Loan Guarantees for Projects That Employ Innovative Technologies
On May 16, 2007, the Department of Energy (DOE or the Department) published a Notice of Proposed Rulemaking and opportunity for comment (NOPR) to establish regulations for the loan guarantee program authorized by Title XVII of the Energy Policy Act of 2005 (Title XVII or the Act). Title XVII authorizes the Secretary of Energy (Secretary) to make loan guarantees for projects that “avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.” Title XVII also identifies ten categories of technologies and projects that are potentially eligible for loan guarantees. The two principal goals of Title XVII are to encourage commercial use in the United States of new or significantly improved energy-related technologies and to achieve substantial environmental benefits. DOE believes that commercial use of these technologies will help sustain and promote economic growth, produce a more stable and secure energy supply and economy for the United States, and improve the environment. Having considered all of the comments submitted to DOE in response to the NOPR, the Department today is issuing this final rule.
Table of Contents Back to Top
- FOR FURTHER INFORMATION CONTACT:
- SUPPLEMENTARY INFORMATION:
- I. Introduction and Background
- II. Public Comments on the NOPR and DOE's Responses
- A. Technologies
- 1. Definition of New or Significantly Improved Technology
- 2. Definition of Technologies in General Use
- 3. Nuclear Generation Projects
- B. Financial Structure Issues
- 1. Lender Risk, Stripping and Pari Passu
- 2. Equity Requirements for Project Sponsors
- 3. Other Governmental Assistance
- 4. Credit Assessment and Rating Requirements
- 1. Lender Risk, Stripping and Pari Passu
- 2. Equity Requirements for Project Sponsors
- 3. Other Governmental Assistance
- 4. Credit Assessment and Rating Requirements
- C. Project Costs
- D. Solicitation
- E. Payment of the Credit Subsidy Cost
- F. Assessment of Fees
- G. Eligible Lenders and Servicing Requirements
- H. Federal Credit Reform Act of 1990 (FCRA)
- I. Default and Audit Provisions
- J. Tax Exempt Debt
- K. Full Faith and Credit
- L. Responses to August 2006 Solicitation
- M. Other Issues Raised in the Public Comments
- 1. Non-Recourse Financing.
- 2. Timeline for Processing Application.
- 3. Conditional Commitment
- 4. Restrictions on the Transferability of Guaranteed Obligations
- III. Regulatory Review
- A. Executive Order 12866
- B. National Environmental Policy Act of 1969
- C. Regulatory Flexibility Act
- D. Paperwork Reduction Act
- E. Unfunded Mandates Reform Act of 1995
- F. Treasury and General Government Appropriations Act, 1999
- G. Executive Order 13132
- H. Executive Order 12988
- I. Treasury and General Government Appropriations Act, 2001
- J. Executive Order 13211
- K. Congressional Notification
- L. Approval by the Office of the Secretary of Energy
- List of Subjects in 10 CFR Part 609
- PART 609—LOAN GUARANTEES FOR PROJECTS THAT EMPLOY INNOVATIVE TECHNOLOGIES
DATES: Back to Top
Effective Date: This rule is effective upon October 23, 2007.
FOR FURTHER INFORMATION CONTACT: Back to Top
David G. Frantz, Director, Loan Guarantee Program Office, Office of the Chief Financial Officer, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-8336, e-mail: firstname.lastname@example.org; or Warren Belmar, Deputy General Counsel for Energy Policy, Office of the General Counsel, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-6758, e-mail: email@example.com; or Lawrence R. Oliver, Assistant General Counsel for Fossil Energy and Energy Efficiency, Office of the General Counsel, 1000 Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-9521, e-mail: firstname.lastname@example.org.
SUPPLEMENTARY INFORMATION: Back to Top
I. Introduction and Background
II. Public Comments on the Notice of Proposed Rulemaking and DOE's Responses
1. Definition of New or Significantly Improved Technologies
2. Definition of Technologies in General Use
3. Nuclear Generation Projects
B. Financial Structure Issues
1. Lender Risk, Stripping and Pari Passu
2. Equity Requirements for Project Sponsors
3. Other Governmental Assistance
4. Credit Assessment and Rating Requirements
C. Project Costs
E. Payment of the Credit Subsidy Cost
F. Assessment of Fees
G. Eligible Lenders and Servicing Requirements
H. Federal Credit Reform Act of 1990 (FCRA)
I. Default and Audit Provisions
J. Tax Exempt Debt
K. Full Faith and Credit
L. Responses to August 2006 Solicitation
M. Other Issues Raised in the Public Comments
III. Regulatory Review
A. Executive Order 12866
B. National Environmental Policy Act of 1969
C. The Regulatory Flexibility Act
D. Paperwork Reduction Act
E. Unfunded Mandates Reform Act of 1995
F. Treasury and General Government Appropriations Act, 1999
I. Treasury and General Government Appropriations Act, 2001
K. Congressional Notification
L. Approval by the Office of the Secretary of Energy
I. Introduction and Background Back to Top
Today's final rule establishes policies, procedures and requirements for the loan guarantee program authorized by Title XVII of the Energy Policy Act of 2005 (42 U.S.C. 16511-16514). Title XVII authorizes the Secretary of Energy, after consultation with the Secretary of the Treasury, to make loan guarantees for projects that “(1) avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and (2) employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.” (42 U.S.C. 16513(a))
On May 16, 2007, the Department published a Notice of Proposed Rulemaking and Opportunity for Comment (NOPR, 72 FR 27471) to establish regulations for the Title XVII loan guarantee program. DOE held a public meeting on the NOPR in Washington, DC on June 15, 2007.
Section 20320(a) of Public Law 110-5, the Revised Continuing Appropriations Resolution, 2007 (Pub. L. 110-5) authorized DOE to issue guarantees under the Title XVII program for loans in the “total principal amount, any part of which is to be guaranteed, of $4,000,000,000.” Section 20320(b) of Public Law 110-5 further provides that no loan guarantees may be issued under the Title XVII program until DOE promulgates final regulations that include “(1) programmatic, technical, and financial factors the Secretary will use to select projects for loan guarantees; (2) policies and procedures for selecting and monitoring lenders and loan performance; and (3) any other policies, procedures, or information necessary to implement Title XVII of the Energy Policy Act of 2005.” The regulations being finalized today fulfill that requirement.
Section 1702 of the Act outlines general terms and conditions for Loan Guarantee Agreements and directs the Secretary to include in Loan Guarantee Agreements “such detailed terms and conditions as the Secretary determines appropriate to “(i) protect the interests of the United States in case of a default [as defined in regulations issued by the Secretary]; and (ii) have available all the patents and technology necessary for any person selected, including the Secretary, to complete and operate the project.” (42 U.S.C. 16512(g)(2)(c)) Section 1702(i) requires the Secretary to prescribe regulations outlining record-keeping and audit requirements. This final rule sets forth application procedures, outlines terms and conditions for Loan Guarantee Agreements, and lists records and documents that project participants must keep and make available upon request.
II. Public Comments on the NOPR and DOE's Responses Back to Top
DOE received comments on the NOPR from 47 interested parties. Twenty interested parties presented oral comments and/or submitted written comments for the record at the public meeting. DOE summarizes below the major areas of the NOPR on which it received public comment, and discusses the Department's responses to those comments. Only major areas of the NOPR are discussed here, although DOE carefully reviewed all comments it received on the NOPR, and in some cases made adjustments to the rule text that are not discussed at length in this preamble.
A principal purpose of the Title XVII loan guarantee program is to support “innovative technology” projects in the United States that “employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.” (42 U.S.C. 16513(a)(2)) Section 1701(1) (A) of the Act defines “commercial technology” as “a technology in general use in the commercial marketplace.” (42 U.S.C. 16511(1)(A))
Title XVII does not require, but on the other hand does not prohibit, different treatment for different eligible technologies or projects in the Title XVII program. Furthermore, the Act does not explain or define the phrase “new or significantly improved” in section 1703(a)(2), nor does it explain or define the terms “general use” or “commercial marketplace.” In the NOPR, DOE proposed to define the term “new or significantly improved technology” to mean “a technology concerned with the production, consumption, or transportation of energy, and that has either only recently been discovered or learned, or that involves or constitutes one or more meaningful and important improvements in the productivity or value of the technology.” (72 FR 27480)
Because Title XVII focuses on encouraging and incentivizing innovative technologies not already in “general use” in the U.S. commercial marketplace, DOE stated in the NOPR that the Title XVII loan guarantee program should only be open to projects that employ a technology that has been used in a very limited number of U.S. commercial projects or used in a commercial project for only a limited period of time. Therefore, DOE proposed two possible ways of interpreting “general use”: it could mean “ordered for, installed in, or used in five or more commercial projects in the United States,” or “in operation in a commercial project in the United States for a period of five years, as measured beginning on the date the technology was commissioned on a project.” (72 FR 27480) DOE requested comment on these alternatives, and also on whether the same definition should apply to all types of projects and technologies eligible for loan guarantees. (72 FR 27474) As DOE stated in the NOPR, a project may be eligible for a Title XVII loan guarantee if it uses technology that has been used in any number of projects and for any period of time outside the United States, so long as the technology is not in “general use” in the United States.
1. Definition of New or Significantly Improved Technology
Public Comments: Section 609.2 of the proposed regulations defined “new or significantly improved technology” to mean “a technology concerned with the production, consumption or transportation of energy, and that has either only recently been discovered or learned, or that involves or constitutes one or more meaningful and important improvements in the productivity or value of the technology.” Several commenters expressed the view that this definition is too narrow because it does not include improvements in “new systems or system integration.” Other commenters stated that the definition should reference or include the term “commercial use.” Some commenters stated that the definition was appropriate.
Parson Whittemore Incorporated (PW) and Forest Energy System, LLC (FES), for example, assert that the proposed definition of new or significantly improved fails to capture the potential value of “systems” rather than individual technologies. They recommend expanding the definition to include improvements from new systems or systems integration. (PW at 1; FES at 1).
The Nuclear Energy Institute (NEI) and Bechtel Corporation (Bechtel) challenged the NOPR's proposal to require that the technology be both new or significantly improved and not in general use in the commercial marketplace in the United States. They maintain that Title XVII only requires that a technology be new or significantly improved “as compared to” commercial technologies in service in the U.S. at the time the guarantee is issued. (NEI at 25; Bechtel at 5).
The Verenium Corporation (Verenium) stated that it is possible that a technology has been in existence for some time but has never been commercially applied for some reason, such as a technology that was not viable when competing with oil at $20 a barrel but is competitive with oil at $60 a barrel. Verenium stated that DOE should focus on technologies “not yet in” use and therefore should make the definition of New or Significantly Improved Technology refer to the defined term “Commercial Technology.” (Verenium at 10).
