense for an electricity project, it does not make as much sense for a
fuels project, because off-take agreements do not generally exist in
the liquid fuels industry. The Renewable Fuels Standard (RFS) mandate
that requires consumption of biofuels apparently does not qualify as an
off-take agreement, in fact the national requirement of the use of
renewable fuel does not seem to be factored into DOE's decision-making
process in any way. The RFS waiver for cellulosic biofuels basically
only requires oil companies to purchase fuels that are available in the
marketplace. It seems that the purpose of a DOE loan guarantee is to
help new market entrants, however DOE is effectively only agreeing to
issue loan guarantees to companies producing fuels that are already in
the market. Due to the ability of the oil companies to not use fuels
not already in the market place, it seems that we are giving all the
cards to the oil companies. This situation suggests two questions:
Is the market for fuel fundamentally different from the market for
electricity? Should there be different guidelines for fuels projects?
Answer. There is no question that the market for fuel is
fundamentally different than the market for electricity. The loan
programs welcome biofuels projects as they can help diversify our
transportation fuel supply. Biomass loan guarantee applications present
a number of challenges including, but not limited to, significant
technology, production, and commodity price risk. These risks present
challenges in structuring projects that comply with the Title XVII
statutory requirement that the Secretary determine that there is a
``reasonable prospect of repayment'' of each loan guaranteed under
Title XVII, Despite the challenges presented by biofuels projects, the
loan programs currently have several biofuels projects in due
diligence, and DOE hopes to be able to issue a conditional commitment
to a biofuels applicant in the near future.
As you know, the Loan Guarantee Program is one of several
incentives that developers of biofuels can potentially use. DOE invests
heavily in energy research and development and demonstration programs
for biofuels, including numerous cost-shared grants where repayment is
not required, and there are significant tax advantages for biofuels
included in the tax code.
Question 2b. Does DOE have the authority to establish different
guidelines for fuels?
Answer. DOE reviews each loan guarantee application on its own
merits against a common set of criteria outlined in each solicitation.
All projects must meet the basic eligibility criteria, at a minimum,
including the statutory requirement of a ``reasonable prospect of
repayment.''
Responses of Jonathan Silver to Questions From Senator Barrasso
Mr. Silver, thank you for your testimony. According to the
Department of Energy's ``The Loan Programs: An Overview'' briefing
paper (page #12) from September 21, 2010, the Loan Guarantee Approval
process goes from the ``Solicitation'' stage all the way to the ``Deal
Monitoring'' stage.
Question 1. At what point on this chart does the Office of
Management Budget (OMB) become involved?
Answer. OMB is currently involved during the Approval Process,
where it reviews the deal prior to the issuance of a conditional
commitment, and again during the Closing Process, where it approves the
final credit subsidy cost.
Question 2. Is the technology evaluation solely up to the
Department of Energy (DOE)?
Answer. Yes, the Department oversees the technology analysis of
applications.
Question 3. Has the White House engaged in the review process for
any specific applications?
Answer. The Secretary of Energy has ultimate responsibility for
approving the issuance of a loan guarantee. The Department, in
reviewing each transaction, coordinates with appropriate offices
throughout the Administration to ensure the loan programs are executed
in a manner consistent with relevant statutes, regulations, and
Administration policies.
Question 4. After the Department sends out a solicitation, does the
Department change criteria for selecting and evaluating technology?
Answer. No. Projects are evaluated and selected according to the
criteria laid out in the solicitation to which they are responsive and
the requirements of Title XVII.
Question 5. What is involved in the Due Diligence part of the
approval process?
Answer. ``Due Diligence'' is a broad term; the Department engages
in ``due diligence'' throughout the review process, all the way to
financial close. The initial due diligence phase, which occurs before
conditional commitment, includes, among other things, a close
examination of the technology, and an analysis of the financial model
and plan for the project. The projects also undergo detailed legal,
market, and environmental reviews, including an evaluation to determine
if they are and will be in compliance with the National Environmental
Policy Act (NEPA), the Endangered Species Act (ESA), Davis-Bacon labor
requirements, and other state and local laws and regulations. It is
during this work that the Loan Programs Office (LPO) deal team engages
outside consultants and advisors with specialized expertise relevant to
the project to assist with the transaction.
After due diligence has proceeded to a point where discussion of
substantive business issues makes sense, LPO begins an often lengthy
negotiation with the applicant on the terms and conditions of the
potential loan guarantee. In some instances, the proposed project must
be significantly restructured to ensure that it is creditworthy and
meets the statutory requirement of a reasonable prospect of repayment.
During the initial due diligence phase, the LPO credit staff
undertakes a comprehensive credit analysis of the proposed transaction.
The credit team calculates an estimated credit subsidy cost based on
the agreed upon term sheet between the applicant and the Department.
This credit subsidy cost is calculated using a methodology approved by
OMB. As part of this analysis, LPO credit staff reviews and scores
every aspect of the transaction, including, but not limited to: pledged
collateral, market risk, technology risk, regulatory risk, contractual
foundation, operational risk, and recovery profile. The result is a
credit subsidy range that incorporates all available information
regarding the project and financing at the time.
Due diligence continues after a conditional commitment is made, all
the way up to financial close. Conditional commitments are
``conditional'' because they are contingent on the applicant meeting a
number of conditions precedent to financial close, and which are laid
out in the commitment. During the post conditional commitment period,
DOE staff completes any remaining due diligence, with a primary focus
on ensuring that all conditions precedent (of which there generally are
many) are met. The parties simultaneously negotiate and draft final
loan documentation during this period. Once all outstanding issues have
been addressed, DOE staff conducts a final credit analysis to calculate
the final credit subsidy cost. The credit subsidy cost is then reviewed
and approved by OMB. Once the credit subsidy cost is finalized, the
project immediately moves to financial closing, at which point any fees
due from the borrower, including those for the credit subsidy cost,
must be deposited into Treasury, and budgetary resources supporting the
loan guarantee are obligated.
Question 6. If an applicant promptly provides all the information
requested by DOE, how long will the due diligence part take?
Answer. In order to ensure that taxpayer monies are properly
safeguarded, the Department uses best practices, similar to those
private sector lenders would use in reviewing such deals. It is
important to keep in mind that these transactions are large and complex
and that no two deals are alike. In the private sector, the due
diligence associated with such transactions is measured in months, not
weeks. And, because of considerations that are unique to federal
financing (e.g., environmental and labor regulations), the Department's
process is even more robust in some regards. Given the complexities
associated with these deals, it is very difficult to apply timeframes
to any one part of the process with any specificity.
Responses of Jonathan Silver to Questions From Senator Cantwell
Mr. Silver, in 2008, GAO found significant shortcomings with the
current DOE loan guarantee program, many of which still remain
unaddressed.
This past summer GAO issued another critical review of the program.
They found that DOE had not developed the tools necessary to assess
progress within the program, noting the program lacked adequate
performance goals to help operationalize its policy goals.
GAO acknowledged that DOE has established some performance goals
and measures. However, GAO found that the measures were too few to
reflect the full range of policy goals for the Loan Guarantee Program.
As an example, GAO noted that there is no measurable performance goal
for job creation.
Moreover, they found that the performance goals for the program do
not reflect the full scope of the program's authorized activities; for
example, they say nothing about promoting energy efficiency. Without
sufficient performance goals, DOE cannot know whether the Loan
Guarantee Program is achieving the desired results.
Question 1a. What are DOE's plans to remedy these concerns raised
by the GAO?
Answer. The Department takes very seriously the analysis and
recommendations put forth by GAO. The Department agrees that it is
important for the Loan Guarantee Program to accurately track its
progress and the impact that the projects it supports are having. It
has long tracked important metrics for our projects such as greenhouse
gas emissions avoided, power generated, and individual loan
performance. We believe that these are important measures of the
effectiveness of our program. In addition, we continue to work to
improve our methods for tracking and measuring success in the context
of the loan programs.
Question 1b. Does DOE have plans to revisit its performance
measures and goals? If so, what is the status of that effort?
Answer. The Department continuously looks for the best ways to
measure the Loan Programs' projects performance and goals.
Question 1c. Does DOE plan to do a post-hoc analysis of the
projects that have received loan guarantees to determine the success of
the program?
Answer. The Department's involvement with projects does not end at
financial close. The Loan Programs Office has a portfolio management
team that will be involved in actively monitoring and managing the
investments in the portfolio throughout their term. Separate and apart
from this monitoring function, the Department is continually reviewing
the progress of the loan programs, and the impact they have had, as
part of the Department's strategic and budget planning.
Question 2a. Mr. Silver, in its report issued in July, GAO found
that DOE ``is implementing the program in a way that treats applicants
inconsistently, lacks systematic mechanisms for applicants to appeal
its decisions or for applicants to provide feedback to DOE, and risks
excluding some potential applicants unnecessarily.''
GAO found that DOE's implementation of the program has favored some
applicants and disadvantaged others in a number of ways, including
providing preferential treatment to applicants proposing nuclear
projects.
Further, GAO found that DOE lacks systematic mechanisms for
applicants to appeal its decisions or provide feedback to DOE on the
department's administration of the program.
What is DOE doing to address these issues identified by the GAO
investigation?
Answer. We take all recommendations seriously. In cases where we
agree that improvements are needed, we are either actively taking steps
to make these improvements or have completed them. On some of the
recommendations, we believe that we already have the necessary
procedures in place. Regarding the four recommended actions on pages 12
and 13 of the GAO report, the Department takes the following positions:
1. The Department agrees that it is important for the Loan
Guarantee Program to accurately track its progress and the
impacts that the projects it supports are having. It has long
tracked important metrics for our projects--including
greenhouse gases avoided, power generated, and individual loan
performance. We believe that these are important measures of
the effectiveness of our program. In addition, we continue to
work to improve our methods for tracking and measuring success
in the context of the loan programs.
2. We disagree with GAO's assessment that we treat applicants
unfairly. The Loan Programs are solicitation-based--meaning
that we accept applications only in response to specific
solicitations that we issue, each of which is tailored to a
specific category or categories of technologies or project
types. Each solicitation clearly lays out the criteria that
will be used to analyze applications submitted in response to
that solicitation--and DOE is vigilant in applying them on a
consistent basis within each category.
3. The Department believes that current process for rejected
applicants is working. Each application receives a full and
fair review by the Program, comparable to the lending process
in the private sector. These reviews consist of highly
sophisticated technical and financial analyses conducted by our
experienced professional staff.
The Department agrees that more transparency was needed and
LGP has worked hard to improve this. To that end, we have
implemented a more proactive communications policy with
applicants. Our intake staff is empowered to reach out to
applicants to ask questions of, seek information from, and work
with applicants to ensure that each application is fully and
fairly reviewed.
4. The Department agrees with the overall goal to
systematically obtain and address feedback from applicants. The
Loan Guarantee Program talks regularly with stakeholders to
receive feedback. In addition, we recently implemented a
feedback page on our new website that allows stakeholders,
including applicants, to provide feedback anonymously.
Question 2b. In general, has DOE and OMB determined that nuclear
energy projects are more or less risky than other projects funded under
this program?
Answer. Each transaction is evaluated on the specifics of that
transaction. Some nuclear transactions may be less risky than some
innovative technology transactions; for example, sponsors may have
greater resources, management depth and expertise which they bring to
the projects.
Question 3a. Mr, Silver, as I'm sure you can tell, there is a great
deal of frustration amongst many of us in Congress about the speed and
transparency of the Loan Guarantee Program. While there has been real
progress from past years in both areas, further improvement is
necessary, and quickly.
In my view, the greatest frustration stems from what seems to be a
lack of urgency. The policy imperatives that motivated the creation of
this program in the first place are no less pressing today than they
were five years ago: job creation, energy security, environmental
protection.
I believe all of these issues are more pressing than they were five
years ago. They are all critical issues of national concern and they
are good reasons to deploy more renewable energy. In addition, for both
financial and statutory reasons, applicants for loan guarantees are
often under tremendous pressure to move quickly. Yet DOE and OMB
sometimes seem to operate as though there were no cause for urgency.
I would like to hear your assessment of whether that is an accurate
perception. Are DOE and OMB personnel processing these applications
with a sense of urgency?
Answer. The Department and OMB are processing applications with a
sense of urgency. The Department takes its responsibility to both
applicants and the U.S. taxpayer seriously. It is not uncommon for
applicants to submit applications for projects that are not ready for
deployment, and therefore, review may be delayed until necessary
information is re-submitted. The due diligence process includes a
thorough review of all financial, technical, legal, environmental and
other relevant data. These reviews often demonstrate the need for
material changes to the terms and structure proposed in the
application, which in turn may lead to lengthy negotiations with the
applicant. While deals have taken a long time to close in the past, the
Department has made significant improvements that have increased the
efficiency of the process. For example, it has hired more staff;
launched an online application portal; streamlined the NEPA process;
redesigned and launched a more user-friendly website; and initiated
more proactive communication with applicants. Nonetheless, the unique
and highly complex nature of each project, and the importance of
ensuring that each project is structured and documented in a manner
that minimizes the risk to the taxpayer, means that these are time-
consuming and resource intensive projects to bring to closing. There is
simply no generic ``one-size-fits-all'' method of reviewing the
applications; and many of the time-sensitive issues--like issuance of
regulatory approvals and conclusion of negotiations with off-takers,
construction contractors, equipment suppliers and the like--are not
within the Department's control.
Question 3b. Do you have any recommendation on legislation Congress
could pass that would improve the DOE loan guarantee process more
transparent and responsive?
Answer. The Administration has made a limited number of requested
changes which we believe are either necessary or helpful, including
allowing project credit subsidy costs for modifications to Title XVII
loan guarantees, to be paid from a combination of borrower payments and
appropriated funds; expanding the Section 1705 program to include
efficient end use energy technology projects; reaffirming that the Loan
Guarantee Program can provide guarantees to projects at multiple sites;
and clarifying when project sponsors may be eligible for multiple loan
guarantees for eligible projects under the Section 1705 program. In
addition, we believe that the programmatic improvements we have made
will go a long way toward meeting the goals set for our programs. We
also have previously submitted technical drafting assistance at the
recommendation of this committee to improve the program. We
continuously look for ways to improve the program and will work with
OMB and the Congress if there are specific changes we believe could
improve the program.
Question 4a. Mr. Silver, in the 1970's and 1980's, the Department
of Energy wasted billions of taxpayer dollars on defaulted loans to
subsidize synthetic fuels through the synfuels corporation. According
to GAO, 10 of the 14 projects funded through that program resulted in
defaults.
In spite of that history, DOE is now considering a loan guarantee
application from a coal-to-liquids project in Wyoming.
According to analysis by the Natural Resources Defense Council,
even if 90% of the CO2 from liquid coal plants is captured,
then well-to-wheels CO2 emissions would be still be higher
than emissions from today's crude oil system.
Why is DOE considering making new investments in synthetic fuels?
Answer. The Secretary of Energy has made the commercialization of
technologies that enable carbon capture and sequestration (CCS)
technologies a policy priority. Title XVII of the Energy Policy Act of
2005 (EPACT 2005), under which the DOE Loan Programs Office was
established, expressly provides for loan guarantees for gasification
projects incorporating carbon capture and sequestration, including
integrated gasification combined cycle projects, industrial
gasification projects, petroleum coke gasification projects, and
liquefaction projects. Accordingly, the Loan Programs Office is
considering several prospective projects deploying advanced
gasification technology with CCS. The DOE invited these projects to
enter due diligence after a competitive solicitation process and
thorough preliminary review.
In addition to power, these projects may produce substitute natural
gas, chemical feedstocks or transportation fuels. The program does not
have a bias for or against any particular product of gasification
technology. Instead, we focus on projects that have strong development
teams capable of implementing complex technological projects. In
addition, we evaluate prospective projects based on the degree to which
each advances energy policy objectives, which includes the reduction or
avoidance of greenhouse gas emissions compared with existing technology
and competing technology investments.
Question 4b. What data do you have to suggest that such an
investment is either economically or environmentally sound?
Answer. The Department's National Energy Technology Laboratory
(NETL) has published extensive research over several years on the
economics and lifecycle greenhouse gas emissions of coal-to-liquids
(CTL) technology. NETL has examined, for example, coal-to-liquids
technology using a methanol-to-gasoline production process and
incorporating carbon capture and sequestration (CCS.)
These studies have found that the lifecycle greenhouse gas
emissions of this process with 88 percent CCS are approximately five
percent below the EPA Renewable Fuel Standards 2 (RFS2) petroleum
baseline emission standards established under Section 526 of the 2007
Energy Independence and Security Act (EISA) of 2007. In addition, the
studies found that the lifecycle emissions of CTL with CCS are
substantially below many sources of imported crude oil, which currently
account for a large portion of the oil refined in the U.S.
All of the advanced fossil technology projects currently in Loan
Program due diligence were found to be economic upon preliminary
review. The Program invited the projects into due diligence based on
their economic viability. It is possible that the due diligence process
will discover that economics of certain projects have changed. All
projects to which the Department extends loan guarantees must,
according to Section 1702 of EPACT 2005, have ``a reasonable prospect
of repayment of the principal and interest on the obligation by the
borrower.''
Question 4c. How do coal-to-liquids projects meet the statutory
language of the Loan Guarantee Program requiring projects to ``avoid,
reduce, or sequester emissions of air pollutants or man-made greenhouse
gases''?
Answer. The NETL studies cited above found that the lifecycle
greenhouse gas emissions of a coal-to-liquids process with 88 percent
CCS are approximately five percent below the EPA Renewable Fuel
Standards 2 (RFS2) petroleum baseline emission standards established
under Section 526 of the 2007 Energy Independence and Security Act
(EISA) of 2007. In addition, the studies found that the lifecycle
emissions of CTL with CCS are substantially below many sources of
imported crude oil, which currently account for a large portion of the
oil refined in the U.S.
The Loan Programs Office will verify the lifecycle greenhouse gas
emissions for each project under review during the due diligence
process. The Department will not extend a loan guarantee offer to any
project that does not meet the statutory requirement in Section 1703 of
EPACT 2005 to ``avoid, reduce, or sequester air pollutants or
anthropogenic emissions of greenhouse gases.''
Question 5a. Mr. Silver, in your response to a letter sent by Rhone
Resch, President & CEO of the Solar Energy Industries Association
(SETA), to President Obama regarding the $1.5 billion rescinded from
the Loan Guarantee Program last month, you stated that ``In the short
term, we have the resources to support a broad portfolio of clean
energy technologies and anticipate that those resources will allow DOE
to support credit worthy projects across all open solicitations.''
Does this mean that the estimated 81 projects requesting more than
30 billion dollars in loans will not get funded unless Congress
restores at least $1.5 billion?
Answer. The Loan Programs Office is committed to utilizing the
funds we currently have in the 1705 program to fund solid projects to
achieve our statutory objectives. As discussed above, DOE is currently
engaged in pre-conditional commitment due diligence on over forty 1705-
eligible projects (in addition to the twelve 1705-eligible projects
that have already received conditional commitments to date, and
projects eligible under 1703 and ATVM). Twenty-three of these projects
are sufficiently far along in the process that DOE has already provided
a working draft term sheet and begun active negotiations with the
applicant. DOE estimates that these twenty-three projects,
cumulatively, would utilize most, if not all, of the uncommitted
appropriated 1705 funds. Of course, as in the private sector, it is
possible that not all projects that have received draft term sheets
will ultimately reach the conditional commitment and/or closing stage.
Accordingly, DOE will continue to move forward with due diligence on
the other projects in its pipeline and will actively review the new
Part II project applications that it expects to receive by the upcoming
application submission deadlines.
Many projects that are eligible under 1705, but which do not
receive loan guarantees under that program, will be eligible to receive
loan guarantees under the 1703 program, which currently is a self-pay
credit subsidy program.
In addition, the 2011 President's Budget includes $500 million in
credit subsidy to support energy efficiency and renewable energy
projects under 1703. The Administration is monitoring the Loan
Guarantee Program and will continue to seek appropriate funding levels
to ensure the program can achieve its objectives.
Question 5b. I interpret your statement to mean that now DOE plans
to spread the available funds across all technologies and all
solicitations; commercial renewable, innovative renewable, transmission
and the new solicitation for commercial renewable manufacturing, is
that correct? If so, is that decision based on any Congressional
guidance?
Answer. DOE is committed to funding as many well-designed, well-
structured, and creditworthy projects as possible. Projects from all of
the open solicitations remain eligible for loan guarantees.
Question 5c. Would you agree that project sponsors believe that
when they file an application pay all of the fees and costs--which
could amount to millions of dollars in some cases--that if they meet
all of the solicitation's criteria of a credit-worthy project there
will be sufficient funds to cover the subsidy costs?
Answer. Each solicitation issued under the 1705 program makes clear
that the Department's ability to pay the credit subsidy cost associated
with loan guarantees is ``subject to the availability of funds.''
Question 5d. What are you telling applicants now with respect to
the chance that projects may well not be funded due to lack of funds?
How will DOE treat the fees of credit-worthy applicants in the event
you are not able to offer a loan guarantee due solely to lack of funds
to cover the subsidy cost? Are fees refundable?
Answer. Applicants to the Loan Programs Office are made aware that
the Department's ability to pay the credit subsidy cost under the 1705
program is ``subject to the availability of funds.'' Many projects that
are eligible under 1705, but which do not receive loan guarantees by
the September 30, 2011 sunset date, will be eligible to receive loan
guarantees under the 1703 program, which currently is a self-pay credit
subsidy program--though the 2011 President's Budget includes $500
million in credit subsidy to support energy efficiency and renewable
energy projects under 1703. Administrative fees associated with
applying for a loan guarantee are used to cover the expenses that the
Department incurs in reviewing the applications, as required by Title
XVII. They are not refundable.
Question 5e. Isn't there a possibility that the Section 1705
program could run out of funding early next year? Given this fact why
would new applicants apply for loans under the open solicitations?
Answer. The Loan Programs Office is committed to financing well-
structured, well-designed, and creditworthy projects that will be able
to reach financial close by September 30, 2011, regardless of when
their applications are received. As discussed above, as in the private
sector, it is possible that not all of the twenty-three projects that
are in the process of term sheet negotiations will ultimately reach the
conditional commitment and/or closing stage. Accordingly, DOE will
continue to move forward with due diligence on the other projects in
its pipeline and will actively review the new Part II project
applications that it expects to receive by the upcoming application
submission deadlines.
Question 6a. Mr. Silver, Master Limited Partnerships (also known as
MLPs) have been used to help finance mining, as well as oil and gas
drilling, supporting the development of critical domestic fuel sources.
Given the need for additional investment capital to support U.S
domestic energy supply, do you think that this type of structure should
be extended to include qualified renewable energy projects?
Answer. The Loan Programs Office has not formed a view on Master
Limited Partnerships.
Question 6b. Do you agree that allowing MLPs to be used for
renewable energy on a basis comparable to that afforded to fossil fuels
could both expand the supply of domestic renewable energy as well as
expand the base of investors eligible to invest in America's renewable
energy resources?
Answer. The Loan Programs Office has not formed a view on Master
Limited Partnerships.
Responses of Jonathan Silver to Questions From Senator Bennett
Scoring conventions of the Congressional Budget Office (CBO)
require the Appropriations Committee to include a proviso in the Energy
and Water Appropriations bill to prohibit projects that have previously
received certain federal funding, such as grants, from receiving a
Title 17 loan guarantee. CBO argues that using federal funds to support
a project that receives a federally-guaranteed loan shifts risk from
the developer to the federal government. As the loan guarantee program
matures, the number of projects that would be disqualified because of
their past funding history grows, particularly in the fossil energy
category because of DOE's Clean Coal Power Initiative (CCPI). Although
fossil is particularly affected, the problem also cuts across
categories, and probably includes projects in the nuclear and renewable
categories.
Question 1a. Does DOE agree with CBO's assessment that if a project
has received a federal grant in the past that additional risk is
assigned to the federal government?
Answer. The Department has not undertaken an analysis of this
issue. The Department executes the loan programs consistent with its
statutory requirements. More broadly, DOE seeks to ensure the most
efficient use of taxpayer dollars and that sponsors have sufficient
``skin-in-the-game''.n all projects supported by the program.
Question 1b. Given that funding appropriated for loan guarantees in
FY07 does not have the same prohibition on receiving federal grants,
would the loans issued from FY07 loan authority therefore be inherently
more risky to the federal government than those issued from FY09 and
later, all things being equal?
Answer. Again, the Department has not undertaken an analysis of
this issue. However, no project is funded, under FY07 or FY09 authority
or otherwise, unless the Department has undertaken an extensive and
rigorous review of the risks associated with the project, the Secretary
has determined that there is a reasonable prospect of repayment, and
OMB has approved the credit subsidy computation. It should also be
noted that, although the FY07 appropriation does not contain this
requirement, not all projects that may be funded under that authority
will necessarily have received other federal support.
Question 1c. What protections does DOE have in place to ensure
strong protections against default?
Answer. To protect against default, before issuing a loan
guarantee, our team of highly qualified professionals thoroughly
evaluates the technology, the structure and financial plan, the
construction agreements and other project documentation, and costs and
timeline to complete the project. From this review, we develop a
detailed understanding of the sources of cash available for repayment
of the loan. Our loan guarantee documentation includes the full range
of customary lender protections--representations and warranties,
detailed conditions precedent to each loan disbursement, covenants and
events of default; we generally have a lien on all project assets;
depending on the specific risks of the project, we include risk
mitigants, such as debt service reserve accounts, cash sweeps, sponsor
support agreements and mandatory prepayment provisions, among others;
and we receive detailed financial and operating reports throughout the
life of the loan, supplemented by independent engineering reports
during the construction period and otherwise as appropriate.
Question 2a. There are at least three distinct exceptions to the
ineligibility proviso discussed above: (1) the FY09 Supplemental
Appropriations bill allows a project to receive both a loan guarantee
and a federal grant or cooperative agreement as long as the grant or
agreement was recorded on or before May 1, 2009; (2) the loan guarantee
must be offered from the $4 billion authority from FY07, which is not
subject to the prohibition; and (3) DOE may use a CCPI grant award to
pay the cost of a loan guarantee for a specific project referenced in
section 1703(c)(I)(C) of EPACT05.
Is DOE aware of any other exceptions to the ineligibility proviso?
Answer. The text of the prohibition contains a number of additional
exceptions, including an exception for ``otherwise allowable Federal
income tax benefits.''
In addition, the prohibition currently applies only to the 2009
appropriations authority for loan guarantees issued under Section 1703.
Question 2b. Is it DOE's position that if a project has received a
federal grant (i.e. a CCPI grant) to support the project, and none of
the above exceptions apply, the project would be ineligible to receive
a loan guarantee?
Answer. If the grant proceeds are ``expected to be used (directly
or indirectly)'' to support the project, the project would be
ineligible to receive a loan guarantee under Section 1703 using FY09
budget authority. It is also worth noting that the FY09 Supplemental
Appropriations bill provides that OMB must certify compliance with the
restriction before a loan guarantee may be issued using the FY09
authority. In addition to the restrictions contained in the FY09 budget
authority, there may be other reasons why a project that has received a
grant may not qualify for a DOE loan guarantee. For instance, grants
are often used to support technologies prior to their commercial
readiness.
Question 2c. Has DOE examined the current list of applicants (or at
least those in the short-term pipeline) and determined whether they are
eligible for a loan guarantee in light of this proviso? At what time in
the application process is this determination made?
Answer. Yes. Only one project currently in due diligence could be
ineligible to receive a loan guarantee under the 2009 Supplemental
Appropriations Bill because it has also received a Federal grant. DOE
may proceed with this project using available authority from FY07.
Although this statutory prohibition does not apply under the FY 2007
authority, DOE's analysis of the credit subsidy cost takes into account
other forms of federal assistance. There is at least one other project
that has been put on hold because the Tennessee Valley Authority was
proposed to be the project off-taker, which would not be permissible
under the terms of the FY09 restriction. Although we do not have
complete data, we believe there are other projects (or potential
projects) that may be inhibited from entering into off-take
arrangements with TVA, or similar entities, as a result of the
restriction. The eligibility determination is made during due
diligence, before a term sheet for the project is final (although
compliance must ultimately be certified by OMB prior to closing). We
would not offer a conditional commitment to a project before ensuring
all eligibility requirements can be met.
Question 2d. If the proviso is interpreted strictly, could the loan
guarantee program potentially lose most if not all applicants?
Answer. The Department interprets the proviso strictly. As stated
above, two of the current projects in due diligence would be ineligible
to receive a loan guarantee using FY09 authority because of the
proviso, but at least one of those projects may be funded from FY07
authority, to the extent funding remains available. Other projects that
might be precluded by the prohibition may also be eligible under
Section 1705, which does not include this prohibition. As stated above,
even though the prohibition does not apply, the credit subsidy cost
would take into account other forms of federal assistance.
Question 3a. According to your testimony, ``[f]ollowing the
Secretary's approval, LPO offers a conditional commitment for a loan
guarantee.... This commitment is `conditional' because it is contingent
upon the applicant meeting certain conditions precedent to financial
close.'' With regard to these ``conditions precedent''.
What specific measures are being taken by DOE to ensure the timely
acquisition by the applicant of all the relevant federal, state, local,
and tribal permits necessary to implement each loan guarantee project?
Answer. Beyond the clear incentives for a project sponsor to
complete the project quickly, there are several means by which the
Department ensures the timely acquisition of all relevant permits by
loan guarantee applicants. First, the loan guarantee application
instructions in program solicitations at Attachment 1, Section B. 10,
instruct the applicant to ``provide a list of all federal, state and
local licenses, permits and approvals required to site, construct,
implement and operate the project, including environmental
authorizations or reviews necessary to commence construction and
operation. For approvals already received, provide the filing and
approval dates and parties involved; for those not yet received,
provide the filing date, steps to be taken to obtain them, and expected
date(s) they will be obtained.''
Further, Section IV. B. 1. a. vii. of the solicitation states that
an evaluation criteria for Part II application review is: ``the extent
to which all necessary land rights and state and local permits, as well
as the environmental clearances necessary to proceed, have been
obtained or approved.''
These requirements would be verified and part of the due diligence
process; and, absent extraordinary circumstances, no guaranteed loan
proceeds would be disbursed until all such permits and approvals have
been issued.
In addition, the National Environmental Policy Act (NEPA) review
process documentation (an environmental assessment or environmental
impact statement) prepared for each project will include a description
of the environmental permits required for implementing the proposed
action. The analysis included in the NEPA documentation will address
``whether the action threatens a violation of Federal, State, or local
law or requirements imposed for the protection of the environment'' (40
DFR 1508.27(10)). In the case of any necessary wetland permitting for
the loan guarantee project by the U.S. Army Corps of Engineers, the
Loan Programs Office's (LPO's) NEPA review process will involve the
Corps as a cooperating agency, which enables the Corps to satisfy the
requirements of Section 404 of the Clean Water Act using LPO's NEPA
process. This avoids duplicative NEPA review processes and expedites
permitting.