The Union of Concerned Scientists (UCS), however, stated that “DOE needs to develop objective criteria to demarcate ‘new’ or ‘significantly improved’ technologies from the sprucing up and recycling of current technologies,” and asserted that the approach of the NOPR relied upon “subjective judgments concerning the definition rather than employing more objective, quantitative measures of novelty and significant improvement.” (UCS at 1). UCS did not, however, offer any suggestions as to what sort of “objective, quantitative measures of novelty and significant improvement” would be appropriate for adoption in the rule. TXU Generation Development Company LLC (TXU) argued that the rule should adopt a “flexible definition” with DOE and expert consultants making decisions on particular technologies at the preliminary application stage. (TXU at 7).
Eastman Chemical Company (Eastman) supported the NOPR's proposed disqualification of projects solely in the research, development, or demonstration phase as long as the criteria is applied “to the overall project and does not make a project ineligible just because one subsection of technology is new.” Eastman adds: “Arguably, a use of proven or commercial technologies in a new or novel configuration, combination, or implementation method, such as polygeneration should qualify as a ‘new or significantly improved technology.’ ” (Eastman at 3).
Beacon Power Corporation (Beacon) recommends broadening the definition by adding the following italicized phrase so that the definition would read: “technologies concerned with the * * * productivity or value of the technology or an improvement over an existing technology that will perform the same function.” (Beacon at 3). Ameren Services Company (Ameren) supported the proposed definition of new or significantly improved technologies, subject to the addition of the following phrase: “in service in the United States at the time the guarantee is issued,” which is part of the statutory definition in § 1703(a)(2) of the Act. (Ameren at 2).
DOE Response: There is no one universally accepted or agreed upon definition of the term “technology.” Generally, technology is thought to be the practical application of science to industrial or commercial objectives. Technology may also include electronic or digital products and systems considered as a group. DOE believes that the term “technology” in Title XVII was intended to have a very broad meaning, given the purposes of Title XVII, and therefore does not believe it is advisable to set down by rule a narrow definition of what will be considered a “technology” for purposes of this program.
However, the Department believes it is important to establish what may enable a particular technology to be considered “new or significantly improved”. By its explicit terms, the Title XVII loan guarantee program is not open to all technologies and projects, but only those that are new or significantly improved in comparison to commercial technologies in use in the United States.
Several commenters asserted that the proposed definition of “new and significantly improved technology” in the NOPR mistakenly requires that in order to be eligible for a loan guarantee, a project must employ a technology that is both new and improved and is not in commercial use in the United States. They argue that the regulatory definition should be clarified to make clear that the test is new or significantly improved as compared to commercial technologies in service in the United States. They correctly quote Title XVII, but are mistaken as to the import of that language and the language in the NOPR. Either a technology is in general use in the U.S. commercial marketplace or it is not. If it is in general use, then the same technology could not possibly be “new or significantly improved” in comparison to technology in general use in the U.S. commercial marketplace, and it is ineligible for a Title XVII loan guarantee. Yet a technology does not automatically become eligible for a Title XVII loan guarantee merely because it is not a U.S. commercial technology; rather, it must be “new or significantly improved” in comparison to such commercial technology. If the statute required only that it be “new” or “different” in comparison to commercial technologies, then it might well be that in order to become eligible for a Title XVII guarantee, all a project sponsor would need to show is that it was using a technology currently not in commercial use in the United States. But such an interpretation of Title XVII would render as surplusage the words “or significantly improved” in section 1703(a)(2) of the Act. As a result, the term “new or significantly improved” cannot simply mean not currently in commercial use in the United States; it must mean that the technology itself is either newly developed, or it must constitute a significant improvement over technologies currently in U.S. commercial use. Notably, in order to be eligible for a loan guarantee a technology need not be both new and significantly improved, but must only be one or the other.
DOE does believe it is useful to clarify that while a “new” technology must be newly developed, discovered or learned, a “significantly improved” technology may in fact be “old” but a significant improvement over technologies currently in commercial use in the United States. Thus, and as noted in the NOPR, DOE agrees with the assertions by some commenters that a technology could be eligible for a loan guarantee even if it was developed long ago and even if it is used in the same commercial application outside the United States, as long as that technology is not in general commercial use for that application in the United States at the time the loan guarantee is issued. Consistent with DOE's interpretation of section 1703(a)(2) of the Act, section 609.2 of the final rule provides, in part, as follows:
New or significantly improved technology means a technology concerned with the production, consumption or transportation of energy that is not a Commercial Technology, and that has either: (i) Only recently been developed, discovered or learned; or (ii) involves or constitutes one or more meaningful and important improvements in productivity or value, in comparison to Commercial Technologies in use in the United States at the time the Term Sheet is issued.
2. Definition of Technologies in General Use
Public Comments: Under section 1703(a)(2) of the Act, projects are eligible for Title XVII loan guarantees only if they employ new or significantly improved technologies as compared to “commercial technologies” that are “in service in the United States” when guarantees are issued. Section 1701(1)(A) defines “commercial technology” to mean “a technology in general use in the commercial marketplace.” The NOPR proposed two alternative definitions of “general use”: A technology would be considered to be in “general use” if it had been “ordered for, installed in, or used in five or more [commercial] projects in the United States”; or alternatively, if it had been “in operation in a commercial project in the United States for a period of five or more years as measured beginning on the date the technology was commission[ed] on a project.” This definition is important because, as noted above, a proposed technology cannot qualify a project for a Title XVII loan guarantee if it is in “general use” in the U.S. commercial marketplace. 
Several commenters stated that the first of the alternatives set forth in the NOPR was acceptable, but the second alternative definition should not be an option or should be revised. On the other hand, several commenters stated that the second alternative definition would be appropriate for nuclear projects because the early operational phase is more useful in determining whether a technology is workable and acceptable. Other commenters stated that the second alternative should not be adopted because it likely would lead to a very large number of nuclear projects being eligible for loan guarantees since there is a long period of time between initiation of work on a nuclear generation facility and the completion of five years of operation, and during this time a large number of projects using the same technology could apply for and be granted loan guarantees. Still other commenters were of the view that it is impossible to adequately define “general use” and asserted that DOE therefore should approve or disapprove loan guarantee proposals to use technologies on a case-by-case basis. Commenters also expressed the view that the two alternative definitions for “general use” should be combined into one definition.
More specifically, in their joint comments Constellation Nuclear Utilities, Inc., Entergy Corporation, Exelon Corporation, and NRG Energy, Inc. (Nuclear Utilities) asserted that for nuclear technologies the definition of a technology that is in “general use” should be based upon five or more years of operation of any given new design (e.g., an advanced reactor design that is separately certified by the Nuclear Regulatory Commission (NRC)). They argued that if DOE were to use the “five or more projects” alternative for defining what constituted “general use,” it would be essential that the phrase “order for, installed in, or used in” should be changed to “ordered for, installed in, and used in,” since for nuclear plants, ordering would take place many years before use. (Nuclear Utilities at 19-20). NEI, Dominion Resources Services, Inc. (Dominion) and Excelsior Energy, Inc. (Excelsior) submitted similar comments. (NEI at 24, Dominion at 12, Excelsior at 2-3).
Southern Company Services, Inc., (Southern) stated that technology should be considered in “general use” when financing has been established for five or more projects in the United States. Southern stated that its proposed interpretation of “general use” would assist DOE's effort in having a broad portfolio of large and small projects with a wide variety of technologies supported by the Title XVII program, because it would limit the number of project participants that employ the same technology. Southern also asserted that the successful implementation of five projects employing a particular technology should greatly reduce the concerns of the credit markets, and stated that not considering a technology to be in “general use” until it has been in operation in a commercial project in the United States for five years could result in an unlimited number of projects utilizing the same technology. (Southern at 1).
Verenium stated that if over a five-year period a technology has been used in fewer than five projects, the technology is probably not in general use because it would indicate there is some barrier to competitiveness. The restriction to five projects, according to Verenium, should be stated as only a “presumption,” so that DOE could deviate from it in appropriate circumstances. Verenium further argued that the term “ordered for” may be ambiguous, and thus suggested the use of “in the process of being installed” if DOE adopts an alternative employing this concept, and thus suggested the following language for the definition of Commercial Technology:
“Commercial Technology means a technology in general use in the commercial marketplace in the United States, but does not include a technology solely by use of such technology in a demonstration project funded by DOE. A technology is presumed to be in general use if it has been installed or used or is in the process of being installed in five commercial projects in the United States.”
(Verenium at 12-13).
Standard Poor's (SP) stated that projects involving integrated gasification combined cycle (IGCC) and coal-to-liquids (CTL) technologies currently lack a commercial track record and therefore would be assigned a risk premium by that rating agency. However, SP said that if there are at least five operational projects using a particular technology, and as long as there was a material track record of operations, the perceived risk and thus the risk premium associated with the technology would be substantially reduced. (SP at 2). The Iogen Corporation (Iogen), believes that the definition proposed in the NOPR is too restrictive and notes that the financial community has displayed great reticence to providing debt financing at reasonable commercial rates for new technologies that have not been widely demonstrated. Iogen would prefer that DOE not adopt a single “bright line” test and that the Department instead rely on market forces to determine the need for a guarantee. However, if the Department is going to develop a test, Iogen proposes to combine the two alternatives into one modified definition, so that a particular technology would be considered to be in general use if it had been installed or used in five or more projects in the United States for a period of five years. (Iogen at 2-3).
The Coal Utilization Research Council (CURC) stated that the “proposed definition of general use is not suitable as it relates to projects that will use technologies that have been in commercial use for other applications,” and that “size, process configurations, and technology modifications are among the several general characteristics of projects that need to be considered when applying the general use definition.” (CURC at 5). Baard Energy L.L.C. (Baard) proposed that, with respect to CTL projects, “general use” should be defined by the first alternative set forth in the NOPR, i.e., technologies that have been installed and used in five or more commercial projects in the United States. Baard asserts that the second alternative, five years, is too short. In order to accommodate construction schedules for CTL plants and to allow for innovations and improvements, Baard maintains that the second alternative should be extended to ten years. (Baard at 3).
Bechtel Power Corporation (Bechtel) recommends combining the two alternatives for determining “general use” proposed in the NOPR, as follows:
The technology or combination of technologies have been ordered for, installed in, and used in five or more projects in the U.S., each for a period of five years, measured from date of commissioning.