Question 3b. What specific measures are being taken by DOE to
streamline the NEPA review process where applicable and to mitigate the
associated time delays for applicants?
Answer. The Department is expediting the NEPA review process in
numerous ways:
1) We have developed Memorandums of Understanding with the
California and Nevada U.S. Bureau of Land Management (BLM)
offices to serve as cooperating agencies on the NEPA review of
any project that involves a DOE loan guarantee and a grant or
permit from BLM. This avoids duplicative NEPA review processes
and allows the Department to take advantage of the BLM ``Fast
Track'' NEPA review process;
2) The Department adopts the NEPA review documentation
prepared by other Federal agencies instead of performing
separate reviews to ensure no duplicative processes. The
Department has worked with BLM, the Army Corps, and the U. S.
Department of Housing and Urban Development's NEPA
documentation;
3) The Department worked with the Council on Environmental
Quality (CEQ) to adapt existing categories of actions that do
not require preparation of a NEPA environmental assessment or
environmental impact statement (i.e., categorical exclusions).
Exchange of letters between Secretary Chu and CEQ Chairman
Sutley confirmed the appropriateness of applying the
categorical exclusions to projects that retool and reequip
existing facilities;
4) LPO environmental compliance staff conducted webinars for
potential applicants to educate them on the NEPA review process
associated with Loan Programs Office and DOE NEPA requirements;
5) The Loan Programs Office website was enhanced to include
detailed information concerning the NEPA review process and
examples of NEPA compliant documents prepared for loan program
applications that can be used by applicants as templates for
their project;
6) LPO environmental compliance staff meet with applicants
prior to their submission of Part II applications to ensure the
information provided expedites the NEPA review process. This
includes encouraging applicants to submit their required
environmental report in a format and content that closely
resembles the final DOE NEPA document;
7) Loan Programs Office staff work closely with the DOE
Assistant General Counsel for Environment's legal staff to
reduce the time required for internal review and approval of
LPO's NEPA documents. This involves providing project pre-
briefings to legal staff before they receive a document for
review. Loan Programs Office also established a single point of
contact on the legal staff to coordinate the review and
approval process; and
8) The Loan Programs Office Environmental Compliance Division
increased the NEPA staff from a single contractor in August
2008 to a staff of eight Federal FTEs and numerous support
contractors by September 2009, which increased the throughput
of NEPA reviews by the office.
Question 3c. What specific measures are being taken by DOE to
facilitate the acquisition of federal land permits by the applicants?
Answer. In addition to the measures described above to help
facilitate applicant's acquisition of federal land permits for loan
guarantee projects, the Department has also served as the lead federal
agency to coordinate among federal regulatory and land management
agencies responsible for administering federal lands. Specifically, the
Department has stepped up to serve as the federal nexus for the
Endangered Species Act Section 7 consultation with the U.S. Fish and
Wildlife Service (FWS) that results in FWS issuing a Biological Opinion
and Incidental Take Permit, which must be obtained before the applicant
can obtain various federal land permits and close a loan guarantee
agreement with DOE. The Department also negotiated agreements between
BLM and other federal regulators (namely FWS) to expedite BLM right-of-
way approval of transmission line corridors necessary to service
renewable energy development projects. In addition, DOE works closely
with loan guarantee applicants to ensure that they are fully apprised
of land management agency requirements for permits and approvals early
in the due diligence process. This eliminates surprises that could
adversely affect the loan guarantee closing process.
Responses of Jonathan Silver to Questions From Senator Stabenow
In 2007, I worked with House and Senate colleagues to ensure that
Section 136 was in place to help auto companies manufacture new fuel
efficient vehicles in the United States. To date the loans granted have
been successful in producing new jobs and new domestic manufacturing.
However, over 100 applications have been filed with the DOE and the
vast majority of those applications are from suppliers. Furthermore, of
the five companies that have received a conditional loan agreement from
DOE under this program, only one was a supplier. That company, Tenneco,
decided not to pursue finalization of the loan.
Participation of suppliers is critical to the deployment of
advanced technology vehicles. Parts manufacturers contribute almost 30%
of the $16.6 billion in automotive R&D and provide much of the
intellectual capital required for the design, testing, and engineering
of new parts and systems and play a major role in the deployment of
established and emerging technologies. Recently, this Committee
reported an amendment to section 136, in part to make it clearer that
suppliers can qualify.
Question 1a. Are statutory changes necessary for DOE to administer
the ATVM program in a way which more suppliers can take advantage of
the program?
Answer. DOE is committed to working with all applicants who qualify
under the ATVM loan program. Many suppliers have had difficulty
qualifying, as there needs to be a nexus between the supplier and a
specific ATVM car model. Section 136 of the Energy Independence and
Security Act of 2007 states that the term ``qualifying components''
means that components must be:
(A) designed for advanced technology vehicles; and
(B) installed for the purpose of meeting the performance
requirements of advanced technology vehicles.
Many of our applicants do not meet these requirements, or if they
do, their production volumes for ATVM vehicles are too small as to make
a loan feasible.
Question 1b. Are there other obstacles from your perspective?
Answer. Supplier contracts often have the OEM acquiring the
components receiving the rights to intellectual property which DOE must
receive from the component maker as collateral under the Act. In
addition, payment terms with OEMs are often in arrears; such terms
expose an ATVM component loan to additional risk.
Question 2a. Regarding loan guarantees under section 1705 and
section 1703: Can you please provide specific information on how DOE
analyzes applications to categorize, prioritize and evaluate financial
health?
Answer. The Department's credit staff conduct a rigorous project
finance underwriting and credit analysis similar to that conducted by
commercial financial institutions. For project finance transactions,
the critical element of the review is an evaluation of cash available
for debt service after consideration of all costs and revenues and
evaluation of all risks that could affect costs or revenues.
Question 2b. Please explain how DOE analyzes the debt of mature
publicly traded companies with conventional debt?
Answer. Since most Department transactions do not involve recourse
to publicly traded sponsors, DOE does not focus on the debt of such
companies except to the extent DOE is analyzing the ability of such
companies to fulfill their obligations such as to provide transaction
equity or to backstop contractual obligations. In analyzing mature,
publically traded companies, the Department utilizes conventional
credit analysis.
Question 2c. Is there an acceptable debt-to-equity ratio or other
measure of leverage for an application to be successful in securing a
guarantee?
Answer. The acceptable debt-to-equity ratio varies with the risk
associated with each project; there is no uniform standard.
Question 2d. In the private sector, investment bankers view
applicants as partners and they communicate continuously as deals are
being structured. Michigan companies tell us that there is zero or
little interaction with applicants about timeline, company business
models, or creditworthiness, that the process is a black box, that DOE
simply takes written information and later renders a verdict. How much
communication do you have with applicants about the above issues?
Answer. The Department has implemented a more proactive
communications policy with applicants. Our intake staff is authorized
to reach out to applicants to ask questions of, seek information from,
and work with applicants to ensure that DOE's evaluation is fully
informed. We seek to ensure that all projects are given a full and fair
evaluation under the terms of the applicable solicitation and our
governing documents. Once a project is in the due diligence/negotiation
stage, our investment officers and attorneys are in regular and
continual contact with applicants and their advisors.
Question 2e. When applicants have follow up questions about their
loan guarantee, how are those handled? It seems logical that each
applicant would get a ``client manager'' or ``caseworker'' to
communicate with regarding their application.
Answer. The Department reorganized its staff into technology domain
groups to create efficiencies and capitalize on the expertise of our
staff. The Department also implemented a more proactive communications
policy with applicants. The intake staff is authorized to reach out to
applicants to ask questions of, seek information from, and work with
applicants to ensure that DOE's evaluation is fully informed. We seek
to ensure that all projects are given a full and fair evaluation under
the terms of the applicable solicitation and our governing documents.
Once an application is accepted into the due diligence/negotiation
process it is assigned an investment officer who serves as the point of
contact for incoming and outgoing questions between the Department and
the applicant.
Question 2f. Has DOE been given any guidelines by OMB related to
the process, communication or financial requirements for applicants?
Answer. DOE is responsible for carrying out the Title XVII program,
and coordinates closely with Treasury and OMB consistent with statutory
requirements. The programs' initial regulations, which provide public
guidance on how the program operates, were developed through standard
rulemaking procedures, which involve OMB by statute.
In addition, OMB has provided guidance to all agencies on various
matters relating to the Recovery Act, including communications
regarding applications for Recovery Act funding. Since Section 1705
funds came under the Recovery Act, some of that guidance applies. With
respect to financial requirements, OMB Circular A-129 outlines policies
for all Federal credit programs, to ensure efficient and effective use
of budgetary resources.
Question 3. What is the nature of the working relationship between
DOE and the Office of Management and Budget on loan guarantee
applications and section 136 applications?
Answer. DOE is responsible for implementing the programs, including
reviewing applications and making award determinations. Pursuant to
OMB's oversight authority provided by the Federal Credit Reform Act,
OMB and DOE coordinate closely to ensure accurate cost estimates for
each of the awards.
Responses of Jonathan Silver to Questions From Senator Sanders
Question 1. Is it true that DOE is considering providing a clean
energy loan guarantee to a coal-to-liquids project despite the fact
that using coal to produce liquid fuel produces double the greenhouse
gas emission impact of using conventional oil? If so what steps is DOE
planning to take to mitigate the greenhouse gas emissions impacts of
this project, and what criteria is DOE using to ensure that all loan
guarantee projects result in the deployment of projects that are truly
clean, meaning they result in a reduction of greenhouse gas emissions
and other pollution and environmental degradation relative to
conventional technologies?
Answer. It is the Department's policy not to comment on specific
applications. However, DOE believes that coal-to-liquids (CTL) projects
incorporating carbon capture and sequestration (CCS) may be eligible
under Title XVII of the Energy Policy Act of 2005, provided that they
meet the other requirements of the program such as economic viability
and reduced greenhouse gas emissions. The DOE's National Energy
Technology Laboratory (NETL) has published extensive research over
several years on the economics and lifecycle greenhouse gas emissions
of CTL technology incorporating CCS. These studies have found that the
lifecycle greenhouse gas emissions of this process with 88 percent CCS
are approximately five percent below those produced by the EPA
Renewable Fuel Standards 2 (RFS2) petroleum baseline established under
Section 526 of the 2007 Energy Independence and Security Act (EISA) of
2007. In addition, the studies found that the lifecycle emissions of
CTL with CCS are substantially below many sources of imported crude
oil, which currently account for a large portion of oil refined in the
U.S.
The Loan Program verifies the lifecycle greenhouse gas emissions
for each project in our portfolio. The DOE will not extend a loan
guarantee offer to any project that does not meet the statutory
requirement in Section 1703 of EPACT 2005 to ``avoid, reduce, or
sequester air pollutants or anthropogenic emissions of greenhouse
gases.''
Question 2. Do you agree with C130 that the risk of default for a
new nuclear power plant could be as high as 50 percent, and how will
you protect taxpayers when the federal government is backing billions
in nuclear loan guarantees?
Answer. As CBO noted earlier this year, the 50 percent default
estimate was developed several years ago, prior to enactment of the
Title XVII statute and regulations. CBO has since revised this
estimate, reflecting the current market and additional information
available at this time. DOE evaluates nuclear projects with a broad
range of characteristics. For instance, some proposed loans are to
corporate borrowers, while others are to project finance borrowers.
Some plants have regulated rate bases, while others sell power on a
merchant basis. The default risk depends on the type of borrower and
project, among other things, and we ascribe the probability of default
accordingly.
We seek to protect the taxpayer through a number of risk mitigants,
including i) debt service reserves to cover operating costs during
extended shutdowns or subpar performance, ii) cash sweeps, iii)
mandatory prepayment provisions, iv) provisions for liquidated damages
from the Engineering, Procurement, and Construction contractor, v)
contingent equity commitments and vi) and a perfected security interest
in the project.
Question 3. Regarding nuclear loan guarantees, what criteria, if
any, are in place to ensure that entities receiving loan guarantees are
meeting their obligations for adequacy of decommissioning funds for
existing plants?
Answer. As a condition precedent to financial close, the project
must receive a Combined Operating License (COL) from the NRC which
requires the licensee to comply with NRC's regulations pertaining to
adequate funding arrangements (among other matters)to ensure timely
plant decommissioning. The Independent Engineer, on behalf of the DOE,
reviews and validates the project's decommissioning plan, including the
estimated decommissioning costs. The estimated decommissioning costs
are included in the project's financial pro forma which is reviewed and
validated to ensure that the forecasted annual plant operating revenues
are adequate to cover all financial obligations, including the funding
for plant decommissioning.
Responses of Jonathan Silver to Questions From Senator Landrieu
Question 1. I am encouraged to hear that the V-Vehicle Company,
whose original application was denied, is making significant progress
with DOE on their second application under the Advance Technology
Vehicle Manufacturing (ATVM) program. As you know, V-Vehicle's
automobile is a low-cost, fuel-efficient vehicle that will meet
aggressive emissions standards and the highest safety rating. In
addition, the company wants to locate the facility in Monroe, LA,
bringing jobs to a rural region of my state that so desperately needs
good jobs. Can you comment to the V-Vehicle application and where it
currently stands? When do you expect to award the next round of ATVM
projects? Do you expect to announce multiple projects over the next
several months? How many ATVM projects does DOE have in the pipeline
for the rest of 2010?
Answer. It is the Department's policy not to comment on specific
applications. DOE recently announced another conditional commitment
under the ATVM program. This brings to six the number of conditional
commitments that have been made under the program. DOE anticipates
offering several more conditional commitments over the next several
months.
Question 2. It has come to my attention that DOE has taken the
position that its loan guarantee for wind energy does not have to apply
to the U.S. government's maritime cargo preference statutes. Under that
law, any U.S. financed project that ships cargo must use at least 50
percent of U.S. flagged vessels for transport of that cargo. This issue
was most recently addressed in Section 3511 of the Defense
Authorization Act of 2009 (PL 110-417), which strengthened any
ambiguity that existed to which agency has the authority to determine
the applicability of U.S. cargo preference laws and conferred that
responsibility to the U.S. Maritime Administration.
In addition, an underlying objective of the DOE loan guarantee
programs is to create domestic investment and jobs, as funded through
the President's Economic Stimulus Initiative. DOE's current position on
the Cargo Preference Act runs counter to this objective, since domestic
shipping jobs will be usurped by foreign flagged vessels. Having U.S.
flagged vessels bring over wind mill blades from China and other
foreign nations helps supply domestic jobs, since the manufacturing of
these parts will not occur in the U.S. As such, I do not understand why
DOE believes that projects financed by their loan guarantee programs
need not abide by current law regarding cargo preference. Further, I
understand that DOE has indicated to abide by terms governing the
issuance of U.S. guaranteed credit, and, under the terms of the 1954
Cargo Preference Act, that all U.S. credit programs are subject to the
terms of that Act.
I'd like to understand DOE's position on its ability to make
determinations on U.S. Cargo Preference laws given the provisions of PL
110-417. I would also like to understand why DOE would take the
position that stimulus funds should be used for the purchase of foreign
exports and not be shipped by U.S. shipping companies. Can you tell me
why DOE has taken the position that they need not abide by the Cargo
Preferences Act?
If this is an oversight on DOE's behalf, can I get your commitment
to reverse it immediately?
Answer. DOE is currently pursuing a consultative process on this
matter with the Department of Transportation under 46 U.S.C. 55305(d)
of the Act.
Question 3. I am concerned that the Loan Guarantee Program has
placed too many conditions on the loan program and made the process too
difficult even for strong projects to get through the process. For
instance, I understand that projects that have received a grant or
earmark from the federal goverment are disqualified from receiving a
loan guarantee. This seems to make no sense. If the project has
received the stamp of approval from another rigorous Federal approval
process, why should they be automatically precluded from DOE programs?
My question is whether DOE is precluding applicants that have
already received another source of Federal funding from participating
in their loan guarantee programs?
If yes, do you support this practice and believe it should be
continued?
Answer. DOE executes the loan programs in accordance with all
relevant laws and regulations. The 2009 Supplemental Appropriations
bill contains language that precludes DOE from offering loan guarantees
using FY 2009 budget authority to projects that have received, or
expect to receive, certain forms of federal government support,
including grants. In addition, different government programs serve
different purposes: a finding of suitability for a research grant based
on promise or potential is not necessarily an indication that a
technology or project is ready or able to enter the commercial market
with a loan.
______
Responses of Jens Meyerhoff to Questions From Senator Bingaman
Question 1. The rapid growth and apparent success of First Solar in
several markets appears to have given you access to capital that many
others in the solar sector have been unable to find. Some may say this
indicates you don't need the program, as the private sector should be
available to you. Once could even go a step further and say financing
for solar is moreikely to help your competitors than your company. What
are your thoughts on these points?
Answer. Financing for solar projects at the project entity level is
in its infancy in the United States. Banks carefully evaluate this
emerging business opportunity and are in a steep learning curve. Solar
generating systems are long lived (20+years) assets and the private
sector today neither provides enough liquidity (debt capacity) nor
adequate term/duration commensurate with the asset's longevity.
Typically, bank loans will have a tenure of seven years, introducing
refinancing risk or impairing the project economies.
Today's mid-sized solar projects of up to 50MW are generally
financed through the corporate balance sheet of larger utility
companies or financial investors with tax capacity. Smaller projects
are mostly equity financed, making them most expensive.
The PV industry is in the process of opening and enabling private
sector lending. This has been successfully accomplished in Europe with
the support of the Germaneconstruction Bank. Over the past years,
European banks have developed enough experience and comfort with solar
PV, where the reliance on such programs has declined significantly.
Our competitors are equally active in accessing new sources of
liquidity as evidenced by SunPower's recent announcement of rated solar
bonds in Italy.
The focus of these financings is at the project level and not at
the corporate level. So while First Solar can support construction and
warranty/O&M viability with its balance sheet, the actual debt
financings of the project is a matter of project viability, technology
risk and asset maturity. In that aspect all industry participants face
similar challenges.
Given First Solar's emphasis on very large scale solar
installations, one could argue that these projects require more support
to open large institutional financing capability than most others, as
liquidity requirements are in excess of $1 billion, in most cases too
large to be balance sheet financed by our utility customers.
To reiterate, the DOE 1703/1705 programs provide the following
benefits in that aspect:
Significant increase in debt liquidity.
Important financing bridge, until the U.S. financing markets
fully develop for utility-scale solar projects.
Encourages development of innovative renewable technologies,
including those which help utilities to integrate solar power
projects into their grids.
Reduces the cost of capital, which indirectly reduces the
cost of renewable power.
Question 2. There are those that would argue that the United States
doesn't need this type of program. Companies such as yours could take
advantage of support offered overseas and prove the technologies there
and then deploy them later in the US when they are sufficiently
demonstrated that banks and utilities are more comfortable with them.
Do you agree with this? What implications do you see for the United
States in such a policy?
Answer. There are a few flaws to this logic:
a) The market dynamics between European FIT systems, which
provide cash on cash returns compared to a much more complex
tax incentive structure in the U.S. do not necessarily make the
project financing structures transferrable. U.S. projects and
their cash flows are USD denominated and span over 20-25 years.
This adds significant currency risk and allows only large
international banks to possibly participate.
b) US projects are larger in size and require institutional
financing through bond issuance. These offerings access
different capital sources that even in Europe are just
emerging.
c) Grid integration of large scale solar is ``local'' and not
easily transferred from Europe. The process of technology
adoption by the utilities requires deployment of renewable
sources in their infrastructure. These learning cycles are
specific to each region and differ significantly even within
the U.S. Given the U.S. market structure, it is the first large
scale transition market and has the opportunity to lead large
scale renewable integration, innovation and establish clear
leadership for our industry. The size of power plants being
realized in the southwestern United States will dwarf anything
in Europe and allow cycles of learning and product innovation
not previously achieved. A follower approach will allow others
to capture this competitive advantage and the obvious economic
benefits.
Question 3. Have you had the opportunity to review the CEDA
legislation contained in S. 1462? Do you have any opinions you could
share?
Answer. The Clean Energy Deployment Administration (CEDA), or Green
Bank, is an important part of the American Clean Energy Leadership Act.
By providing loans and loan guarantees at federal treasury interest
rates, the Green Bank would lower the cost of financing debt to
renewable power projects by 2-4 percentage points. This would directly
address the biggest obstacle to expanded deployment of renewable
generation: the cost to utilities. The Green Bank would provide loans
and loan guarantees at minimal risk to the taxpayer. The Green Bank
would lend overwhelmingly to projects with a proven history of
effective deployment. The default rates on such projects are extremely
low and, even under the most cautious assumptions; the prospective
default rate would be roughly 10%. The Green Bank would see the loans
and loan guarantees repaid in the vast majority of the projects, which
means the taxpayer will be exposed to minimal levels of risk.
The Green Bank is modeled after federal corporations with proven
track records, such as the Export-Import Bank and the Overseas Private
Investment Corporation. It would be a wholesale, non-profit corporation
wholly owned by the government and accountable to Congress. It is a
very low-cost way to generate the financing for large volumes of
renewable power without materially affecting utility rates and
disrupting the economy. Establishment of a Green Bank would be a
significant commitment to moving our energy supply--and our economy--
toward clean, domestically produced sources of energy.
Responses of Jens Meyerhoff to Questions From Senator Cantwell
Question 1. Over the past couple of years this committee has held
several hearings on mechanisms to provide low-cost project financing to
facilitate domestic deployment of renewable energy projects and
manufacturing facilities.
Do you support such an idea? Do you believe it would be more
straightforward than the current Loan Guarantee Program
Answer. Facilitating domestic deployment begins with demand
creation. Finance support policies then enable providers to meet demand
and help scale the industry, lower costs and advance product adoption.
Generally, we support the idea of a national Renewable Energy Standard
(RES) as a proven policy for creating market demand. We very much agree
that a RES or Clean Energy Standard should not create additional
significant cost to the consumers.
There are a few things to consider around a national RES:
a) Renewable energy resources generally have lower capacity
utilization of transmission resources due to their
intermittency. In order to protect the rate payer, the total
cost of ownership of renewable energy needs to be understood.
Generally, renewable energy has to be deployed in a portfolio
approach. For example, wind generation happens mostly at night,
providing base load, while idling transmission capacity during
the day. In addition, wind generation is not very predictable
and therefore provides little to no capacity value to a
utility. However, when combing wind and solar, the two
technologies become synergistic as solar is a peaking resource
utilizing transmission capacity when wind does not. Adding
biomass or natural gas generation to the mix provides further
firming of the generation capacity. A national RES should
consider carve outs for different technologies in order to
motivate and drive true integration of renewable energy sources
into the existing infrastructure. It should further comprehend
hybrid solutions of natural gas and solar in order to
incentivize technology integration of different generation
assets without risking reliability in the electricity delivery
mechanism. Natural gas and solar have interesting synergies
which can be further optimized. Natural gas has fast response
times to offset the intermittency of solar, but natural gas
generation has high fuel cost component that over 20 years
expose generators and rate payers to commodity risk. Solar on
the other hand has no fuel cost and highly predictable long
term generation cost and therefore offers a natural hedge to
the natural gas generation asset.
b) Rate payer burden could be further reduced by
restructuring commercial terms in the underlying power purchase
agreements. Given our industry's outlook towards significant
further cost reductions through technology advances and the
fact that cost will scale with volume, one could consider
escalation based PPA's that allow for lower rate payer burden
in the near term until scale and cost reduction on a volume
weighted average basis further scale electricity cost. In order
to truly enable this while providing maximum debt quantum for
project finance, a government backed loan program should
consider more custom tailored DSCR structures and ratios in
support of these commercial solutions.
With respect to project financing:
a) Predictability remains the single most important aspect of
any program. If a program is not predictable, it becomes
opportunistic and will likely not provide benefits to the rate
payer. Any program must be aligned to the industry's
development cycles in tenure and sunset dates must be
application based and completion based.
b) Subsidy programs must be integrated and should be seen
holistically. A program like the section 1603 treasury grant is
equally important as the DOE loan programs. One covers equity
the other debt. Both need to be liquid and affordable in a
successful project finance structure.
c) The cost of solar PV financing to the tax payer are
significantly overestimated. The current blended recovery rate
does not discriminateetween generation assets and manufacturing
assets. Europe has financed over =50 billion in solar PV assets
with a very low default rate (virtually 0% for tier one
suppliers). The current recovery rate of 55% either assumes
defaults of investment grade utilities under rate based PPA's
or fundamental flaws with the existing technologies.
Question 2. In your opinion, could such a direct loan program be
established and get up and running more quickly than the loan guarantee
program has?
Answer. The timing for such a program and how it would replace the
existing 1703/5 programs would be the biggest concern. We would need a
phased approach and keep the current programs in place while shifting
over. The main concern as with the existing resources is that the
government is not a bank and neither has the ability to easily make
credit decisions nor does it have the ability to attract and retain the
human capital to run such a program effectively. In Europe, most of
these programs are facilitated by commercial banks that use their
project finance resources for diligence matters. This allows thousands
of transactions to be processed annually with cycle time of less than 3
month even for large scale projects.
Question 3. How do you think your company or the companies you
represent could benefit from such a program?
Answer. A program as described in the prior paragraph would benefit
all industry participants greatly. Germany's KFW program has allowed
companies of all sizes including installers to scale and create a
predictable business model. In order to avoid abuse or a taxing of the
rate payer when combined with a national RES, one might think about a
scaling function that correlates market size, generation cost to
lending terms.
The direct loan program as defined is highly attractive and would
provide significant renewable electricity cost reductions. It is a
viable answer to the over $30 billion provided by the central bank of
China to Chinese Solar Panel suppliers.
Question 4. Do you think that the low interest rates and long
repayment schedules available under this program would positively
impact the financings of clean energy projects and that any resulting
savings would translate to lower costs for ratepayers?
Answer. They key constraint for solar PV financing in the US is
liquidity, term (loan length) and cost of capital (interest rates).
Renewable energy generation assets typically have limited operating
expense and little to no fuel cost. This means that in large part their
cost are all capital based. Loan tenure and interest cost have a
significant impact on the electricity price. For example in the US
desert southwest environment a reduction in the cost of capital of
100bps has the same effect on the power plant's levelized cost of
energy (LCOE) as a reduction in the installed cost of $0.30/watt (DC).
In order to reach the ratepayer, a few things would need to be assured:
a. The program has to be predictable, so its benefits can be
priced into the electricity price without any risk.
b. A scale should be applied in terms of leverage ratio that
is tied to electricity cost and solar resource. For example, if
a generator offers $0.15/kwh at 1,800 hrs of irradiance, the
leverage ratio should be less than a generator offering $0.13/
kwh. In reverse the leverage ratio should also be higher if
$0.15/kwh were offered at only 1,500 hrs of irradiance. The
data for this is readily available and the algorithm is simple.
This would motivate companies to drive electricity cost down
and help scale the industry. It would maximize volumes and job
creation.
______
Responses of Michael D. Scott to Questions From Senator Bingaman
Question 1. In your testimony you talk about what you view as an
incorrect reading of the Federal Credit Reform Act as it applies to the
loan guarantee program that leads to over-estimation of costs and
excessive aversion to risk. Is this interpretation of OMB with regard
to the program different than the way the statute was interpreted with
regard to other credit programs you are aware of? Are you aware of what
might cause such a different interpretation?
Answer. To answer the first part of the question, it is important
to understand that Title XVII of the Energy Policy Act of 2005, created
a unique Federal credit program that is substantially different from
any other Federal credit program. It is also necessary to understand
that the ``excessive aversion to risk'' is also addressed through
requirements in the Final Rule that are not consistent with the
underlying statute, Congressional intent, other statutory requirements,
or published Federal credit policies.
With respect to the narrow issue of the calculation required under
the Federal Credit Reform Act (``FCRA''), the first difference is that
with implementation of Title XVII through Sec. 1702(b)(2), the borrower
is responsible for the full cost of the obligation (``credit subsidy
costs'') as well as the administrative costs (Sec. 1702(h)) of the loan
(evaluation, negotiation, and servicing). Under every other Federal
credit program, the U.S. Government pays for the credit subsidy and
administrative costs of the program through taxpayer funded
appropriations. This means that the borrower generally has very little
interest in the mechanics of the calculations required under the FCRA.
The second difference, which is also relevant in assessing OMB's
approach, is that Title XVII will generate a relatively small number of
loans with highly unique characteristics, each for relatively high
dollar amounts. This contrasts with pre-crisis Federal credit programs
that are characterized by a large number (often in the hundreds of
thousands or millions) of homogenous loans, each for relatively small
dollar amounts.
In general, OMB is doing many of the same things in executing the
FCRA for Title XVII that it does in all other Federal credit programs.
This approach fails to recognize the significant differences between
Title XVII and all other Federal credit programs. The FCRA shortcuts
that OMB takes in all other Federal credit programs are not appropriate
for Title XVII.
In calculating the credit subsidy costs, OMB has significant
control over critical inputs into the Credit Subsidy Calculator and for
which the FCRA provides general or specific direction. For instance,
the FCRA provides specific direction regarding the discount rates to be
used in discounting the cash flows, general direction about measuring
cash flows to and from the U.S. Government, and general direction on
adjusting the cash flows for defaults (which requires the development
of a cumulative probability of default curve).
DISCOUNT RATES
As it relates to the discount rates used to discount the cash
flows, the historical practice of OMB is to use the discount rates
(Treasury rates for a given maturity) included in the President's
budget assumptions. While this approach is not strictly consistent with
the statutory requirements of the FCRA (see Sec. 502(5)(E)), it is
administratively simple for OMB and generally does not matter in the
context of a program where the U.S. government is paying the credit
subsidy costs. However, in Title XVII where the borrower is responsible
for paying the credit subsidy costs and is in fact borrowing from the
Federal Financing Bank (``FFB'') at the same rate indicated in
Sec. 502(5)(E), the mismatch between the two rates (an assumed rate
versus an actual rate) results in an inaccurate calculation. OMB and
Treasury have historically opposed the use of the discount rates
required by Sec. 502(5)(E) because they do not believe that a corporate
borrower reflects the same credit risk as the U.S. Government and
therefore its cash flows should not be discounted at rates that reflect
the U.S. Government's borrowing costs. While I certainly understand
this view (and dealt with it in the context of the Air Transportation
Stabilization Board as well as the expansion of the Rural Economic
Development Loan and Grant Program from the 2002 Farm Bill) and further
understand that OMB and Treasury have historically opposed this
particular statutory direction, the way to deviate from it is to
legislatively amend the provision in the FCRA, not to seek backdoor
solutions to disagreements with the existing statute. Until the FCRA is
so amended, it is OMB's duty to comply with the statute as written.