Bechtel's other comments regarding “general use” are focused on new nuclear technologies that have never been built in the United States. According to Bechtel, the technologies in question (“Gen III” and “Gen III+” nuclear designs) should be judged individually for purposes of determining whether either of the alternative meanings of “general use” proposed in the NOPR apply to them. Bechtel states that the “general use” language in the rule must clearly distinguish new generations or new applications of a technology such as Gen III or Gen III+ in order to assure that they are not excluded from loan guarantee eligibility by the fact that over 100 nuclear plants have been built in the United States, when those plants used different designs and were constructed in a much different industry and regulatory environment. (Bechtel at 4).
CPS supports the second alternative definition set forth in the NOPR, and submits that the five to seven year construction period for a nuclear project means that starting the “clock” from the time the technology is commissioned on a project, may mean that the project is disqualified at or prior to the technology's in-service date. CPS asserts that guarantees should be available, to the extent of appropriations, until each distinct technology is in full commercial operation. (CPS at 7). Abengoa Bioenergy New Technologies (ABNT) recommends that DOE select the definition which utilizes time from first commercialization as the basis for defining “general use.” ABNT argues that if the other alternative is selected, DOE will be discouraging competition and applications from a number of projects which are eligible under a given solicitation or invitation, and that by determining eligibility on the basis of “a fixed window of time,” DOE will provide certainty that a project will remain eligible for a loan guarantee at some future time regardless of intervening events with other projects or technologies. ABNT does not dispute the NOPR's proposal of a five-year time frame, but suggests that a superior approach may be to establish a time frame according to the commercial technology defined in each solicitation or invitation. (ABNT at 1).
DOE Response: DOE agrees with concerns expressed by many commenters about the “five project” alternative proposed in the NOPR. These commenters were concerned that a definition that did not include an operational component, which lenders need to develop confidence that a technology is proven and is viable in actual commercial operation, may not be workable for this program, and may not result in effective reduction of commercial risk and effective increased commercial marketplace acceptance prior to the closing of loan guarantee program eligibility. DOE believes that other entities considering incorporation of a particular technology into their planning want to see technologies proven in actual practice before investing substantial sums on that technology and incorporating it into large-scale capital expenditure plans. Furthermore, operational experience reduces risk from the standpoint of the credit and debt markets, and can lead to increased access to capital markets at lower rates. We particularly note and find persuasive SP's comment that if there were at least five operational projects in a particular technology within the United States, the perceived risk premium associated with the technology should be substantially reduced. We also note that adoption of the “five projects” proposal in the NOPR but without including an operational period could result in technologies or projects involving very long development and construction times being disqualified from receiving additional loan guarantees before even one project had commenced commercial operations, or in extreme cases, before any projects employing the technology had even commenced construction.
After review and evaluation of the comments, DOE accordingly has revised section 609.2 of the NOPR as follows:
Commercial Technology means a technology in general use in the commercial marketplace in the United States at the time the Term Sheet is issued by DOE. A technology is in general use if it has been installed in and is being used in three or more commercial projects in the United States, in the same general application as in the proposed project, and has been in operation in each such commercial project for a period of at least five years. The five year period shall be measured, for each project, starting on the in service date of the project or facility employing that particular technology. For purposes of this section, commercial projects include projects that have been the recipients of loan guarantees from DOE under this part.
DOE believes this definition reasonably addresses the concerns that DOE considers persuasive. By referring to the “same general application” as the proposed project, the definition provides that a technology is not necessarily considered in “general use” if it has been used for completely different projects or applications than in the proposed project. For example, the fact that fuel cells have been used in some small-scale applications for flashlights would not disqualify an application for a project that proposed to use fuel cells to power a motor vehicle. The definition also makes clear that it is only use of a technology in a project in the United States that can potentially render it in “general use” for the purposes of this program. The definition provides that each of three projects using a particular technology must be in service for five years before the technology is considered to be in general use. Thus, this definition deals with the concern expressed by some commenters that technologies should be barred from program eligibility only if there has been substantial actual operational experience with them. Finally, the definition clarifies that projects that have received loan guarantees will be counted when determining whether technologies have been used in a sufficient number of projects to render them no longer eligible for the program. DOE believes this is consistent with the overall purpose of the program in encouraging the introduction of new and improved technologies into the commercial marketplace, but ensuring that technologies do not remain forever dependent on loan guarantee support in order to be commercially viable. The Title XVII program should help introduce technologies to the commercial marketplace, but it should be up to those technologies and to the commercial marketplace as to whether the technologies continue to be economically and technologically viable, or not.
DOE notes that even though the definition of “commercial technology” it is adopting in this rule may permit multiple projects using the same technology to be eligible for a Title XVII guarantee, DOE is under no obligation to seek authority for, or to issue solicitations for, all or any particular technology that may fall within the outer limits of eligibility for a loan guarantee, as that eligibility is prescribed by Title XVII and this rule. Indeed, it is perfectly possible that DOE may decide not to issue a solicitation covering a certain technology, even though projects using that technology would be eligible under this rule for a loan guarantee. Furthermore, this definition of “commercial technology” in no way limits DOE's ability to include within a solicitation a selection criterion, and assign a weighting for that criterion, based on the number of projects already in service using that technology.
3. Nuclear Generation Projects
Public Comments: Comments from the nuclear industry asserted that regulations proposed in the NOPR were not appropriate or workable for commercial nuclear power projects because of the size and unique regulatory and litigation-related risks surrounding these projects. The industry's stated primary concern is the ability of industry participants to access the capital markets at what they view as reasonable rates, terms and conditions.
CPS Energy (CPS), on behalf of itself and the Large Public Power Conference, a group of utility companies with nuclear power facilities, recommended that new nuclear technology should be defined separately and differently from other technologies eligible for Title XVII loan guarantees. CPS cited two principal factors supporting this recommendation: (1) The capital intensive nature of new nuclear development; and (2) the different technologies proposed represent vastly different scales of new technology, as compared with other types of eligible projects. CPS stated that the cost of new nuclear generating capability is in the neighborhood of $2,000 per kilowatt and the capacity of the plants is in excess of 1,300 megawatts, that five different reactor technologies are being proposed, and that none of the technologies currently are in operation in the United States. Therefore, CPS asserted that each of the five technologies should be treated as a distinct new technology eligible for loan guarantees. (CPS at 7).
Iogen, however, strongly opposed DOE making the loan guarantee program more favorable for larger projects involving electricity generation from nuclear power or coal combustion/gasification than for other types of projects, such as those that would advance the President's “20 in Ten” initiative, which Iogen said depends on the widespread deployment of advanced biofuels refineries. (Iogen at 1). The American Council on Global Nuclear Competitiveness (ACGNC) stated that DOE should look beyond nuclear power plants when defining the term “advanced nuclear energy facilities” that appear in section 1703 of the Act. ACGNC stated that this language is broad enough to allow DOE to issue loan guarantees to projects that will restore the domestic nuclear energy design, manufacturing, service and supply industry, such as uranium mining and milling operations; uranium conversion and enrichment facilities; reactor component fabrication facilities; and used fuel recycling plants. (ACGNC at 2-3). Goldman and Sachs Co. (Goldman Sachs) recommended that the final rule expressly include nuclear power generating stations and advanced technology low enriched uranium (LEU) production facilities in the definition of what could constitute an eligible project. Goldman Sachs emphasized that the described facilities are essential to fostering the domestic development of emissions-free, affordable base-load nuclear power generation, and that advanced nuclear energy facilities are one of the ten categories of projects specifically addressed in the Act. (Goldman Sachs at 5).
DOE Response: Nuclear projects were the only type of projects for which some commenters asserted the final rule should accord different treatment than other technologies. However, most if not all of those comments argued that different treatment was appropriate because of the very large cost and long construction and permitting/licensing time for such projects. And yet, similar arguments could be made in support of some other types of potentially eligible projects, such as refineries, IGCC facilities, or CTL projects. No commenters argued that nuclear technology per se makes nuclear projects deserving of different and more favorable treatment than the final rule affords to other projects that have large capital requirements and difficult regulatory environments. Moreover, DOE believes it has dealt appropriately with many if not most of the concerns expressed by nuclear industry participants regarding the issues of “general use” and other matters discussed elsewhere in this preamble and in the final rule text. Therefore, the final rule does not differentiate between nuclear power generation projects and all other projects.
B. Financial Structure Issues
The Act imposes certain limitations on the financial structure of proposed projects, including that a loan guarantee “shall not exceed an amount equal to 80 percent of the project cost of the facility that is the subject of the guarantee as estimated at the time at which the guarantee is issued.” (42 U.S.C. 16512(c)) Section 1702(g)(2)(B) of the Act further requires that “with respect to any property acquired pursuant to a guarantee or related agreements, [DOE's rights] shall be superior to the rights of any other person with respect to the property.” In the NOPR, the Department interpreted this statutory provision to require that DOE possess a first lien priority in the assets of the project and other assets pledged as security, and stated that because DOE believed it is not permitted by Title XVII to adopt a pari passu security structure, Holders of the non-guaranteed portion of a loan or debt instrument supported by a Title XVII guarantee would have a subordinate claim to DOE in the event of default.
DOE proposed in the NOPR that it only would issue a guarantee for up to 90 percent of a particular debt instrument or loan obligation for an Eligible Project. This limitation was subject to the overriding statutory requirement that DOE's guarantees for a particular project could not exceed 80 percent of Project Costs. Furthermore, in connection with any loan guaranteed by DOE that may be participated, syndicated, traded, or otherwise sold on the secondary market, DOE proposed to require that the guaranteed portion and the non-guaranteed portion of the debt instrument or loan be sold on a pro-rata basis. In the NOPR, DOE proposed not to allow the guaranteed portion of the debt to be “stripped” from the non-guaranteed portion, i.e., sold separately as an instrument fully guaranteed by the Federal government.
The Act does not mandate a specific equity contribution to a project that receives a Title XVII loan guarantee, but DOE proposed in the NOPR that in order to receive a loan guarantee, Project Sponsors must have a significant equity stake in the proposed project. DOE solicited comments on the merits of adopting a minimum equity percentage requirement for projects, and stated that in evaluating loan guarantee applications, the Department would consider whether and to what extent a Project Sponsor will rely upon other government assistance (e.g., grants, tax credits, other loan guarantees, etc.) to support financing, construction or operation of a project.
Finally, DOE proposed to require with submission of an application for a loan guarantee a “credit assessment” for the project without a loan guarantee from a nationally recognized rating agency, where the size and estimated cost of the project justify such an assessment. Additionally, DOE proposed to require that not later than 30 days prior to closing, Applicants must provide a “credit rating” from a nationally recognized rating agency reflecting the Final Term Sheet for the project without a Federal guarantee. The Department requested comments as to whether it should establish a project size (dollar) threshold below which DOE could waive the credit assessment and rating requirements.