CASH FLOWS TO THE U.S. GOVERNMENT
With respect to the issue of what constitutes a cash flow to the
U.S. Government, one explanation of OMB's approach might be that the
Sec. 1701(2) reference to the term ``cost of a loan guarantee'' points
to the definition included in the FCRA under Sec. 502(5)(C). In a
``loan guarantee'' program that does not use the FFB, this would be the
appropriate reference. However, in establishing the Final Rule, OMB
provided that where DOE guarantees 100% of the Guaranteed Obligation,
the loan shall be funded by the FFB (Sec. 609.10(d)(4)(i)). The FFB is
an instrumentality of the U.S. Government under the general supervision
of the Secretary of the Treasury. Under the FCRA, use of the FFB
results in a credit subsidy calculation done in accordance with the
FCRA requirements under Sec. 502(5)(B) (cost of a direct loan). The
main difference between the cash flows considered in the context of a
loan guarantee and those of a direct loan are that the interest
payments made to the U.S. Government, or by the U.S. Government (in the
case of FFB payments back to Treasury for its own borrowings), are
evaluated. The most substantial impact is that the spread above
Treasuries (Treasuries represent the FFB's cost of funds) charged by
the FFB to the borrower are considered a cash inflow to the U.S.
Government. A historical example of this is the FFB's financing of the
USDA's Rural Utilities Service (``RUS'') electric program loans. The
12.5 basis points spread above Treasuries that the FFB charges on these
loans caused a positive credit subsidy program (meaning that it cost
the U.S. Government money) to turn into a negative credit subsidy
program (meaning that it ``makes'' money for the U.S. Government).
Prior to, and during much of my tenure at Treasury, OMB often opposed
the use of the FFB because they viewed it as expanding the subsidy
provided to the borrower or the program. In the instant case of Title
XVII, the spreads are wider than the 12.5 basis points charged in the
RUS program and can generate significant net present value offsets even
after factoring in the net post-default curve cash flows.
Another cash flow to the U.S. Government that is not currently
included in the credit subsidy calculation is the ``Facility Fee''
payment required of the applicant at the signing of the conditional
commitment. DOE charges an upfront ``Facility Fee'' based on the amount
guaranteed that ranges from a low of 50 basis points to a high of 100
basis points. In the July 2010 GAO report (GAO-10-627), GAO observes in
footnote ``a'' on page 22 that, ``According to agency documentation,
this fee is intended to cover the LGP's cost of loan setup and
associated legal and finance fees.'' Using the Southern Company loan
guarantee commitment as an example, Southern will be required to pay a
Facility Fee of $41.6 million. The cost to set up the loan and the
related legal fees are likely to be in the low to mid hundred thousand
dollar range and should be paid ``as-incurred'' as a Sec. 1702(h) fee.
The concept of charging a ``Facility Fee'' is common in the private
sector where banks have reserve and capital requirements, and therefore
legitimate costs associated with committing capital. However, the FFB
does not incur finance fees to issue debt or incur charges for reserves
or capital, so there is no legitimate expense here. Excluding the
``Facility Fee'' as a cash inflow to the U.S. Government increases the
cost of the program on borrowers in a manner that is not consistent
with the FCRA. The net of this particular issue is that fees that are
charged to the borrower that are not cost based should be treated as a
cash inflow to the U.S. Government for purposes of the Federal credit
subsidy calculation. To the extent that a portion of the fee represents
an actual expense of the U.S. Government, then that specific portion
would not be included as a cash inflow to the U.S. Government. This
approach is consistent with treatment of administrative expenses under
Sec. 502(5)(A) and Sec. 504(g) of the FCRA as well as the Sec. 1702(h)
requirements of Title XVII that ``The Secretary shall charge and
collect for guarantees in amounts the Secretary determines are
sufficient to cover applicable administrative expenses.'' This approach
is also consistent with SFFAS 2, ``Accounting for Fees'', paragraph 93
(at page 308 and 309).
Recoveries are a specified cash inflow to the U.S. Government under
the FCRA definitions of the ``cost of a loan guarantee'' and the ``cost
of a direct loan''. It has been therefore disappointing that OMB has
not insisted that all sources of recoveries be fully analyzed, valued
and treated as a cash inflow to the U.S. Government. This represents a
significant issue because as outlined in the DOE/OMB Report to the
Committees on Appropriations entitled ``Credit Subsidy Methodology'',
OMB established a ``base recovery rate'' that could be notched up or
down according to a ``number of factors''. In practice however, OMB has
applied a base recovery rate of 55% for all projects, regardless of
individual project-specific factors. While we understand that OMB may
have done some minor notching in at least one instance, they have not
required DOE to actually hire professionals (paid for by the borrower
as a Sec. 1702(h) administrative expense) to provide expert valuations
on the multiple sources of project specific recoveries available to the
U.S. Government. This approach is implicit under the FCRA and is
important because recovery values will vary on a project-by-project
basis. This is due to the technology, nature and structure of the
project, the project sponsors, contractual differences, loan
amortization characteristics, as well as other factors. Examples of
different sources of recovery include:
1. From the sale of the underlying asset serving as the
collateral;
2. From sponsor contractual commitments to inject new equity;
3. From commitments from the project's technology and/or EPC
contractors to cover certain obligations, such as cost overruns
or other contingencies;
4. From other collateral provided to the U.S. Government,
such as cash collateral accounts; and,
5. From other contractual or structural protections agreed to
by the project sponsor.
One concrete example of multiple sources of recovery occurred
during the execution of the loan guarantee program by the Air
Transportation Stabilization Board. The ATSB hired a variety of
valuation experts to provide opinions on a range of collateral that the
ATSB ultimately became contractually entitled to. These experts opined
on items that would generate recovery cash flows to the U.S. Government
such as the sale of aircraft, real estate, simulators, equipment,
gates, routes, slots, warrants and other contractual provisions. The
retention of these experts and use of their valuations provided the
ATSB with a sound and supportable basis to make recovery valuation
estimates and incorporate the data into the credit subsidy calculation.
DEFAULT CURVE USED
In the FCRA definitions of the ``cost of a loan guarantee'' and the
``cost of a direct loan'', OMB is directed to adjust the cash flows for
defaults. Beginning with the Emergency Steel Oil and Gas Loan Guarantee
Board, the ATSB, and other Federal credit programs since, OMB and
Treasury have preferred to have the rating agencies rate proposed
transactions. This is because these loan structures are well within the
wheelhouse of the rating agencies core evaluation competencies and the
ratings can be directly linked to the vast statistical rating and
default data available for periods reaching back 90 years and is
consistent with OMB Circular A-11 direction to use statistical evidence
where possible for credit subsidy calculator inputs. This approach is
certainly preferred as compared with potentially more biased
alternatives.
The default curve used by OMB is a critical component in
determining the value of the cash flows. However, there is more than
one default curve that could be selected and therefore default curve
selection can be used to drive preordained outcomes. For example, there
are at least three default curves available from the various rating
agencies including:
a. All Issuer
b. All Non-Financial Issuer (excludes financials)
c. Utility
The ``All Issuer'' has the highest cumulative probability of
default for a given rating, followed by the ``All Non-Financial
Issuer'' and then the ``Utility'' default curve. There are reasons to
exclude the ``Utility'' default curve (i.e., not exactly the same
transaction structure seen in the historical data represented).
Likewise the use of a default curve that includes financials is not
representative of the transactions seen in Title XVII, so the most
statistically valid default curve to use is the ``All Non-Financial
Issuer''. While we are not certain as to which default curve OMB is
using in the Credit Subsidy Calculator, this is a critical input that
significantly impacts the credit subsidy calculation and should be well
understood by the Administration to ensure that the most statistically
relevant data is used.
OMB DIRECTIVES TO DOE REGARDING ESTIMATED AND FINAL CREDIT SUBSIDY
AMOUNTS
OMB has provided guidance and direction to DOE (and indirectly to
applicants) that is inconsistent with the underlying statutes and
rules. Specifically, the Final Rule and the relevant solicitations
provide for a non-binding estimate of the Federal credit subsidy costs
of a proposed project but recognize that the final Federal credit
subsidy amount can only be determined near the date of financial
closing and disbursement.
Common language in the solicitations says ``The final Credit
Subsidy Cost determination must be made at or prior to the closing on
the Loan Guarantee Agreement and may differ from the preliminary
estimate of the Credit Subsidy Cost, depending on project-specific and
other relevant factors including final structure, the terms and
conditions of the debt supported by the Title XVII guarantee and risk
characteristics of the project.'' This is consistent with the
requirements of the Federal Credit Reform Act of 1990, Title XVII, the
Final Rule and the relevant solicitations.
However, OMB has suggested that the non-binding estimate of the
Federal credit subsidy is actually an amount that the final credit
subsidy required will not be below. This is problematic for four
reasons:
a. It is not consistent with the FCRA requirement that the
credit subsidy cost be determined at the ``date of
disbursement'';
b. It suggests that changes in the final business plan,
project rating or transaction structure (whether positive,
negative or neutral) are not relevant to the final credit
subsidy cost calculation;
c. The existing assumptions and inputs used to calculate the
Federal credit subsidy estimates have not been faithful to the
FCRA and this approach will further compound the errors; and,
d. It is important for project sponsors and other
stakeholders to know that there is a statutory and fact-based
framework that will be followed with respect to the calculation
of the credit subsidy payment required and that positive or
negative factors that arise after the term sheet but before
financial closing will be fully considered in accordance with
the law.
The faithful implementation of the FCRA is a time sensitive and
critical issue, particularly for those project sponsors in the due
diligence queue at DOE. The reason is that the non-binding Federal
credit subsidy cost estimates that OMB and DOE provide project
sponsors, gives the sponsor its first look at the expected check that
the U.S. Government will seek, and this informs their investment
decision. If the credit subsidy number provided is at a particular
level that makes the project uneconomic, principally because the
calculation was not faithful to the statute, and this drives a project
sponsor and its investors to abandon a project that would otherwise
have been viable, then not only have the purposes of Title XVII been
frustrated, but the loss to all interested parties, including the
Administration and Congress, is irreplaceable. This is a new issue in
Federal credit programs as it is principally only relevant in a
``borrower pay'' program.
Question 2. You advocate for the removal of the limitation on total
guarantee levels under the self-pay provisions of the loan guarantee
program, as you would argue the FCRA provisions were overridden by the
subsequent enactment of section 1702(b)(2). Critics have argued that
this would result in increased risk to the taxpayers, as there would
not be any inherent check on the volume of lending under the program.
Do you agree with this assessment?
Answer. I do not agree with that assessment for the following
reasons:
1. There are statutory, Final Rule, and solicitation based
requirements that must be met by any applicant and these are
challenging and limiting;
2. The self-pay requirement will limit interest and capacity
and generally result in much higher quality project sponsors
and underlying projects;
3. Project sponsors had requested almost $175 billion in
guarantees over the prior four years (according to a GAO July
2010 report) and yet only $695 million has closed (and all
under Sec. 1705 of the ARRA) which suggests that the program is
unlikely to be unrestrained;
4. As a practical matter, many of the projects and the
technologies have long lead times between application,
submission, conditional commitment and satisfaction of the
conditions precedent required for closing. During this time
frame, sponsors and their investors will see many changes to
their business plan, the market and the business environment
that will impact the final investment decision and potentially
lead to project cancellations before closing;
5. The five year history of the program does not inspire
confidence with project sponsors, leading many sponsors to
delay or abandon projects that they would otherwise have
advanced because of the large upfront costs involved in
developing projects;
6. The Administration and Congress have many levers to
influence DOE to ensure that the program is executed
responsibly; and,
7. There are opportunities to ensure oversight through
required reporting mechanisms and perhaps non-volume limiting
legislation that could provide Congress with confidence in the
appropriateness of the utilization of the program.
Question 3. Have you had an opportunity to review the CEDA
legislation contained in S. 1462? Do you have any opinions you could
share?
Answer. Yes, I reviewed the CEDA legislation some time ago and have
several comments. First, as we have seen with Title XVII and other
Federal credit programs, executing Federal credit programs can be very
difficult. They require the cooperation and coordination with the White
House, OMB, Treasury, as well as the program agency. If there is
internal opposition from any of these groups, the rules, regulations,
ability to use the FFB, FCRA requirements can all be used to delay or
derail the execution of the program. Allowing the recognized and known
problems of Title XVII to remain unresolved creates precedent problems
for the execution of future Federal credit programs, whether CEDA or an
infrastructure bank.
Second, as a general matter, it is important to recognize the
concerns that OMB, Treasury and others may have in the creation of the
CEDA. For instance, if a portion of the targeted technologies are too
new to be able to establish a ``reasonable probability of repayment''
(a fairly standard term included in rules/regulations, if not in the
underlying statute, for Federal credit programs) it may be better to
consider grants or equity investments, with appropriate upside for the
taxpayer, for those technologies that cannot meet the ``reasonable
probability of repayment'' standard needed for loan guarantees or
direct loans.
Third, whenever the ``full faith and credit'' is pledged (as is the
case in the version that I read) and not otherwise limited by statute,
the U.S. Government is providing a full, 100% guarantee. As such, it
can be better for the program and participants to allow or direct the
use of the FFB to provide the financing. This is because it will lower
the U.S. Government's net credit exposure, lower the credit subsidy
amounts required and provide certainty of financing execution as
compared with allowing or requiring private sector financial
institutions to finance 100% U.S. Government guarantees. OMB has often
supported private sector involvement in Federal credit programs under
the belief that they will bring their credit analysis capabilities to a
program. My experience from Treasury demonstrated that the private
sector does not apply the same credit standards for 100% guarantees or
partial guarantees and therefore the value they add to a Federal credit
program is questionable. While the private sector certainly likes to do
this business because it represents a source of relatively risk free
profits, they do not reduce the credit exposure of the U.S. Government,
and in fact make it more expensive for the U.S. Government and the
borrower. Further, as we saw in the most recent financial crisis,
private sector financing of loan guarantees present real market
execution issues which can significantly impede the objectives of the
Federal credit program and potentially create market perception
concerns for Treasury issuances.
Question 4. You have several concrete steps that you believe the
President could take now to correct deficiencies in the loan guarantee
process. Presumably, the deficiencies result from previous OMB
interpretations of FCRA and Title XVII that you believe were incorrect.
Assuming that OMB is disinclined to reverse those interpretations, are
there specific changes that could be enacted to the guiding statutes
that would clarify these issues for OMB and DOE?
Answer. I do not believe that it is possible to legislate program
execution for Title XVII. OMB and Treasury have too many tools
available to them to delay or derail any Federal credit program.
Successful execution of Title XVII, or any Federal credit program,
relies on a willing and knowledgeable Executive, particularly when
multiple misinterpretations have been made.
One example of the problem with legislating a solution can be seen
in the concept that the Secretary could independently assign a credit
rating as opposed to having a credit rating agency do so. While the
Secretary may take a more optimistic view of a particular sponsor and
transaction than a rating agency, this approach would probably result
in OMB developing its own default curve for those ratings assigned by
the Secretary to be used in OMB's Credit Subsidy Calculator. OMB could
reasonably justify developing its own default curve as the Secretary
would not be able to demonstrate a multi-decade track record for his/
her ratings. Further, even if this was not the case, there are a number
of other inputs to the Credit Subsidy Calculator that OMB has control
over and can influence in the event that one tool is removed via
legislation. It is also important to recognize that OMB has significant
control over an agency's budget and can influence the Secretary in ways
that are less transparent.
______
Responses of Marvin S. Fertel to Questions From Senator Bingaman
Question 1. Critics of the loan guarantee program argue that
nuclear energy is a developed technology and that it is therefore
unnecessary to provide loan guarantees since the private sector should
be able to correctly price financing. How do you respond to this
criticism?
Answer. New nuclear power plants deserve financing support for
several reasons.
First, the new nuclear power plants now under development in
several regions of the United States are the first nuclear energy
facilities built in several decades. They are being built under a new
Nuclear Regulatory Commission (NRC) licensing process that, although
conceptually much improved from the process in place when the first
plants were built in the 1970s and 1980s, is still untested. In the
eyes of the financial community, the licensing process represents some
level of risk and, until the companies and the NRC have demonstrated
that the licensing process works as intended, the financial community
is unable to quantify the degree of risk. In addition, although the
nuclear reactor designs being developed in the United States are
evolutionary advances on the 104 light water reactors in commercial
operation, they do incorporate innovative technology enhancements and
features that have never been used before. For this reason, they
qualify as an ``innovative'' technologies eligible for loan guarantees
under Title XVII of the 2005 Energy Policy Act.
In addition, loan guarantees for new nuclear power plants address a
structural challenge facing companies interested in building new
nuclear generating capacity. Unlike the many consolidated government-
owned foreign utilities and the large oil and gas companies, U.S.
electric power sector consists of many relatively small companies,
which do not have the size, financing capability or financial strength
to finance power projects of this scale on their own, in the numbers
required. This challenge can be managed, with appropriate rate
treatment from state regulators or credit support from the federal
government's loan guarantee program, or a combination of both. Loan
guarantees, in particular, offset the disparity in scale between
project size and company size. Loan guarantees allow the companies to
use project-finance-type structures and to employ higher leverage in
the project's capital structure. These benefits flow to the economy by
allowing more rapid deployment of clean generating technologies at a
lower cost to consumers. By reducing the cost of capital, loan
guarantees reduce the cost of electricity and moderate the impact on
the economy as the United States transitions to a lower carbon
footprint.
Loan guarantees are a powerful tool and an efficient way to
mobilize private capital. The federal government manages a loan
guarantee portfolio of approximately $1.1 trillion to ensure necessary
investment in critical national needs, including shipbuilding,
transportation infrastructure, exports of U.S. goods and services,
affordable housing, and many other purposes. Supporting investment in
new nuclear power plants and other critical energy infrastructure--
which will, in turn, create jobs and investment in the manufacturing
supply chain--is a national imperative.
Question 2. You advocate for vesting final authority to determine
credit subsidy costs in the Department of Energy, rather than OMB. In
your view, would this entail a change in the Federal Credit Reform Act,
or is there a way in which this would be consistent with that statute?
Answer. NEI does not believe it is necessary to amend the Federal
Credit Reform Act in order to vest final decision-making authority over
credit subsidy costs for the Title XVII loan guarantee program with the
Secretary of Energy. We believe the uniqueness of this program
justifies placing that authority with the Secretary of Energy. First,
the Title XVII loan guarantee program is fundamentally different from
other federal loan guarantee programs in that nuclear project sponsors
are expected to pay the credit subsidy cost associated with loan
guarantees. Second, unlike other federal credit programs, which consist
of large portfolios of relatively small loans, the DOE loan guarantee
program consist of a relatively small portfolio of large loans, at
least with respect to nuclear projects. Third, the transactions under
Title XVII are complex, highly structured financings--an area in which
the Office of Management and Budget has limited experience and
expertise. By contrast, the Department of Energy has acquired
considerable expertise in this area and, through the due diligence
teams working on its behalf to review and structure the projects to
protect the taxpayer interest, is best-positioned to conduct the
analyses and assessments necessary to derive reasonable and equitable
credit subsidy costs. NEI believes that OMB can and should continue to
play an advisory and oversight role, but we do not believe it is
appropriate to vest final decision-making authority in an agency that
does not have the experience or expertise to discharge that authority.
In this instance, the Department of Energy, as the expert agency,
should be accorded more deference than it currently enjoys.
Question 3. Have you had the opportunity to review the CEDA
legislation contained in S. 1462? Do you have any opinions you could
share?
Answer. NEI has reviewed the CEDA legislation in S. 1462 and
supports CEDA enthusiastically. We appreciated the opportunity, during
the early part of 2009, to work on a bipartisan basis with committee
staff to structure the CEDA proposal. Given that more than a year has
elapsed since the Senate Energy and Natural Resources Committee
approved the CEDA legislation, it may be appropriate to review the CEDA
legislation to address any lessons learned during implementation of the
Title XVII loan guarantee program.
The U.S. electric industry faces a formidable investment challenge.
Consensus estimates show that the electric sector must invest between
$1.5 trillion and $2 trillion in new power plants, transmission and
distribution systems, and environmental controls to meet expected
increases in electricity demand by 2030. To put these numbers in
perspective: the book value of America's entire electric power supply
and delivery system today is only $750 billion, which reflects
investments made over the last 60 years.
Addressing the financing challenge will require innovative
approaches. Meeting these investment needs will require a partnership
between the private sector and the public sector, combining all the
financing capabilities and tools available to the private sector, the
federal government and state governments--particularly if we hope to
reduce the electric sector's carbon footprint, which will require
replacement of a significant portion of our existing generating
capacity with carbon-free capacity like nuclear energy and renewables.
The clean energy loan guarantee program authorized by the 2005
Energy Policy Act was an important step in the right direction, but
only a small step. That program was designed to jump start construction
of just a few clean energy projects with high technical risk. That goal
remains as valid now as it was in 2005, but today we face an additional
challenge--financing large-scale deployment of clean energy
technologies. The $18.5 billion in loan guarantees currently authorized
for new nuclear power projects might support three projects, at best.
It does not come close to supporting the new nuclear power projects
that will be ready to start construction over the next several years.
America needs 21st century institutions to manage 21st century
challenges. The times demand a new federal financing corporation--a
Clean Energy Development Bank--modeled on the U.S. Export-Import Bank,
with sufficient financing capability to ensure that capital flows to
clean technology deployment--renewables, advanced coal-based systems,
nuclear and other clean fuels--in the electric sector. If it is sound
public policy to support export of U.S. goods and services through the
Export-Import Bank, which has $100 billion in financing capability at
its disposal, surely it is also good public policy to support
deployment of clean energy infrastructure and creation of green jobs in
the United States.
Response of Marvin S. Fertel to Question From Senator Murkowski
Question 1. The Government of Japan has changed their laws to allow
the Government of Japan (NEXI & JBIC) to financially support nuclear
projects located in the U.S. that involve Japanese companies and/or
technology (e.g., USEC; South Texas Project; SCANA; Comanche Peak).
(Previously, the GOJ financial support was only for projects in
developing countries.) But the GOJ assistance is conditioned on the USG
providing similar support through nuclear loan guarantees. This GOJ
support reduces the financial burden and risk to the USG from a loan
guarantee. Given the delays in DOE acting on the various pending
nuclear loan guarantees, some in Japan may be wondering about the
degree of USG commitment to nuclear power. Are you aware of this
financial support by the GOJ?
Answer. NEI is aware that the government of Japan altered its
regulations governing financing by its export credit agencies (JBIC and
NEXI) to allow those entities to support the financing of new nuclear
power plants in the United States. We are also aware that the Japanese
export credit agencies and COFACE, the French export credit agency, are
prepared to invest approximately $6 billion in two new nuclear projects
in the United States. This financing, of course, would reduce the
amount of guaranteed debt that would be required from the Department of
Energy and is conditional on the U.S. government providing guaranteed
debt side-by-side with the French and Japanese debt (although Japan and
France are not providing the same amount of debt as the United States).
It is fortunate that the French and Japanese government are willing to
be partners in new nuclear plant development in America, but it is
necessary for the United States to provide financing support now and in
the future if these partnerships are to succeed. This situation would
be significantly strengthened with the existence of a permanent
financing platform like CEDA.
Responses of Marvin S. Fertel to Questions From Senator Landrieu
Question 1. Your testimony seems to argue for a much more
transparent process at DOE and OMB in regards to the administration of
the DOE loan guarantee program. Would you give us an example of the
type of transparency you seek? How would a more transparent process
assist in addressing the ``defects'' you identify in the development of
the credit subsidy costs for clean energy projects?
Answer. Since borrowers receiving loan guarantees for nuclear
energy projects are expected to pay the credit subsidy cost associated
with those guarantees, the industry has a legitimate interest in the
assumptions and methodology used to calculate credit subsidy cost.
The nuclear energy industry has two major concerns in this area.
First, we are frustrated over the lack of transparency associated with
the process of developing the credit subsidy cost. Second, from what we
can deduce, we do not believe there is a defensible factual basis for
the key assumptions and inputs--particularly regarding probability of
default and recovery rate--used in the Credit Subsidy Calculator to
estimate credit subsidy costs.
NEI recommends a number of steps to improve the transparency and
accuracy of the process by which credit subsidy costs are calculated.
Specifically:
1. For nuclear power projects, the most reasonable process
for calculating credit subsidy costs is a detailed, project-
specific assessment and credit analysis. We do not believe the
current approach, which relies too heavily on standard
assumptions applied to all technologies, with limited project-
specific flexibility, can produce accurate results. The current
methodology uses (1) composite data on default probabilities
for corporate debt, and (2) a 55% recovery rate, applied
without regard to when default might occur. Although admittedly
simple, this formula-driven approach will not produce accurate
or appropriate results, and will not serve the loan guarantee
program's objectives--to support deployment of clean energy
technologies in such a manner that the risk to the federal
government is fully offset by fees paid by the borrower.
2. Loan guarantees for nuclear power projects--in which the
borrower pays the cost of the guarantee--resemble a commercial
banking transaction more than a typical federal loan guarantee
program, and should, therefore, be managed like a commercial
transaction, and aligned with standard commercial practices as
nearly as possible. Among other benefits, such alignment will
facilitate the transition to private sector lending for nuclear
energy projects, once the first projects, financed with DOE
loan guarantees, have demonstrated a successful track record.
Like all other terms and conditions negotiated between the
Department of Energy and a project sponsor, and incorporated
into a term sheet, conditional commitment and final agreement,
the credit subsidy cost must also be the product of a
transparent and interactive process between the federal
government and the applicant. Such transparency is lacking in
the DOE loan guarantee program's calculation of credit subsidy
cost.
3. The staff at the Department of Energy (DOE) and the Office
of Management and Budget (OMB) responsible for developing
estimates of credit subsidy costs should hold technical
consultations with project sponsors for any loan guarantee
request in excess of $1 billion. We believe that the magnitude
and complexity of these transactions merits face-to-face
interaction with the applicants. The purpose of these
conferences would be to review the assumptions and estimates
generated by DOE and OMB, and allow the sponsor to provide
additional analysis as appropriate to DOE and OMB in specific
issue areas. This could include project-specific default
probabilities and recovery plans that would estimate recovery
values under various default scenarios at various stages of the
project. The recovery plans could then be subject to review by
the DOE independent engineer. This process would produce a set
of project-specific default probabilities and recovery
estimates that could be used in the credit subsidy model. Since
we are dealing with a limited number of large transactions,
this additional step in the direction of greater transparency
should not represent a significant burden.
Question 2. Your testimony states that the use of a standardized
recovery rate by OMB in its credit subsidy calculator does not satisfy
the requirements of the Federal Credit Reform Act (FCRA) of 1990, and
that the 55% recovery rate used is an arbitrary number with ``no basis
in actual market experience with financial structures like those
supported under Title XVII.'' Is it your belief that the standardized
recovery rate fails to account for the uniqueness of the financing
structures involved in large-scale clean energy projects? How do we
know what recovery rate to use that will provide adequate protections
for the taxpayer?
Answer. As noted above, the vast majority of federal credit
programs are characterized by high volumes and relatively low dollar
amounts, concentrated in housing, education, rural development and
small business. In calculating credit subsidy costs for these program,
the Executive Branch makes a number of simplifying assumptions and,
because the federal government pays for the credit subsidy costs of
these transactions, borrowers are generally indifferent to the
methodology by which credit subsidy costs are calculated. These
simplifying assumptions should not be used in lieu of project-specific
assessments in the case of a program involving multi-billion-dollar
transactions, in which the borrower pays the credit subsidy cost.
Recognizing the uniqueness of each project, the recovery rates for
each transaction should be derived from detailed project-specific
analysis, in the same way that detailed analysis produces a a credit
rating (which includes a probability of default) for each project. The
case-by-case process would protect taxpayers in the same manner that
this process is routinely used to protect investors in commercial
financing decision-making. Furthermore, the recovery rates derived from
such analysis can then be benchmarked against historical experience.
According to historical data from Moody's Investors Service and
Standard and Poor's, ultimate recovery rates for regulated utility debt
range from 87 percent to 99 percent. Recovery rates for project finance
debt are comparable, in the range of 90 percent to 100 percent, because
project finance transactions employ structural features designed
specifically to maximize recoveries in the event of default.
Question 3. Do you think we have complete policy alignment within
the Executive Branch with respect to the value, merits, and need for
the DOE loan guarantee program?
Answer. NEI does not believe there is, or ever has been, the
necessary policy alignment within the Executive Branch--and
specifically between DOE and OMB--on the value and need for the clean
energy loan guarantee program. Absent such alignment, it is difficult
to imagine how the Title XVII program can be successful implemented
over the long-term.
______
Responses of the Office of Management and Budget* to Questions From
Senator Bingaman
---------------------------------------------------------------------------
* Answers provided by Jeffrey D. Zients, Acting Director, Office of
Management and Budget.
---------------------------------------------------------------------------
Question 1. In previous hearings we've heard testimony about how
government agencies such as the Overseas Private Investment
Corporation, Ex-Im Bank, and USDA seem to manage risk, similar to
private sector investors, on a portfolio rather than transaction-by-
transaction basis--and are assessed by OMB on that basis, rather than
examining every transaction independently. Do you understand this to be
the case, and is there some statutory difference that would lead to
this different treatment? Is there anything in the current laws
governing the loan guarantee program that would preclude the assessment
of risks on a portfolio basis rather than a transaction-by-transaction
basis?
Answer. OMB's role for the Title XVII program is consistent with
that for other Federal credit programs under the Federal Credit Reform
Act of 1990 (FCRA). Under the oversight authority in Section 503 of the
FCRA (2 U.S.C. 661b), 011/113 delegates the modeling of credit subsidy
costs to agencies, and issues implementing guidance to ensure
consistent and accurate estimates of cost. OMB reviews and approves
modeling methods, assumptions and credit subsidy cost estimates for
each direct loan and loan guarantee program. For new programs or
programs where actual experience is not available, OMB works closely
with agencies to create or revise credit subsidy models. OMB also
reviews any programmatic or legislative change that impacts the subsidy
cost of new or existing credit programs.
For those credit programs that issue many loans or guarantees with
relatively homogeneous or a standardized set of characteristics,
contract terms and risks (e.g., student loans), the credit subsidy cost
estimates are calculated on a portfolio basis, using an average subsidy
cost per loan.
In contrast, reliance on a portfolio calculation for the credit
subsidy cost is not appropriate in the ease of project finance or other
programs (like DOE loan guarantees) that provide relatively large loans
or guarantees, and for which the characteristics, terms, and risk vary
greatly from project to project (and thus are not relatively
homogeneous or standardized). In these credit situations, it is
necessary to develop cost estimates on a loan-by-loan basis in order to
accurately capture estimated costs.
Title XVII loan guarantees generally support large infrastructure
investments, by nature, reflect a wide variety of underlying projects,
risks, and terms. As a result, the subsidy cost will vary from project
to project and therefore, an estimated subsidy cost must be developed
for each award.
This is the same approach we use for loans or loan guarantees of
other similar programs that involve larger deals or new structures. For
example, in the case of those loans or loan guarantees made by OPIC,
Ex-Im, and USDA that involve larger deals, new structures, or other
special cases, the subsidy cost estimate is developed on a loan-by-loan
basis. Each of these agencies also makes loans or loan guarantees that
are smaller in size and that have standard characteristics and terms.