1. Lender Risk, Stripping and Pari Passu
Commenters that addressed the 90 percent, no stripping, and pari passu provisions in the NOPR were generally opposed to these restrictions. SP commented on the 90 percent guarantee limitation in combination with the stripping prohibition stating that “[t]his is the provision [sic] that has the greatest credit consequence. The rating associated with a partially guaranteed obligation will be substantially lower than the `AAA' rating of a fully guaranteed instrument . . . [and] will result in a significantly higher cost of debt for the project than if it was fully guaranteed.” (SP at 5). SP also stated that “[t]he disadvantage created by the partial guarantee can be overcome if the loan can be `stripped', effectively creating two tranches of debt, one with a `AAA' rating and the second rated much lower.” (SP at 5).
NEI asserted that allowing 90 percent guaranteed loans, instead of placing the limit at 80 percent as did the August 2006 Guidelines, did not improve what NEI viewed as a limitation adversely affecting the overall viability of the Title XVII program for nuclear projects. NEI stated that the NOPR would create a financing structure that is not workable. It would create, according to NEI, a hybrid loan facility for which there is no market, a debt instrument with a guaranteed portion and a non-guaranteed potion which cannot be stripped, and would render the unsecured, non-guaranteed portion of the debt “quasi-equity.” The impact, according to NEI, would be to compromise project economics, increase debt service requirements, and increase costs to electricity consumers.
NEI further said if DOE's proposal were adopted, the Title XVII loan guarantee program would not operate like other successful Federal loan guarantee programs. NEI stated that those other programs generally provide for 100 percent Federal guarantee coverage of the loan amount; allow pari passu treatment of non-guaranteed commercial debt; and permit stripping of guaranteed debt from non-guaranteed debt and follow standard practice in determining eligible project costs. NEI said that DOE's NOPR was deficient on all four of these issues. (NEI at 2-3).
In a set of joint comments, Citigroup, Credit Suisse, Goldman Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch (Investment Bankers) stated that investors or lenders in the fixed income markets will be acutely concerned about a number of political, regulatory and litigation-related risks surrounding nuclear power, including the possibility of delays in commercial operation of a completed plant. The Investment Bankers also stated that these risks, combined with the higher capital costs and longer construction schedules of nuclear plants, as compared to other electric generation facilities, may make lenders unwilling to make long-term loans to such projects on commercially viable terms. (Investment Bankers at 1).
The Nuclear Utilities also stated that the Title XVII loan guarantee program must guarantee debt through workable financing instruments. They asserted that limiting guarantee coverage to 90 percent, prohibiting pari passu security structures, and prohibiting “stripping,” would result in a program that would not support the financing of new nuclear plants in the United States. The Nuclear Utilities said that their primary concern relates to the percentage of a project's debt the loan guarantee will cover. They believe that DOE would be fully justified in guaranteeing 100 percent of a Guaranteed Obligation, up to 80 percent of project cost. Moreover, the Nuclear Utilities stated that providing 100 percent guarantee coverage of a debt instrument is not only necessary because commercially viable financing is not available on an non-guaranteed basis, but also because a 100 percent U.S. government guarantee will enable lenders and borrowers to maximize the efficiency of the existing, well-established marketplace for government guaranteed debt. The Nuclear Utilities also believe that the “no stripping” requirement combined with the prohibition on pari passu security structures, creates a form of “hybrid” debt for which there is no natural, existing market. According to the nuclear industry, the market participants would incur a significantly higher average cost of financing, as well as unnecessary transaction costs to achieve project structures that would enable the project's debt to be placed with its appropriate constituents in the existing marketplace. The Nuclear Utilities stated that such structures could lead to a form of “synthetic” stripping that undercuts the purpose of the no stripping requirement. (Nuclear Utilities at 5-8). They recommended that any concern about lender due diligence should be addressed by DOE retaining outside legal, technical, and financial experts to supplement its internal expertise in performing the necessary project due diligence and assessing project risks, and that the reasonable costs and expenses of these experts should normally be borne by the sponsors and constitute part of project costs. (Nuclear Utilities at 10-11).
The Investment Bankers expressed views that are generally consistent with those of the Nuclear Utilities. They also noted that in some cases, investors in the AAA government-guaranteed market are restricted, legally or otherwise, from investing in the sub-debt market. They said that requiring investors to own interests through a mandated hybrid instrument in both AAA paper and deeply subordinated “quasi-equity” paper removes both of these financing instruments from their natural market. (Investment Bankers at 1). The Investment Bankers stated that “[t]here is a deep and highly efficient market for `AAA' government guaranteed paper. Investors in that market are distinctly different from those investors who participate in the sub-debt market. Requiring investors to own interests through a mandated hybrid instrument in both AAA paper and deeply subordinated `quasi-equity' paper removes both of these financing instruments from their natural markets.” (Investment Bankers at 1). The 100 percent Government guaranteed debt instruments are purchased by investors who are more risk averse. Investors in non-guaranteed debt instruments are willing to take more risk for the prospect of greater returns on their investments. Verenium also expressed concern about the 90 percent guarantee limitation and the prohibition on “stripping” that are similar to the concerns expressed by the Investment Bankers and the Nuclear Utilities. (Verenium at 4). Verenium suggested that one alternative to 100 percent guarantees would be to allow the non-guaranteed loan to be repaid on a shorter amortization schedule than the guaranteed loan. (Verenium at 6).
According to JP Morgan Securities, Inc. (JP Morgan) it is unclear how lenders would fund the non-guaranteed portions of a partially guaranteed loan on which stripping was prohibited since banks rarely lend for tenures beyond eight to ten years, particularly when the debt is subordinated. JP Morgan further stated that an expectation that lenders would maintain the non-guaranteed portions for the life of such loans is unrealistic, and that by taking a second lien interest, a lender's participation is tantamount to an equity investment. (JP Morgan at 1).
Bechtel contended that a commercially viable market does not exist for a hybrid instrument for which stripping is barred. Eliminating stripping, according to Bechtel, is not in line with other Federal loan guarantee programs and would increase the cost of project debt by eliminating a bank's ability to utilize various securitization vehicles, such as the Private Export Funding Corporation (PEFCO) or Govco, Inc., the special purpose lending vehicle of Citigroup, which provide efficient and cost effective vehicles to fund federally guaranteed loans. Bechtel further agreed that the first lien requirement in the NOPR is inconsistent with established norms in project lending and that the Export Import Bank of the United States, the Overseas Private Investment Corporation, and the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) program at the Department of Transportation treat any non-guaranteed debt as pari passu in terms of both payment and security. (Bechtel at 2).
Power Holdings of Illinois LLC (Illinois), however, supported the 90 percent loan guarantee limitation in the NOPR, and the proposed prohibition on stripping. (Illinois at 1). Baard also agreed with the 90 percent limitation. Baard said that this limit was an improvement over the 80 percent of debt instrument guarantee limit set forth in the August 2006 Guidelines, and that it would be an effective mechanism for ensuring that investors/lenders perform rigorous due diligence prior to committing their money for a project. (Baard at 5).
2. Equity Requirements for Project Sponsors
Almost all parties that submitted comments on this issue were opposed to a fixed numeric minimum equity requirement. Illinois agreed with the concept that Project Sponsors should be required to have a significant equity stake in a project, but said DOE should not adopt a fixed, numeric minimum equity percentage, threshold, or requirement. Illinois asserted that equity structure in a given project can vary with a number of factors, including technology used and the market for the project's products, and that imposing a fixed, numeric minimum equity percentage threshold or requirement for projects that might for good reason fall below such a threshold could result in the exclusion of otherwise worthy projects. (Illinois at 2). NEI also stated that DOE should not mandate a specific minimum equity percentage for eligible projects. The appropriate debt/equity ratio, according to NEI, will vary across technologies and sectors and among projects, and should be determined by project economics. (NEI at 23). Bechtel offered similar comments. (Bechtel at 2).
3. Other Governmental Assistance
Most parties commenting on this issue stated that other governmental assistance to a project should be considered beneficial to the project and to DOE, and should not be used to exclude projects from consideration for the Title XVII program or regarded as a negative factor when evaluating the merits of particular projects. With respect to DOE's consideration of the “extent the Applicant will rely on other federal and non-federal governmental assistance” (section 609.7(b)(9) of the proposed regulations), Iogen agreed that this factor should be considered, but a primary consideration should be whether there was significant private equity involvement in a proposed project. Iogen stated that under no circumstances should Federal government assistance be counted toward any equity contribution requirement. Iogen agreed that DOE should include Federal government assistance only as an evaluation factor, and not as one of the six disqualifying conditions listed at section 609.7(a) of the proposed regulations because, among other things, government assistance reduces total project costs, thus reducing the size of any loan guarantee, increases the likelihood of debt repayment, allows DOE to better leverage its participation in a variety of projects, and is an indicator of strong political and community support. Iogen also stated that presence of Federal government assistance does not, in itself, limit the level of private commitment. For example, Iogen stated that a project with 20% federal assistance, a 50% loan guarantee, and 30% equity, could reasonably be preferred over a project with an 80% loan guarantee and 20% equity. (Iogen at 4-5).
Bechtel stated that multiple forms of governmental assistance should not be a negative factor because tax and other incentives are intended to be complementary, not exclusive, and multiple forms of governmental assistance could enhance a project's economics and creditworthiness. Therefore, Bechtel asserted that subsidy costs should be adjusted to reflect the reduced risk of default where there are multiple forms of governmental assistance. (Bechtel at 6). The Nuclear Utilities also expressed the view that other forms of governmental assistance should be viewed positively. (Nuclear Utilities at 20-23). CURC stated that if a project obtains other forms of governmental assistance, the cost of the loan guarantee should be adjusted to reflect the reduced risk of default on the underlying debt obligation as a result of the other support. CURC said that DOE should not limit a project's ability to receive more than one form of federal assistance. (CURC at 5).
4. Credit Assessment and Rating Requirements
The NOPR proposed that a project sponsor must obtain a preliminary credit assessment and subsequent credit rating for a project without a loan guarantee from a recognized credit rating agency. (609.6(b)(21) and 609.9(f)). Most commenters that expressed a view on this issue stated that a credit assessment or rating was not very useful, and too expensive and that a better value could be obtained from entities other than established rating agencies.
USEC Inc. (USEC) stated that it does not understand the purpose of proposed § 609.9(f) which required that applicants obtain a credit rating from a nationally recognized rating agency reflecting the final term sheet without a Federal guarantee. USEC said that such a requirement would add to the cost of the application process with little benefit since the credit rating agencies are ill-equipped to evaluate the technical risks associated with new or emerging technologies. USEC stated that credit rating agencies look to historical data—not clearly relevant to new or emerging technologies. On the other hand, USEC said that DOE is positioned to conduct such an evaluation on its own with the other information provided in the application. (USEC at 5).
SP stated that the credit assessments provided at the time of application will likely have to be limited to a rating category (with the `+' and `−' signs that normally accompany SP ratings), because project documentation will likely be in a very preliminary state at this point. (SP at 8). Goldman Sachs recommended that the requirement for a credit assessment as part of the application submission be eliminated from the final rule although sponsors should be able to elect to obtain a credit assessment as part of their application submission if they wish to do so. Goldman Sachs stated that obtaining a credit assessment is a long process that “frequently consumes valuable time and resources during the most critical stages of negotiation.” Also, Goldman Sachs asserted that “the primary rating agencies often do not provide a final rating until all documents have been negotiated and closing is imminent” and that the rating will “be highly dependent on the existence of the loan guarantee, and thus a rating without the guarantee will be of little substantive value.” (Goldman Sachs at 9).
FES and PW proposed that DOE set a project cost threshold of $25 million for waiving the credit rating requirement. (FES at 3, PW at 2). Illinois also stated that DOE generally should have authority to waive any credit rating requirement. However, according to Illinois, a simple project size threshold for waiving the requirement would oversimplify the circumstances under which DOE would consider such waivers. Illinois stated that rather than a simple project size threshold, DOE should set forth other criteria, such as a ratio of project debt to sponsor equity, the duration of the loan guarantee or the credit subsidy cost, in addition to the project size. (Illinois at 2).
1. Lender Risk, Stripping and Pari Passu
The primary goals of the Title XVII loan guarantee program are to encourage and incentivize the commercial use in the United States of new or significantly improved energy-related technologies and to achieve substantial environmental benefits.
Sections 609.10(d)(3), (4) and (13) of the NOPR provided, in sum, that (1) DOE could guarantee no more than 90 percent of any debt instrument for an eligible project, (2) the guaranteed portion of any debt instrument could not be stripped from the non-guaranteed portion, and (3) DOE must have a first lien on all project assets pledged as collateral for a guaranteed loan. The vast majority of comments DOE received were in opposition to those provisions.
DOE is persuaded by the comments it received that identified a number of problems and difficulties with proposed sections 609.10(d)(3) and (4), and therefore is revising those sections in the final rule. Because the program focuses on innovative technologies, for which there often is not readily available private market financing at reasonable terms, and thus there is not always a readily available commercial market substitute for debt that does not receive a Title XVII guarantee, DOE has determined that an alternative approach is more appropriate.
Sections 609.10(d)(3) and (4) now provide that DOE may guarantee up to 100 percent of the amount of a loan for a project that receives a Title XVII loan guarantee, so long as all loan guarantees DOE issues for a particular project do not exceed 80 percent of Project Costs, which is a limitation imposed by Title XVII itself. As provided in the NOPR, section 609.7, DOE will evaluate the extent to which the requested amount of the loan guarantee, and the requested amount of guaranteed obligations are reasonable, relative to the nature and scope of the project.
In accordance with Federal credit policy, DOE will issue 100 percent loan guarantees only if the loan is issued and funded by the Treasury Department's Federal Financing Bank. DOE also will issue loan guarantees for loans from private lenders where the guarantee sought is for less than 100 percent of the loan amount, and the final rule provides that if DOE guarantees 90 percent or less of a Guaranteed Obligation, the Eligible Lenders and other Holders will not be prohibited from separating the guaranteed portion from the non-guaranteed portion of the debt instrument. Thus, in cases where a lender issues a loan and receives a guarantee for more than 90 percent of the loan amount, the non-guaranteed portion cannot be stripped from the guaranteed portion.
If a loan is not 100 percent guaranteed, it can be obtained from an approved Eligible Lender. Moreover, if 90 percent or less of a loan is guaranteed by DOE, the Department is allowing Eligible Lenders and other Holders to strip the guaranteed portion of a Guaranteed Obligation from the non- guaranteed portion. DOE believes that in such circumstances, DOE still will gain the benefit of private sector debt market underwriting, but at the same time will ensure that Eligible Projects are able to obtain necessary financing, and be able to do so on reasonable terms.
In the unique context of loan guarantees for innovative energy projects, DOE believes that the changes made from the NOPR will assist projects in obtaining financing on reasonable terms. DOE recognizes that Federal credit policy generally encourages Federal credit programs to require that guaranteed obligations have a non-guaranteed portion. As noted above, the program focuses on innovative technologies for which there is often not readily available private market financing at reasonable terms, and thus there may not always be a readily available commercial market substitute for debt that does not receive a Title XVII guarantee. Therefore, the Department has concluded that these terms are necessary and appropriate to carry out the purposes of this program.
DOE has determined that it should allow stripping on some partially guaranteed loans—i.e., only those on which DOE has guaranteed 90 percent or less of the Guaranteed Obligation. As noted above, the Title XVII program presents a unique situation—one in which loan guarantees will be issued for projects that otherwise might have little or no access to financing on reasonable terms, primarily because of the innovative nature of the eligible technologies and projects.
Where DOE guarantees more than 90 percent of the amount of a Guaranteed Obligation, the guaranteed portion cannot be stripped from the non-guaranteed portion of the loan. In such situations, DOE is concerned that there may not be a sufficient amount of non-guaranteed debt to cause reasonable and appropriate debt market due diligence being performed.
DOE notes that several of the commenters cited other Federal credit programs as justification for removing taxpayer protections proposed in the NOPR; in several cases Title XVII is significantly different from the programs cited. For example, financing under the TIFIA program is statutorily limited to 33 percent of eligible project costs, and therefore there is significant equity and lender participation. The Title XVII program is likely to be extremely large, with $4 billion of loan volume already provided under the 2007 Continuing Resolution, and $9 billion requested in the 2008 President's Budget. DOE already has pre-applications from the first solicitation requesting in excess of $25 billion in loan guarantees. The Title XVII program involves advanced technologies, which by nature are riskier than technologies already in commercial operation.
DOE believes its resolution of the issues addressed above will help ensure that eligible projects of all sizes can gain access to credit on reasonable terms. DOE is concerned about project access to capital markets at reasonable interest rates and on reasonable terms and conditions, and believes that the modifications it has made to the regulations in this final rule address the commenters' concerns, while reducing the chance that unnecessary risks and costs are placed on the Federal taxpayers.
It is customary and common practice in project financing for multiple lenders to enter into a pari passu structure with respect to assets pledged as collateral to secure debt. If such a structure were employed for the Title XVII program, DOE, pursuant to its Loan Guarantee Agreement, and lenders that held non-guaranteed debt, could share proportionately in the proceeds from the sale of project assets pledged as collateral if there were a default and the collateral was sold. In the NOPR, DOE interpreted Title XVII's requirement that DOE have a superior right to project assets pledged as collateral to prohibit pari passu structures, and as requiring all other lenders to be subordinate to DOE.
In the final rule, DOE has modified its regulations to provide that DOE and the Holders of the non-guaranteed portion of the Guaranteed Obligations may share the proceeds received from the sale of project assets. The Department interprets the Title XVII provision requiring DOE to have a superior right to project assets pledged as collateral to mean that DOE retains superior rights within the meaning of the statute even if the Department shares the proceeds from the sale of project assets with the Holders of the non-guaranteed debt as long as DOE controls the disposition of all project assets. Under this interpretation, it is solely within DOE's authority to determine whether, and under what terms, the project assets will be sold at all. For example, DOE retains—as a superior right—the ability, even over the objections of other parties, to decide against the liquidation of project assets and instead to complete construction of the project, subject to appropriations, or to sell an incomplete project to an entity that will complete the project.
The Department views this interpretation as being consistent with section 1702(g)(2)(A) of the Act, which provides that if DOE makes a payment on the guaranteed debt, the Department is subrogated to the rights of the Holder, including the right to “complete, maintain, operate, lease, or otherwise dispose of any property acquired pursuant to such guaranteed or related agreements, or permit the borrower * * * to continue to pursue the purposes of the project.” The Secretary cannot do any of those things unless the Secretary owns or controls the entire project. There is no provision, for example, for the Secretary to purchase the interest of the non-guaranteed lenders or holders of debt that is not supported by a Title XVII guarantee. Furthermore, section 1702(g)(2)(B) provides that the rights of the Secretary, with respect to any property acquired pursuant to a guarantee or related agreements, shall be superior to the rights of any other person with respect to the property, and this provision limits DOE's rights to the collateral to “property acquired pursuant to a guarantee.”
Insofar as it is applicable here, the Department reaffirms the view it expressed in 1980 in connection with the loan guarantee program for alternative fuels, that while DOE is required under section 1702(g)(2)(B) to have a first lien on all project assets, the Department is not prohibited from negotiating and agreeing with parties about how the proceeds from the sale of collateral will be shared. Section 19 of the Federal Nonnuclear Energy Research and Development Act of 1974, Loan Guarantees for Alternative Fuel Demonstration Facilities, Pub. L. No. 93-577, as amended, (Alternative Fuels Act), contained provisions similar to section 1702(g)(2)(B).  Section 19(g)(2) of the Alternative Fuels Act provided, in part, that:
The rights of the Secretary with respect to any property acquired pursuant to such guarantee or related agreements shall be superior to the rights of any other person with respect to such property.
In the preamble to the final rule implementing section 19(g)(2) of the Alternative Fuels Act and in response to arguments by commenters concerning the issue of pari passu sharing of the project collateral, DOE stated as follows:
Subsection 796.11(a)(9) of the proposed regulation required that the guaranteed loan not be subordinate to any other loan for the project and that the guaranteed loan be in a first lien position with respect to assets of the project and other collateral which are pledged as security for repayment of the guaranteed loan. DOE construes the Act to require this, and that only with regard to assets not directly related to the project, but which may be pledged as collateral, may a less than first lien position be acceptable to DOE.
(45 FR 15468, 15471).