For example, for OPIC and Ex-Im, OMB reviews and approves the general
subsidy rate models for both agencies, which are then applied to
calculate individual subsidy costs. Because both of these agencies can
provide hundreds of loans/guarantees each year to small and medium
enterprises, the credit risks for these loans/guarantees are
diversified in a manner more resembling a portfolio program. For
example, USDA's Rural Utility Service provides loan guarantees that
finance traditional technologies and have standard characteristics and
terms, and therefore the cost estimates are developed on a portfolio
basis. In addition, these programs have existed for a number of years,
which allows them to draw on historical (portfolio-based) experience in
developing the subsidy cost estimates.
Question 2. What experience do program officers at OMB have in the
evaluation of terms and conditions in transactions such as those
produced by the loan guarantee program? Is such experience necessary at
OMB for the production of accurate subsidy cost estimates?
Answer. OMB has been carrying out the responsibilities of the
Federal Credit Reform Act (FCRA) for twenty years, since its enactment
in 1990. As indicated in the prior answer, Section 503 of the FCRA
gives OMB the responsibility for credit subsidy cost estimates for all
Federal credit programs. Under FCRA, OMB reviews and must approve
subsidy cost estimates for all loan and loan guarantee programs,
including the credit subsidy cost estimates generated by the Department
of Energy for the Title XVII program. This OMB review ensures that
risks to the taxpayer are appropriately reflected and understood, and
that the budgetary costs of Federal credit programs are accounted for
appropriately and consistently across the various Federal agencies and
credit programs. As such, a core group of highly specialized
professionals with experience in loan and other credit terms has been
in place for many years and has increased over the past year to ensure
timely review of DOE's submissions.
Question 3. Is there differentiation between different technologies
in the subsidy cost model (and the incorporated estimated repayment
rate baseline) that OMB uses to arrive at subsidy cost estimates? Has
this model been compared to the model used by OPIC, Ex-Im, and
equivalent private-sector lenders?
Answer. The subsidy cost model used by DOE to develop estimates of
the credit payments to and from the Government for a Title XVII project
was developed by the Department of Energy, and approved by OMB in 2008.
For each loan, the methodology employed by the model considers project-
specific characteristics including technology, project location,
financial structure, risks and mitigants, and all other factors that
would affect cashflows to and from the Government.
OMB must ensure consistency in subsidy cost estimates for all loan
and loan guarantee programs, including the credit subsidy cost
estimates generated by DOE for the Title XVII program, across various
Federal programs, as stated in question 1.
Question 4. Has OMB reviewed the CEDA legislation contained in S.
1462? Can you share any views on how we might see that implemented
differently than the current loan guarantee program?
Answer. To date, the Administration has not commented upon either
the Senate bill or the House companion bill in detail; as this complex
proposal moves through the legislative process, the Administration
feels strongly that, among other things, legislation must meet the
President's objectives of creating a clean energy economy through an
efficient, cost-effective, and comprehensive approach. The
Administration believes that the Federal Credit Reform Act (FCRA) is
critical to accurately inform policy makers of the cost to taxpayers of
credit programs, and for ensuring that the budgetary costs of Federal
credit programs are accounted for appropriately and consistently across
the various Federal agencies and credit programs.
Question 5. Past Appropriations bills have contained an ``anti-
double dipping'' proviso that forbids the provision of a loan guarantee
``for commitments to guarantee loans for any projects where funds,
personnel, or property (tangible or intangible) of any Federal agency,
instrumentality, personnel or affiliated entity are expected to be used
(directly or indirectly) through acquisitions, contracts,
demonstrations, exchanges, grants, incentives, leases, procurements,
sales, other transaction authority, or other arrangements, to support
the project or to obtain goods or services from the project''. Although
there are some exceptions provided for in subsequent language, this
would appear to preclude any loan guarantee where some of the funding
comes from a federal grant or where a federal instrumentality is the
end user of the product (such as through a PPA or fuel contract). The
Congressional Budget Office seems to argue that without this proviso
there would be increased ``costs'' associated with loan guarantees. Do
you agree with this view? Can you explain, for example, what effect
having the federal government as a customer would have on the subsidy
cost estimate for a given project?
Answer. The credit subsidy cost estimated by DOE and approved by
OMB, whether paid by the borrower or through appropriations, reflects
the estimated cost given all project-specific factors that affect the
cashflows to and from the Government. To the extent that a project is
dependent on future Federal appropriations, or where a Federal
instrumentality is the end purchaser, this would be reflected in the
credit subsidy cost.
Question 6. Most applicants have indicated that, in order for the
program to be effective, they need a predictable process that can
result in at least a conditional commitment (or a much more timely
rejection) within 6 months of application. Assuming an adequate
application is submitted, can the current OMB/Treasury/DOE review
process accommodate this timeline?
Answer. OMB carries out its responsibilities as expeditiously as
possible, and OMB has increased its allocation of staff resources to
this program over the past year to ensure timely review of DOE's
submissions. OMB will continue to allocate the resources needed for
this program, including providing the resources needed to meet the
Department of Energy's target of completing four to five projects a
month.
Before this Administration took office, no projects were approved
under this program. Since then, OMB has completed its review of 17
projects that DOE submitted to OMB for loan closing or a conditional
commitment. To date, OMB has reviewed most of the Title XVII loan
guarantee projects within 30 days, and in several cases considerably
more quickly.
Each project is a complex financial transaction, often involving
billions of dollars and oneof-a-kind structures. It is difficult to
predict how long negotiations and due diligence for these projects will
take, given the size and complexity of these types of deals. As in the
private sector, the due diligence and negotiations surrounding such
transactions often takes many months, and involve many parties with
varied interests. Flexibility in the DOE / Treasury / OMB review
timeline is needed to ensure that DOE can complete the necessary due
diligence, and coordinate with Treasury and OMB to complete the review
needed to ensure that Federal taxpayers' interests are protected in
these transactions.
Responses of the Office of Management and Budget to Questions From
Senator Sanders
Question 1. How long does it currently take OMB to process a
renewable energy loan guarantee application?
Answer. OMB carries out its responsibilities as expeditiously as
possible. To date, OMB has reviewed most of the Title XVII loan
guarantee projects within 30 days, and in several cases considerably
more quickly.
Question 2. Does OMB support. a 30 day time requirement to process
these applications?
Answer. Each project that OMB reviews is a complex financial
transaction, often involving billions of dollars and first-of-a-kind
structures. Flexibility in the OMB review timeline is needed in unusual
circumstances to ensure that OMB is able to complete the review
necessary to ensure that Federal taxpayers' interests are protected in
these transactions.
Question 3. Does OMB support fully restoring funding to the
Recovery Act loan guarantee program, making it whole following the
decision to rescind funding?
Answer. The $1.5 billion rescission this summer was proposed by the
Congress, not the Administration, to offset the cost of a bill that is
supporting essential State and local needs. In the 2011 Budget, the
Administration voiced its support for restoring the funds diverted in
the summer of 2009. The 2011 Budget also includes $500 million in
credit subsidy for energy efficiency and renewable energy projects
applying to the loan guarantee program and an additional $5 billion in
tax credits for renewable energy component manufacturing projects.
Question 4. Does OMB support an extension of the Treasury
Department Renewable Energy Grant Program to continue to provide
upfront incentives to promote renewable energy, given the continued
difficulty in obtaining financing for renewable energy?
Answer. The Administration is considering all the tools at its
disposal to arrive at the correct level of support for clean energy
technology. Clean, renewable energy is a top Administration priority,
critical to reducing our reliance on fossil fuels and our economic
security. At the same time, we also are mindful of the significant
challenges our country faces as we make the tough choices necessary to
restore fiscal discipline and build a foundation for economic growth.
Question 5. Does OMB concur with a previous CBO estimate that the
risk of default for nuclear loan guarantees could be as high as 50
percent?
Answer. Projects applying for Title XVII loan guarantees vary
significantly. Project and sponsor characteristics, loan terms and
conditions, and the various project risks vary greatly from project to
project. As a result, credit subsidy cost estimates must be done on a
project-specific, loan-by-loan basis, and do not depend solely on the
type of technology. The Title XVII loan guarantee model takes into
account all relevant project factors and available information in
determining the risk of default, and potential recoveries on default.
Question 6. What will OMB do, in terms of calculating an upfront
risk subsidy fee to project developers, to ensure taxpayers are
protected as the federal government provides loan guarantees for
nuclear power projects?
Answer. Under the oversight authority in Section 503 of the Federal
Credit Reform Act of 1990 (2 U.S.C. 661b), OMB reviews and must approve
subsidy cost estimates for all loan and loan guarantee programs. OMB
delegates the modeling of credit subsidy costs to agencies, and issues
implementing guidance to ensure consistent and accurate estimates of
cost.
The process of estimating credit subsidy costs for Title XVII loan
guarantees is complex and rigorous. The methods used by DOE and
approved by OMB are used for a range of different clean energy
technologies. Over the past year, the program has issued conditional
commitments for multiple projects across a wide range of technologies
including solar, nuclear, wind, and geothermal. Each of these projects
involves large investments, varied technological, market, and financial
risks (and risk mitigants), and complex contract terms. Accordingly,
credit subsidy estimates for Title XVII loan guarantees reflect these
various project-specific risks and mitigants, which vary not only by
industry and technology but also by sponsor financial strength, equity
contribution, protections and collateral secured for taxpayers, and
other factors. Two loan guarantees supporting projects using the same
technology may have very different credit subsidies.
Title XVII credit subsidy estimates are determined on a loan-by-
loan basis, not on the basis of the industry or technology used in the
project. The Title XVII methodology takes into account each project's
specific technology risk, and each loan's contract terms as well as
other project specific factors. For nuclear power plant projects, the
methodology specifically considers the risk of cost overruns,
construction delays and the development of new technology. In
conducting its underwriting and due diligence to inform these
estimates, DOE also obtains input from third-party engineering, legal,
financial and marketing advisors, as well as credit ratings provided by
nationally recognized credit rating agencies. DOE's calculation of the
credit subsidy cost is reviewed and approved by OMB.
______
[Responses to the following questions were not received at
the time the hearing went to press:]
Questions for Timothy Newell From Senator Bingaman
Question 1. Your previous government and private sector experience
seems to have given you exposure to a number of public and private
sector financing mechanisms, such as OPIC and Ex-Im. Are you able to
contrast how they interact with both applicants and OMB with what you
understand of DOE's interactions?
Question 2. Based on your experience in the US and abroad with your
portfolio companies, is there any real alternative to governmental
involvement in the early deployments of these technologies?
Question 3. Is the market for fuel so fundamentally different from
the market for electricity that there should be different guidelines
for fuels projects? Does DOE have the authority to establish different
guidelines for fuels?
Question 4. Have you had the opportunity to review the CEDA
legislation contained in S. 1462? Do you have any opinions you could
share?
Question 5. According to OMB, their involvement in these
transactions is largely related to calculation of subsidy cost
estimates and they have not substantially been involved in an
operational way. What has been your experience with either OMB or
Treasury participation in the processing of individual transactions?
Question for Timothy Newell From Senator Murkowski
REVIEW OF INSTRUMENTS
Question 1. According to a recent report from Harvard Kennedy
School's Belfer Center, ``Loan guarantees are one of several policy
tools that can be used to support deployment of clean energy
technologies. Which policy tool is most appropriate depends on the
particular state of different technologies, and the principal market
barriers they face.'' The report goes on to suggest that, ``Given the
wide range of tools available, and their potentially differing roles in
promoting different technologies, Congress should consider asking for
an independent review of the relative value of loan guarantees and
other policies to support deployment of clean energy technologies.''
a. Do you believe an independent review would be a useful
undertaking?
b. Are there any policies outside of loan guarantees that you
believe could be more beneficial to advancing clean energy
technologies?
Question for Timothy Newell From Senator Cantwell
Over the past couple of years this committee has held several
hearings on mechanisms to provide low-cost project financing to
facilitate domestic deployment of renewable energy projects and
manufacturing facilities.
On more than one occasion, the Committee has received testimony on
the DOE Loan Guarantee Program, as well as the development of a more
comprehensive program, a ``Clean Energy Deployment Administration'',
which was included in S.1462, the bill reported out of this committee
well over a year ago.
In all of these hearings, one theme that has been articulated
repeatedly is that there is a need for government support to overcome
market failures and facilitate significant deployment of clean energy
technologies. Unfortunately, as the testimony here today has
illustrated, we still have work to do to provide such support in a
consistently effective way.
I have proposed what I believe could be a partial solution, in the
context of the recently-introduced Renewable Electricity Standard. This
bill would require that all major U.S. utilities get 15% of their power
from renewable sources by 2021.
I contributed a provision (section k -- Loans for Projects to
Comply with Federal Renewable Electricity Standard ) that would
authorize the Secretary to issue low-cost loans for renewable energy
projects to meet the standard. The purpose of the loan program is to
greatly reduce costs utilities might incur in complying with RES
mandates, and thus to minimize the impact on the RES on consumer
electricity rates.
I believe with such low interest rates and long repayment
schedules, most renewable energy projects will become significantly
more cost-effective at little or no cost to taxpayers. Energy
efficiency projects in particular are likely to achieve rapid cost
savings that exceed the value of monthly loan repayment requirements.
Moreover, the nature of RES compliance projects, such as
construction of a wind farm or cost savings from an energy efficiency
investment, provides for an almost certain revenue stream throughout
the life of the loan, meaning there is very little risk of a loan
recipient being unable ability to repay the U.S. Treasury.
Question 1a. Do you support such an idea? Do you believe it would
be more straightforward than the current Loan Guarantee Program?
Question 1b. In your opinion, could such a direct loan program be
established and get up and running more quickly than the loan guarantee
program has?
Question 1c. How do you think your company or the companies you
represent could benefit from such a program?
Question 1d. Do you think that the low interest rates and long
repayment schedules available under this program would positively
impact the financing of clean energy projects and that any resulting
savings would translate to lower costs for ratepayers?
Appendix II
Additional Material Submitted for the Record
----------
Executive Office of the President,
Office of Management and Budget,
Washington, DC, October 19, 2010.
Hon. Jeff Bingaman,
U.S. Senate, Washington, DC.
Dear Senator Bingaman: Thank you for your letter of September 20,
2010, to Director-designate Jacob Lew regarding the Department of
Energy's (DOE) Title XVII loan guarantee program. Because many of the
specific questions in your letter require detailed knowledge of
implementation of this program, Mr. Lew has asked that I respond to
ensure that you get full and complete answers to your questions.
The Office of Management and Budget's (OMB) role in reviewing DOE
loan guarantee transactions derives from OMB's statutory oversight
responsibility under the Federal Credit Reform Act of 1990 (FCRA).
Section 503 of FCRA gives the Director of OMB the responsibility for
the credit subsidy cost estimates for all Federal credit programs.
Under this authority, OMB reviews and must approve subsidy cost
estimates for all loan and loan guarantee programs, including the
credit subsidy cost estimates generated by DOE for the Title XVII
program, to ensure that costs are accounted for appropriately, as
required by FCRA. Under the oversight authority in Section 503, OMB
delegates the modeling of credit subsidy costs to agencies, and issues
implementing guidance to ensure consistent and accurate estimates of
cost. For new programs or programs where actual experience is not
available, such as the Title XVII program, OMB works closely with
agencies to create or revise credit subsidy models. OMB also reviews
any programmatic or legislative changes that impact the subsidy cost of
new and existing credit programs.