DOE today adopts the same interpretation of Title XVII as it adopted in regard to nearly identical language in section 19(g)(2) of the Alternative Fuels Act. Thus, DOE interprets the language in Title XVII as requiring a first lien on all project assets, but as allowing DOE to treat assets pledged to secure a project loan that are not project assets the same as project assets. Consistent with the regulations concerning the disposition of proceeds from the sale of assets pursuant to the Alternative Fuels Act (section 796(f) and (k)), section 609.15 of today's final rule also provides that where DOE only guarantees a portion of a Guaranteed Obligation, the Secretary may enter into inter-creditor or other arrangements to share the proceeds from the sale of project collateral with lenders or other holders of the non-guaranteed portion of the Guaranteed Obligation. DOE may, at the discretion of the Secretary, share the proceeds from the sale of collateral. DOE is limited, however, to no greater than a pro rata share for the non-guaranteed Holder. However, in cases where DOE guarantees 100 percent of a loan, the loan must be issued to and funded by the Federal Financing Bank. In those circumstances, DOE will have a first lien priority on project assets pledged as collateral and all other debt for the project at issue must be subordinate to the Guaranteed Obligation.
2. Equity Requirements for Project Sponsors
Title XVII does not itself impose any minimum equity contribution requirement on projects that receive Title XVII loan guarantees. Section 1702(c) provides that DOE can guarantee loans for no more than 80 percent of the cost of a project, but does not place any requirements on where or how a Project Sponsor may obtain other funds for an Eligible Project. Nonetheless, in the NOPR, the Department explained that DOE believed it was prudent to require Project Sponsors to have a substantial equity stake in a project before the project could receive a Title XVII loan guarantee. Thus, DOE proposed (in section 609.7(a)(6) of the proposed regulations) that applications would be denied if “[t]he applicant will not provide a significant equity contribution.”
Most commenters agreed that the regulations should contain an equity contribution requirement, and that the regulations should not set a fixed numeric minimum equity percentage threshold or requirement. Commenters said some projects might have good reasons for not meeting some numeric threshold, and that a specific numeric threshold might result in the rejection of otherwise meritorious projects. Some commenters objected even to DOE requiring by rule that projects have a “significant” equity contribution.
A Title XVII loan guarantee will be offered only to projects where the project sponsors make a significant equity contribution toward the Project Cost. If private investors or project sponsors do not see fit to make any significant equity investment in a capital project, it is hard to see why DOE should back loans for the project with a Federal guarantee. Such projects might well be appropriate for grant money or research and development assistance, but in light of the overall purposes of Title XVII and the statutory requirement that DOE can issue loan guarantees for no more than 80 percent of project cost, the Department believes it would not be prudent to eliminate any equity requirement for the program. It is in the interest of the Federal government to ensure that borrowers have a significant equity interest in the assets to ensure the financial success of the project. Eliminating the requirement might result in project sponsors financing a project entirely through a combination of government-backed loans, and other loans and government assistance. The Department does not believe such an approach would be consistent with the establishment of an overall sound Title XVII program.
Furthermore, DOE will consider the type and degree of equity contribution proposed for an eligible project for a Title XVII loan guarantee to determine whether such contribution is significant and meets the eligibility requirements for a loan guarantee agreement. In evaluating whether a borrower or project sponsor is contributing significant equity to a project, the Department will consider “equity” to be cash contributed by the Borrowers or other principals. Equity does not include proceeds from the non-guaranteed portion of any debt supported by a Title XVII loan guarantee or from any other non-guaranteed debt. The value of other forms of government financial assistance or support also does not constitute “equity.” The Department has set forth this definition of “equity” in section 609.2 of the final rule.
At the same time, DOE agrees with commenters that the Department should not by regulation establish a specified numerical minimum on the equity contribution to an Eligible Project. There likely will be a myriad of financing arrangements and differing circumstances for the disparate types of technologies and projects potentially eligible for Title XVII loan guarantees. The Department believes, based on the record before it, that it should not set at this time a numerical minimum for the equity contribution to an eligible project.
The determination of the significance of the equity contribution cannot practicably be made at the time that the loan application is filed. Thus, DOE has revised section 609.7(a)(6) of the NOPR which stated that an Application will be disqualified if “[t]he applicant will not provide a significant equity contribution” by deleting the words “a significant” and inserting the word “an.” DOE has retained section 609.7(b)(7) which provides that DOE will consider “[t]he amount of equity commitment to the project by the Applicant and other principals involved in the project” when evaluating Applications for Title XVII loan guarantees. DOE will evaluate the amount of equity that will be contributed to a project when evaluating a project against other projects. Section 609.10(d)(5) of today's final rule, however, provides that the Project Sponsors must, at a minimum, have a significant equity investment in a project.
3. Other Governmental Assistance
Section 609.7(b)(9) of the NOPR provided that DOE will consider “whether and to what extent the Applicant will rely on other governmental assistance” when evaluating Applications for Title XVII loan guarantees. In the NOPR preamble, the Department noted that the receipt of other government assistance generally would be viewed negatively. (72 FR 27476).
Several commenters stated that DOE should consider other governmental assistance as a positive and not a negative evaluation factor. As noted above, those commenters asserted that the receipt of other assistance from Federal, state or local governments should be viewed as indicating support for a project and thus adding to its commercial viability, rather than reflecting financial and commercial weakness. Most commenters that expressed a view did believe that it would be appropriate for DOE to at least consider the receipt of other government assistance in evaluating Applications. See e.g. Bechtel at 6, Eastman at 3; and Goldman Sachs at 9.
DOE has retained section 609.7(b)(9) in the final rule as it was proposed in the NOPR. As DOE stated in the NOPR, we recognize that in certain circumstances, multiple forms of Federal assistance to the same project could enhance important national energy policy priorities. We believe the current language in section 609.7(b)(9) is sufficient to address these circumstances.
4. Credit Assessment and Rating Requirements
Section 609.6(b)(21) of the NOPR required the Applicant to submit with its Application a credit assessment for the project without a loan guarantee “where the size and estimated cost of the project justify such an assessment.” Section 609.9(f) of the NOPR proposed to require that not “later than 30 days prior to closing, the applicant must provide a credit rating from a nationally recognized rating agency reflecting the Final Term Sheet for the project without a Federal guarantee.”
Most commenters complained that the rating agency requirements proposed in the NOPR would impose unnecessary costs and burdens on project sponsors, with little corresponding benefit to the Department. (Bechtel, at p. 2-3) Other commenters suggested that the requirement for a credit assessment be eliminated from the final rule. (e.g. Goldman Sachs at p. 9) Two commenters proposed a threshold of $25 million for waiving the credit rating requirement. Another expressed the view that DOE should be able to waive the requirement where appropriate. Two commenters thought that a waiver should not depend on project size, but rather should depend on other factors as well such as the ratio of project debt to sponsor equity.
DOE has retained the credit assessment and rating requirement provisions, 609.6(b)(21) and 609.9(f). DOE believes that these requirements will be beneficial in aiding the Department when it determines the credit subsidy scores for particular projects, and when it assesses and evaluates the risks and benefits of particular projects.
DOE notes the distinction between the credit rating on the overall project debt which lenders or project sponsors may wish to obtain for pricing the debt; and the credit rating without considering the benefit of the guarantee, which will inform DOE's evaluation of the project and estimation of the Credit Subsidy Cost.
DOE agrees that in some circumstances, it may be desirable to waive a credit rating requirement. For example, projects for which project costs fall below a certain level may not warrant the cost of a credit rating, should the cost prove large in comparison to the overall cost of the project. Therefore, in the final rule DOE has added to section 609.9(f) the following language: “where the total Project Cost for an Eligible Project is projected to exceed $25 million.” The Department selected this number because it believes any project that costs below that amount may find it uneconomic to obtain a credit rating and to participate in the Title XVII program. By putting this threshold in place, DOE seeks to support smaller projects.
C. Project Costs
Sections 609.2 and 609.12 of the proposed regulations defined “Project Costs” as those costs, including escalation and contingencies, that are necessary, reasonable, customary, and directly related to the design, engineering, financing, construction, startup, commissioning and shake down of an Eligible Project. Conversely, costs excluded from the definition of Project Costs included initial research and development costs, the Credit Subsidy Costs, any administrative fees paid by the Project Sponsors, and operating costs after the facility has been placed in service.
Public Comments: As noted above, the Department intends to implement Title XVII through the “self-pay” authority provided in the Act. Thus, DOE has no current intention to seek appropriations to pay for the Credit Subsidy Costs of any Title XVII loan guarantees, but rather project sponsors will be required to pay those costs before DOE enters into a loan guarantee agreement. Pursuant to FCRA, the Credit Subsidy Cost reflects the net present value of the estimated payments to or from the Government. It is impossible to tell at this point what the Credit Subsidy Cost will be for any particular project.
Most commenters argued that Credit Subsidy Costs and Title XVII administrative fees that are paid by a project sponsor should be treated as Project Costs. These commenters maintain that the exclusion of Credit Subsidy Costs and administrative fees from Project Cost is inconsistent with the treatment of similar costs in commercial project financing and in other Federal programs. These commenters also state that there is no provision in either FCRA or in OMB Circular No. A-129 that prohibits the inclusion of these costs in a project's financing package. They contend that the inclusion of such fees or costs in the financing package neither increases project risk, nor diminishes the reasonable prospect of repayment of the loan. (See e.g. NEI at pp. 18-19; Nuclear Utilities, at p. 18; and FES at p. 2)
TXU similarly supported the inclusion of Credit Subsidy Costs and administrative fees in total Project Costs and supported making them eligible, at least in part, for the federal loan guarantee. TXU added that total project costs should include 100 percent of the costs to bring a plant into commercial operation, including all financing and start-up costs. (TXU at 7).
SP, however, took a different position from most commenters, and asserted that DOE's proposed definition of the project's total costs is consistent with general market practice, except that, if projects obtain a guarantee from a monoline insurer, the premium paid for such a wrap is generally included in the total cost of the project to be financed. However, its exclusion here appears consistent with the intent of [Title XVII], namely to prevent the subsidy fee itself from potentially becoming a taxpayer liability in the event of default. (SP at 2).
USEC also asserted that Credit Subsidy Costs and administrative fees should be counted as Project Costs. USEC's comments also identified other costs that should be specifically considered to be Project Costs. These include: general and administrative costs; performance incentives paid to employees or officers working on the project (because the project is benefiting from the increased performance); research, development, and demonstration costs that are directly related to the project; and expenses incurred after start-up. USEC said that by excluding potentially large, post-start-up costs, DOE would essentially be requiring an additional equity investment by the project sponsor. USEC argued that DOE should allow these costs as part of Project Costs and evaluate them on a case by case basis when reviewing the economics of a project. (USEC at 6-7).
Beacon recommended that the final rule allow “as an option” the inclusion of Credit Subsidy Costs and administrative fees in the definition of Project Costs. Beacon said that such costs could pose a substantial burden on small businesses and development stage companies unless they are included in Project Costs. (Beacon at 1). Goldman Sachs also recommended that Project Costs be defined to include Credit Subsidy Costs and the administrative cost of issuing a loan guarantee. Goldman Sachs further recommended that Project Costs be defined to include the costs of administrative services provided by affiliates; development expenses; pre-completion operation and maintenance costs; and costs of procurement and testing. Project financings, according to Goldman Sachs, customarily cover all costs associated with the construction of the project, including fees and expenses. To require the project sponsor to cover these costs, in Goldman Sachs' view, would either eliminate the non-recourse nature of the financing or mean that the lenders would have to cover these amounts with a non-guaranteed loan. Moreover, whereas the proposed rule states that the loan guarantee will cover only principal and interest, Goldman Sachs asserted that the loan guarantee should cover all borrower obligations, including without limitation default interest and post-petition interest, reimbursement of letter of credit drawings, prepayment premiums, payments under interest rate hedging agreements, fees, expenses, and indemnification payments. Goldman Sachs said this would be consistent with the definition of “obligations” in project finance loan agreements. (Goldman Sachs at 6). Ameren too opposed the NOPR's exclusion of certain categories of costs from the definition of Project Costs. The NOPR, in Ameren's view, does not explain why the excluded categories are less suitable for a guarantee and Ameren said that the exclusions are “not conducive to encouraging innovation.” (Ameren at 3-4).
DOE Response: For any project that is granted a Title XVII loan guarantee, the Credit Subsidy Cost and administrative costs charged by DOE, are costs that must be paid by the borrower and are necessary terms and conditions of receiving the guarantee. As stated in the SP comments, the DOE position is consistent with the intent of Congress to require such costs be paid by the borrower. Allowing these fees to be included in the Project Costs would increase the amount of debt that could be supported by a Title XVII loan guarantee. As funding is fungible, allowing the Credit Subsidy and Administrative Costs to be financed with the Title XVII loan guarantee could in effect transfer these costs to the taxpayer in the event of default. Furthermore, consistent with the requirements of Public Law 110-5 and as in the NOPR, the final regulations prohibit a Borrower from paying any Title XVII Credit Subsidy Cost with funds obtained from the Federal government, or from a federally guaranteed loan.
While some commenters asserted that other Federal agencies permit items such as Credit Subsidy Costs or similar expenses and administrative fees to be covered by the Federal guarantee issued pursuant to their loan guarantee programs, the Credit Subsidy Cost under Title XVII reflects the subsidy cost of the loan guarantee, as defined in FCRA. It is important to note that this is not comparable to the fees cited in comments which may offset, but do not reflect the explicit subsidy cost for the individual loan guarantee.
To the extent commenters recommended other costs that are not specifically listed in the final regulations for inclusion in the definition of eligible Project Costs, the Department rejects those comments. The Department sees no adequate basis for further revising the rule's definition of Project Costs except as otherwise provided in the final rule.
However, DOE again stresses, just as it did in the NOPR, that the purpose of the Title XVII Loan Guarantee Program is to foster the deployment of qualified innovative technologies that would reduce or sequester air pollutants or anthropogenic greenhouse gas emissions; it is not to assist or support high-risk research into or development of new technologies. Nor is it to assist in the ongoing commercial operations of successful projects. Therefore, costs related to the initial research and development of a new technology or to operating costs will not be accepted as Project Costs for purposes of such guarantees.
Section 609.3 of the proposed regulations required DOE to issue a solicitation to start the process of accepting, reviewing, and ultimately granting applications for Title XVII loan guarantees. This section also set forth certain minimum requirements for each solicitation, including the fees that would be required of persons invited to submit Applications and the criteria that the Department would use to weigh competing Pre-Applications and Applications and to make ultimate selections for loan guarantees. The proposed regulations set forth programmatic, technical, and financial factors, including the percentage of the loan guarantee requested, to be used by DOE to select projects for loan guarantees.
Public Comments: Several commenters stated that DOE should use a “rolling” or “open” application process, as opposed to only accepting Applications for a limited time in response to a particular solicitation. Commenters from the nuclear industry supported this recommendation by pointing to difficulties that may be faced by nuclear project sponsors with a project development timetable that does not match a DOE solicitation. These commenters also noted that DOE is not in a position to assess with precision the market forces that will govern the number of new projects potentially eligible for loan guarantees, or when those projects will need loan guarantees, and contended that other major federal loan guarantee programs—including TIFIA, Ex-Im Bank and OPIC—operate with an open or ongoing (rolling) application process. (NEI at pp. 28-29; Nuclear Utilities at p. 17)
The Nuclear Utilities ask that DOE adopt a flexible “open” application process for large multi-year projects involving more than $2 billion and/or 1,000 MW of generating capacity. (Nuclear Utilities at p. 17) Citi stated that “[b]y accepting applications only in response to a particular solicitation, the DOE loan guarantee process would be unduly prejudicial to projects that happened to have matured to produce the required pre-application materials in the narrow timeframe of a solicitation.” Citi requested clarification that DOE will accept and review applications for eligible projects at any time when sponsors believe that the markets are ready for their investment. This allegedly would not preclude DOE from opening or closing the program for specific technologies at various times. (Citi at 5). Goldman Sachs, Bechtel and USEC likewise recommended an open application process but also supported a simplified three-step process (application, followed by a conditional commitment, followed by negotiation and execution of a loan guarantee agreement). (Goldman Sachs at 8, Bechtel at 7, and USEC at 6) (Bechtel at 6-7). Bechtel indicated that this three-step process is used by other federal agencies. (Bechtel at 7)
Beacon further recommended that language in proposed § 609.4 stating that the Pre-Application must meet all requirements in the solicitation and in the final rule should be modified by changing “must” to “should” or “is expected to.” This change would prevent pre-applications from automatic disqualification if they are missing one item, and would make § 609.4 consistent with § 609.5. (Beacon at 3)
DOE Response: While DOE agrees that an “open” or “rolling” process for Title XVII loan guarantee program applications would give applicants greater flexibility in deciding when, or if, to submit an application to DOE, adopting such a structure at this time would interfere with the Department's ability to select which of the technologies that Title XVII makes statutorily eligible for loan guarantees should be the focus of any such authority made available by Congress. If DOE were to adopt the “window is always open” and “first come first served” approach to Title XVII, as some commenters appear to advocate, then it is possible that all loan guarantee authority provided by Congress at any particular time could be absorbed by only one or a few very large projects, to the exclusion of smaller projects. This could have the result of the program focusing heavily on only certain eligible technologies merely through operation of the rule itself. Moreover, there is no certainty that the projects first through the application door would be in the areas that either the Department or Congress wished to promote at the particular time. DOE should be able to tailor loan guarantee availability to particular technologies and particular projects that are the most promising and that in the Department's judgment will most benefit the Nation. Finally, adopting the open application approach could eliminate the Department's ability to have projects compete against one another for the available loan guarantee authority. Especially in the situation where available authority is likely to be insufficient to satisfy all loan guarantee requests, DOE believes it is desirable for there to be competition among projects for the available loan guarantees, rather than for the authority to be used up on a first come first served basis regardless of the relative merits of potentially eligible projects.
At some future time, after substantial experience has been gained in the administration of the Title XVII program, it may be appropriate and possible for the Department to reconsider this position. In the meantime, however, DOE believes it is appropriate to implement the program by requiring the Department to issue a solicitation for projects, tailored broadly or narrowly as the Department sees fit at the time and in light of programmatic objectives.
The Department thus has decided to adopt a solicitation-based approach to the implementation of Title XVII, as was proposed in the NOPR. The rule provides that each solicitation must set forth relative weighting criteria specifying the factors that will be used to evaluate applications and the relative weighting assigned to each criterion. DOE has considered, but has decided not to require by rule, competitive procedures or requirements to be employed when the Department evaluates applications for loan guarantees. As a practical matter, loan guarantee applications submitted in response to solicitations will be competing against each other for available loan guarantee authority. This enables and indeed requires competition to take place by requiring that each solicitation set forth relative weighting criteria by which applications for loan guarantees will be judged. In that manner, applications will not necessarily be “competed” one against the other, but the evaluation process nonetheless will result in the applications being ranked in such a manner that the applications that best fulfill statutory and solicitation criteria from the Department's perspective will receive higher scores.
DOE is mindful that certain projects, e.g. nuclear power plants, require long lead times prior to the submission of a loan guarantee application, but believes that solicitations can be devised and tailored to particular technologies that accommodate such long lead time requirements consistent with the overarching legislative purpose of promoting technologies that further Title XVII policy goals. Additionally, DOE does not believe it is appropriate to make the language change requested by Beacon to section 609.4 of the final regulations. The listed items to be included with Pre-Application submissions are intended to be mandatory. However, the Department clarifies that a Pre-Application will not necessarily be rejected simply because one or even a few items are not in final form when they are submitted with the initial Pre-Application submission. The Department will exercise reasonable discretion in giving Applicants an opportunity to complete their Pre-Application submissions in a timely manner within the open period provided by a solicitation. DOE, of course, may reject any Pre-Application or Application that it considers incomplete.
E. Payment of the Credit Subsidy Cost
Section 1702(b) of the Act states that: “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.” (42 U.S.C. 16512) Section 20320(a) of P.L. 110-5, however, only authorized DOE to accept Credit Subsidy Cost payments from Borrowers to pay the full Credit Subsidy Costs of loan guarantees with respect to the $4 billion in loan guarantee authority authorized by the CR. Moreover, DOE's intent continues to be to implement the Title XVII program only through the self-pay authority of section 1702(b)(2). As stated in the NOPR, DOE interprets section 1702(b) as authorizing either an appropriation or payment of the credit subsidy cost in full by the Borrower, but Title XVII does not allow and DOE will not allow partial payment of the Credit Subsidy Cost by the Borrower with the remainder covered by a Congressional appropriation.
Public Comments: Several commenters recommended a transparent formula for the calculation of each project's Credit Subsidy Cost. They contend that project sponsors need a reasonably accurate estimate of the subsidy cost early in the development process in order to support multi-billion dollar investment decisions. Otherwise, project sponsors will be forced to engage in lengthy negotiations before they know the amount of the Credit Subsidy Costs they will be required to pay, and before they can properly assess their interest in the Title XVII program. (e.g., Dominion at 9; Southern at 2) For regulated electric companies in particular, negotiation with state regulatory bodies concerning recovery of project costs arguably will be impossible without some reasonable estimate of the Credit Subsidy Cost.
NEI suggested that DOE develop written guidance providing the specific considerations that will enter into the determination of the Credit Subsidy Cost for a project and modify the proposed rule to: (1) Provide for early disclosure to an applicant of how DOE expects to apply those considerations in determining the Credit Subsidy Cost for the applicant's project; and (2) afford the applicant an opportunity to respond in writing for the purpose of allowing DOE to determine whether additional considerations and analysis warrant a re-estimate. (NEI at 17-18).