OMB's role does not overlap with or impede DOE's statutory
authorities for the Title XVII loan guarantee program, and the law does
not give OMB any role in accepting or rejecting projects. Instead, OMB
ensures that the costs of direct loans and loan guarantees are
presented, and reflect estimated risks, consistently across Federal
agencies so that taxpayer funds are invested in a prudent and effective
fashion. OMB's role for the Title XVII program is consistent with that
for other credit programs Title XVII loan guarantees provide relatively
large guarantees where characteristics, terms, and risks vary greatly
from project to project and require cost estimates on a loan-by-loan
basis. This is the same approach we use for loans or loan guarantees of
other similar programs that involve larger deals or new structures,
such as the Overseas Private Investment Corporation and the Export-
Import Bank. In addition, most of these programs have existed for a
number of years, which allows them to draw on historical experience in
estimating costs.
OMB carries out its responsibilities as expeditiously as possible,
and substantially increased its allocation of staff resources to this
program over the past year to ensure timely review of DOE's
submissions. OMB will continue to allocate the resources needed for
this program, including providing the resources needed to meet the
Department of Energy's target of completing four to five projects a
month. Before this Administration took office, no projects were
approved under this program. Since then, OMB has completed its review
of 17 projects that DOE submitted to OMB for loan closing or a
conditional commitment and continues to review projects as
expeditiously as possible. As of October 15, 2010, OMB has one loan
guarantee application under review for a conditional commitment, and
expects to complete its review of this project by next week. The large
majority of Title XVII loan guarantee projects reviewed by OMB to date
have been reviewed within 30 days, and in several cases considerably
more quickly. However, each project is a complex financial transaction,
often involving billions of dollars and first-of-a-kind structures.
There are many factors that might not be predictable in advance or are
not in OMB's control that would make impractical a statutory time limit
on OMB review. Flexibility in the OMB review timeline is needed to
ensure that OMB is able to complete the review needed to ensure that
Federal taxpayers' interests are protected in these transactions.
It is OMB's understanding that DOE is proceeding with due diligence
on 35 additional projects under the Section 1705 authority provided in
the American Recovery and Reinvestment Act that have not yet been
submitted to OMB for review. It is difficult to predict how long
negotiations and due diligence for these projects will take, given the
size and complexity of these types of deals. As in the private sector,
the due diligence and negotiations surrounding such transactions often
takes many months, and involve many parties with varied interests.
However, OMB and DOE are working diligently to meet the statutory
deadline for the Section 1705 authority. We are continuously assessing
both administrative and legislative changes that can be made to
streamline processing of these loan applications consistent with
fulfilling our statutory responsibilities to protect taxpayer funds.
The program appears to have sufficient funding to address the needs of
the projects in the pipeline, and I can assure you we are making every
effort to complete these applications and obligate all available
Section 1705 funds by the statutory deadline.
Thank you, again, for your letter regarding OMB's role in the Title
XVII loan guarantee program.
Sincerely,
Jeffrey D. Zients,
Acting Director.
______
Executive Office of the President,
Department of Energy,
November 5, 2010.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Bingaman: Thank you for your continued interest in,
and support for, the Section 1705 energy loan guarantee program. We
share your view that the program plays an important role in advancing
the deployment of clean energy technologies and the creation of jobs in
the manufacturing, construction, and utility sectors. In response to
your letter of October 14, 2010, we wanted to provide an update on
progress to improve implementation of this program while we work on the
detailed information you requested.
Since the start of this program, the Administration has continued
to work to improve the process of soliciting applications, undertaking
due diligence on the technological, financial, credit, legal,
contractual. environmental, and operational aspects of each project,
structuring the deals, and then scoring and reviewing them for
conditional commitment in the 1705 program. As one part of this effort,
our staffs have worked together to develop a more streamlined approach
to the processing of these projects, including the credit subsidy
scoring and policy review component of program implementation. At the
same time, we have improved systems within the Administration to
protect taxpayers' investment by rigorously reviewing the costs and
estimated risks of these loans and ensuring that this information is
presented accurately and consistently across Federal agencies.
Since October 1, 2009, OMB has completed the credit subsidy scoring
review for all projects in the 1705 program submitted for conditional
commitment, with a review time averaging 18 business days. DOE has
added an online application portal which has reduced the initial
eligibility decision from three to four months to about 10 days, and
improved the diligence and negotiation process so it can be completed
responsibly in several months. As you know, it had previously taken
more than a year. DOE, OMB, and Treasury have made a concerted effort
to identify new ways of streamlining the review process while still
protecting taxpayer resources. As a result of this work, the
Administration will commit to a goal of no more than 20 business days
for OMB and Treasury to review any project that DOE has completed the
due diligence necessary for a conditional commitment, and strive for a
five-business day review when possible.
The Administration is committed to ensuring that the length of the
review process will not stand in the way of advancing worthy projects
in DOE's pipeline for the 1705 program. We can assure you that the
interagency process is ready to review applications responsibly and
quickly, while protecting taxpayer interests.
Thank you again for your interest and support of the energy loan
guarantee program.
Sincerely,
Jeffrey D. Zients,
Acting Director, OMB.
Steven Chu,
Secretary, DOE.
______
Statement of the U.S. Partnership for Renewable Energy Finance
IMPACT ON JOBS THROUGH THE EXTENSION OF THE ARRA 1603 CASH GRANT
The American Recovery and Reinvestment Act's 1603 cash grant for
the construction of renewable power plants stands as a policy success
story over the past two years. However, this success is in jeopardy as
the 1603 program sunsets after 2010, which is already having an effect
on project pipelines. We estimate that the extension of the 1603 grant
program can help to create or preserve over 100,000 ``green'' jobs.
extension of the 1603 grant and 48c manufacturing tax credit will have
POWERFUL EFFECT
The 1603 grant program is effective policy in its own right,
creating economic activity and jobs, and has the double effect of
``underpinning'' the economic activity that is created by the 48C
manufacturing tax credit. The 1603 cash grant provides more certainty
of renewable tax equity financing, giving developers the confidence to
make large capital equipment purchases from the renewable manufacturing
base. The 48C manufacturing tax credit is stimulating a US domestic
supply response to meet this demand. Thus, by providing tax equity
financing certainty, 1603 helps to ensure demand for the supply being
created under the 48C program. We see the extensions of 1603 and 48C as
a 1+1=3 proposition.
It is also worth noting that in the recently released ``The
Recovery Act: Transforming the American Economy through Innovation,''
the Administration has reiterated the view that the US is on a track to
``doubling US renewable energy generation capacity and the US renewable
manufacturing capacity by 2012.'' Meeting this goal would require
approximately 12 GW of capacity additions in 2011, assuming 6 GW of
wind is installed by the end of 2010. We would see this goal as
difficult to achieve even with an extension of 1603, along with the
extension of 48C, and virtually impossible without such timely
extensions.
With the above explanation of how the 1603 grant and the 48C
manufacturing tax credit work together in the marketplace to create
jobs, this paper goes on to explain how the 1603 grant is effective at
mobilizing capital to project development in the United States.
SUCCESS SO FAR FROM THE 1603 CASH GRANT
First introduced in The American Recovery and Reinvestment Act
(ARRA) in 2008, the 1603 cash grant allowed project developers to
convert the existing investment tax credit (ITC) and production tax
credit (PTC) for renewable energy investments into direct cash grants
worth up to 30 percent of a project's capital cost. Most project
developers have insufficient taxable income to use the tax credits
effectively, which in the past has been addressed by bringing in
passive ``tax equity'' investors--mostly large financial institutions.
However the financial crisis sharply cut these institutions' own
taxable income and led to the demise of a number of prominent tax
equity providers. That meant that tax equity was particularly scarce
and therefore not effective in spurring construction in renewable
energy projects such as wind and solar.
The 1603 grant program has been a notable success. Despite the
recession, and because of the 1603 Program, wind power installations
reached nearly 10 GW in 2009, exceeding the previous record of 8.3 GW
set in 2008 by 20%. Solar PV installations also continued strong
growth, reaching 429 MW in 2009, 38% above the 2008 total.
Recent work conducted by the Lawrence Berkeley National Laboratory
(LBNL) and The National Renewable Energy Laboratory (NREL) have so far
estimated that the 1603 cash grant could create approximately 143,000
jobs in the wind industry, both in direct and indirect terms.
The Solar Industries Energy Association (SEIA) and International
Solar (EUPD) [two renewable energy research institutes] have estimated
that in the solar sector some 58,000 jobs will be created through the
program so far out to 2016.
Over the last few years, the wind industry has demonstrated the
importance of steady demand for renewable energy technologies in
creating a domestic supply chain and jobs. According to Lawrence
Berkeley National Lab, between 2006 and 2009, the domestic content of
wind turbines installed in the US rose from 15% to 60%. We attribute
this shift to the stability of the PTC during this period, which
created a steady demand for wind turbines in the US. The $2.3 billion
of 48C tax credits awarded in January 2010 as well as future awards may
further increase domestic content if there is sufficient demand for
these technologies.
outlook from 2011--100,000 jobs at risk*
---------------------------------------------------------------------------
* All tables and their respective footnotes have been retained in
committee files, including all graphics.
---------------------------------------------------------------------------
The 1603 cash grant is scheduled to sunset in the year 2011 (as
does the 48C manufacturing tax credit which has already been fully
allocated). Work done by members of US PREF shows that the expiration
will have a significant impact in the face of a continuing constraint
in the tax equity market, set out in detail in the recently released
paper ``Prospective 2010-2012: Tax Equity Market Observations''\4\ and
``U.S. Renewable Energy Tax Equity Investment and the Treasury Cash
Grant Program.'' \5\
---------------------------------------------------------------------------
\4\ US PREF, ``Prospective 2010-2012: Tax Equity Market
Observations (v1.2),'' July 2010. http://www.uspref.org/whitepapers/ .
\5\ US PREF, ``U.S. Renewable Energy Tax Equity Investment and the
Treasury Cash Grant Program (v2.1)'' 2010. http://www.uspref.org/white-
papers/ .
---------------------------------------------------------------------------
We have now looked at the impact that ending the cash grant would
have on employment. In order to do this we first estimated what we
considered to be the 2011 demand for renewables, in terms of MW's
financed each year, based on industry consensus data. From this
starting point we applied current industry cost estimates to derive the
total investment capital needed, and estimated the share likely to be
financed as separate projects (as opposed to projects financed by their
owners at the corporate level) based on historical trends. The likely
capital structure of these projects, assuming the 1603 grant is not
renewed, comes from US PREF members' experience as lender and investors
in the renewable energy project market. The result of this analysis is
a need for an estimated $9 billion of ``tax equity'' commitments in
2011, as shown in Table 1:
Attracting $9 B of tax equity capital per year will likely be very
difficult given only $6.1 B was raised in 2007, the industry's most
prolific year, in a credit environment not likely to repeat itself
soon. A June 2010 survey of all of the major renewable energy tax
equity investors conducted by US PREF concluded that around $3 billion
per year of tax equity might be available in 2011 and 2012. Table 2
shows the potential renewable deployment with that constraint:
Then using the NREL Jobs and Economic Development Impact (JEDI)
models (used also by LBNL) we looked at the gap between the
unconstrained scenario which would be supported by a 1603 cash grant
extension, and the constrained tax equity outcome:
A key assumption is how much of the manufacturing is done onshore.
While domestic manufacturing may grow in the future (possibly assisted
by the expansion of the 48C manufacturing tax credit), we assumed that
the level of domestic production would not change substantially in the
near term. US manufacturing of wind turbines and their components has
been increasing, Lawrence Berkeley National Lab estimates that imports
represented 39% of the value of wind turbines installed in the US in
2009, down from 85% in 2006. (Source: 2009 Wind Technologies Market
Report, R. Wiser and m. Bollinger, LBNL, August 2010.) Our analysis
assumed that 50% of the value of wind turbines financed would be
imported. The US is a small producer of solar modules, with a 7% share
of the global market. (Source: U.S. Solar Industry Year in Review,
Solar Energy Industry Association, May 2010.) Our analysis assumed that
none of the solar modules, inverters, or other materials or equipment
were manufactured domestically.
On this basis US PREF estimated around 104,000 jobs are forgone by
not extending the 1603 cash grant through 2011 and on in to the future,
where even more jobs would be created. And, as explained above, the
extension of the 1603 cash grant would make more successful any
extension of the 48C manufacturing tax credit in terms of job growth.
______
Flambeau River Biofuels, Inc.,
September 22, 2010.
Hon. Jeff Bingaman,
703 Hart Senate Office Building, Washington, DC.
Dear Senator Bingaman, Flambeau River BioFuels Incorporated is a
Development-stage Company that is committed to advancing the
commercialization of cellulosic biofuel technologies and producing
energy, transportation fuels and chemicals from renewable biomass
resources.
Our project in Park Falls, Wisconsin will be an important first
step in the development of wood-based biorefineries. The facility will
transform 1000 dry tons per day of woody biomass into over 18 million
gallons per year of renewable transportation fuels and green bio-based
chemicals. In addition, we will capture waste heat from our process and
export 21 million Btu/hr of green power to our adjacent Flambeau River
Papers (FRP) mill, making FRP the first integrated pulp and paper mill
in North America to be fossil fuel free. We believe the biorefinery at
Park Falls will be a model for integrated biorefinery operations and
will be especially attractive to pulp and paper companies that are
looking to diversify their operations. Our biorefinery will lower
greenhouse gas emissions, create 165 good, green jobs, preserve the 365
current jobs at the pulp and paper mill, and support rural development.
We believe that our project has significant merit as it meets the
congressional intent for developing the alternative fuels industry. The
Department of Energy Biomass Program selected our project in 2008 as
one of the demonstration biorefineries that will be deployed across our
nation. As a result of that selection we were awarded $30,000,000 in
financial assistance. This year the DOE Biomass Program reaffirmed
their support of our project by increasing their overall level of
financial assistance.
For our project to succeed, we will need assistance from the DOE
Loan Guarantee Program. The realities of today's economic climate have
made banks extremely reluctant to lend to new ventures like ours.
Unfortunately, it appears as though the DOE Loan Guarantee Office has
established exceedingly restrictive funding criteria that will
disqualify most, if not all, alternative transportation fuels projects,
which is contrary to Congressional intent.
Specifically, we have spoken with other companies that have
received DOE Biomass Program awards and that have applied for DOE Loan
Guarantee Program assistance, and it is clear that the DOE LG Office
has adopted criteria for biomass that is more restrictive than those
applied to solar and wind projects. Moreover, the DOE created new rules
after applications where submitted, thus putting applicants at a
significant disadvantage. In this regard, one would certainly have
thought that the DOE LG Office would have worked with the applicants to
help them achieve success before simply rejecting them. Small firms,
such as ours, were advised to find large partners like British
Petroleum. This type of discrimination is a slap in the face to small
business. It is the entrepreneurs who create jobs and are willing to
take risks in fulfilling our nations needs to become energy
independent.
I would ask that you please review the situation and direct the DOE
Loan Guarantee Office to meet your intent to promote alternative
domestic green fuels. The lack of biomass to transportation fuels
projects in the DOE LG portfolio is evidence that the DOE LG staff
needs additional congressional direction. If you or your staff has
questions for me about this project please do not hesitate to contact
me.
As a Nation we continue to fail to meet the Congressional goal for
domestic Cellulosic Biofuel production. Without reinforced direction
from Congress it is my fear the DOE Loan Guarantee Office will continue
to derail Congress' vision of creating a green economy that will bring
new jobs well into the future.
Sincerely,
William (Butch) Johnson,
CEO.