Other commenters seek clarification that when determining subsidy costs, DOE and OMB will evaluate the entire risk profile of the project, including but not limited to creditworthiness of the project and, to the extent of the equity contribution, the project sponsor; the Borrower's exposure to market and commodity risks; and the Borrower's exposure to vendor cost increases or construction delays. According to these commenters, the Department should consider that the more creditworthy the project is, the lower the subsidy cost should be. They ask that the final regulations recognize that greater equity investment, liquidity, and management experience reduce default risk and, therefore, should result in lower subsidy cost. (NEI at 17-18; and Southern at 2)
JP Morgan maintained that the magnitude of the subsidy cost could have a significant impact on a borrower's interest in a loan and a lender's willingness to provide the financing. Given the uncertainty of the Credit Subsidy Cost calculation, JP Morgan recommended that DOE provide borrowers with an option to withdraw their applications upon DOE's notification to the borrower of the subsidy cost to be charged. Similarly, JP Morgan asserted that lenders should be permitted to withdraw any commitments upon notification of the subsidy cost, and that DOE's interpretation of § 1702(b) in the NOPR should be reconsidered in order to permit borrowers to pay part of the Credit Subsidy Costs where there has been a congressional appropriation. (JP Morgan at 2)
USEC asserted that the Credit Subsidy Cost should be small in order to ensure repayment (commensurate with other federal loan guarantees). Apparently in order to keep the Applicant's share of Credit Subsidy Costs small, USEC recommended that DOE seek appropriations for credit subsidy costs because the overall purpose of the Title XVII program is to foster commercial deployment of new and innovative technologies. (USEC at 5). Beacon also maintained that § 609.9(d)(1) of the proposed rule should be modified to permit partial self-funding/partial appropriation of the Credit Subsidy Cost. Specifically, Beacon recommended that DOE should change the parenthetical “(but not from a combination)” in § 609.9(d)(1) to “(including a combination)”. (Beacon at 6). Ameren, too, contended that the NOPR should be revised to allow for the possibility that Congress will appropriate money for payment of the Credit Subsidy Cost. Ameren stated that the regulations should not always require applicants to pay the Credit Subsidy Costs for a guaranteed loan, and encouraged DOE to follow the flexible approach used by Ex-Im Bank. (Ameren at 4-5).
DOE Response: The Department has decided not to alter the proposed regulation dealing with the calculation of Credit Subsidy Costs. With respect to the issue of transparency, the Department certainly understands the need for and importance of a mechanism to allow potential participants in the Title XVII program to calculate an approximate Credit Subsidy Cost for the loan guarantee they are seeking from DOE. The Department currently is working to develop a methodology that can be used to calculate the Credit Subsidy Cost for individual projects under this program. With respect to the comment indicating that the credit subsidy cost should be small, DOE must calculate the Credit Subsidy Cost in accordance with the Federal Credit Reform Act. DOE will calculate the Credit Subsidy Cost of any loan guarantee on a case-by-case basis in accordance with FCRA and OMB Circular A-11. Per the definition in FCRA, the credit subsidy cost reflects the net present value of estimated payments from the government (e.g. default claim payments) and to the government (e.g., recoveries), discounted to the point of disbursement. For any project, the terms and conditions of the guaranteed debt, the risks associated with the project, and any other factor that affects the amount and timing of such cash flows will affect the credit subsidy cost calculation. Factors that mitigate risks will generally lower the credit subsidy cost. We note that the approach used by Ex-Im and recommended by Ameren does not apply here because the fees charged by Ex-Im do not reflect the subsidy cost for the loan guarantee.
The Department and the Office of Management and Budget (OMB) recognize the value to project sponsors and lenders of knowing the earliest reasonable time the appropriate credit subsidy cost for the sponsor's desired loan guarantee. The Department and OMB further recognize that the two agencies must work together to produce any preliminary credit subsidy cost estimate. Accordingly, the Department and OMB are committed to making every effort to agree upon and provide to project sponsors, at the time a Term Sheet is provided, a preliminary credit subsidy cost estimate for the desired loan guarantee, based on information available to the Department and OMB at that time. The final credit subsidy cost determination can only be made at the time of the Loan Guarantee Agreement, and may be different from the preliminary credit subsidy cost estimate, 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.
We note that Applicants are free to withdraw their Applications at any time if they find that the Credit Subsidy Cost is more than the Applicant is willing to pay. The right of an Applicant to withdraw its application does not relieve the Applicant of any obligations to DOE at the time of the withdrawal (including, for example, the payment of outstanding or accrued administrative fees).
On the other hand, we do not agree that lenders in all circumstances should similarly be permitted to withdraw their commitments upon notification of the Credit Subsidy Cost, as recommended by some commenters. The rights of lenders to withdraw will turn on the nature of the commitment that the lender has given to the Borrower.
We also reject the recommendation that Applicants should be able to make partial payment of the Credit Subsidy Cost and rely on appropriations for the remainder of the Credit Subsidy Cost for a particular project. As indicated in the NOPR, DOE interprets section 1702(b)(2) of the Act as not permitting partial payment of the Credit Subsidy Cost by the Borrower, with the remainder coming from an appropriation. DOE believes the statutory language is clear in that regard, but even if it were determined to be ambiguous, DOE would exercise its policy discretion to interpret the statutory provision in the manner set forth herein. Consequently, DOE adheres to the interpretation of this provision set forth in the NOPR, and retains in the final rule the all or none principle with respect to the payment of Credit Subsidy Costs, unless otherwise provided by statute. The Department notes that the final rule does not prohibit the use of appropriations to pay for those Credit Subsidy Costs—indeed, Title XVII explicitly allows that. But DOE has no current intention to seek appropriations to pay Credit Subsidy Costs for any projects.
F. Assessment of Fees
Section 1702(h) of the Act requires DOE to “charge and collect fees for guarantees” to cover the administrative cost of issuing a Loan Guarantee. Proposed sections 609.6, 609.8, and 609.10 provided that DOE would collect fees for administrative expenses covering all phases of an Eligible Project. As defined in proposed section 609.2, these fees consist of the administrative expenses that DOE incurs during: (1) The evaluation of both the Pre-Application, if a Pre-Application is requested in a solicitation, and the Application for a loan guarantee; (2) the offering of a Conditional Commitment, the execution of the Term Sheet, and the negotiation and closing of a Loan Guarantee Agreement; and (3) the servicing and monitoring of the Loan Guarantee Agreement, including during construction, start-up, commissioning, shakedown, and the operational phases of an Eligible Project.
Public Comments: Several commenters stated that administrative fees should be known, quantified, and/or fixed at the time an application is submitted to DOE. Beacon, for example, recommended that all fees should be quantified in advance as a percentage of the loan amount or in a formula based on the loan amount, and said DOE should make a conforming change to the proposed rule. Beacon commented that knowing the basis of fee amounts arguably would facilitate the calculation of project costs and alleviate the burden of cost uncertainties on small businesses and development stage companies. (Beacon at 1). Ameren sought clarification as to how DOE anticipates recovering the costs associated with evaluation of Pre-Applications that progress no farther in the process. Ameren asserted that the costs should be borne by DOE rather than from funds made available for the issuance of loan guarantees. Ameren stated that “[i]t would be inappropriate to reduce funds specifically appropriated for loan guarantees to cover Department administrative expenses that the Department has chosen to bear.” (Ameren at 5-6).
DOE Response: DOE recognizes the concern of several commenters on the advantages of a well-understood formula for calculating administrative fees. The Department may at some future time take action with respect to administrative fees but is not doing so now. The fees are intended to recover only DOE's administrative costs in managing the Loan Guarantee Program. A fee schedule will be published by DOE in the near future.
We reject Ameren's recommendation that the costs of administering the Loan Guarantee Program should be borne by DOE. Section 1702(h) of the Act calls for DOE to “charge and collect fees * * * sufficient to cover applicable administrative expenses” of the Title XVII program. Therefore, while DOE does have discretion to determine which administrative expenses should be properly deemed “applicable” to this program and/or to particular applications and thus recovered from program applicants or participants, the Department certainly is not free to determine that it will recover none of its administrative costs from applicants or participants and, instead, fund the costs of the program through appropriations from Congress.
G. Eligible Lenders and Servicing Requirements
The NOPR stated that participating Eligible Lenders or other servicers must meet certain eligibility, monitoring, and performance requirements. These requirements, which were set forth in sections 609.2 and 609.11 of the proposed regulations, were intended to ensure that the Eligible Lender or other servicer had the financial wherewithal and appropriate experience and expertise to meet its fiduciary obligations in connection with the debt guaranteed by DOE. Section 609.10(g) of the proposed regulations also provided that a lender must provide written notification to DOE prior to the assignment or transfer of any portion of a Guaranteed Obligation.
Public Comments: TXU stated that “[a]ny lender providing debt capital to a project on a limited recourse basis would be performing an exhaustive due-diligence process, using appropriate expertise to analyze the risks.” TXU asserted, therefore, that the duty of care specified in the regulations is unnecessarily duplicative of the process that the lender will use irrespective of the Department's involvement as guarantor. Additionally, TXU contended that any specific duties such as notice requirements should be assigned to an Administrative Agent or Lending Agent and that debt held by other lenders should be freely marketable without administrative burden on all lenders. (TXU at 8). WMPI Pty., LLC (WMPI) recommended that DOE revise the requirements proposed for lenders to take into account that eligible projects are more likely to be financed in capital markets by a group of bondholders through a public offering than by a single lender. Specifically, WMPI pointed out that a commitment letter would not be issued where there is a bond issuance and recommended that DOE recognize this fact in the final rule. WMPI also asserted that the final regulations should be revised to take account of the fact that interest charges and repayment schedules are not known in advance of a bond sale and, therefore, regulations calling for copies of loan documents containing all of the terms and conditions of the loan, including interest charges and principal repayment schedules, will be inapplicable if the financing is done through a bond public offering. (WMPI at 11-13).
Beacon recommended that the language “including a qualified retirement plan, or governmental plan” be deleted from the definition of Eligible Lender in proposed section 609.11(a)(1) because small businesses and development stage companies may need to approach financial institutions that may not have the specified plans. Beacon also recommended the entirety of proposed section 609.11(a)(6) be deleted. That language would require eligible lenders to have experience as the lead lender or underwriter by presenting evidence of its participation in other energy-related projects. Beacon maintains that this requirement is unduly restrictive because not many lenders have such experience and it is also generally irrelevant since the loan guarantee program is limited to new or significantly improved technologies. (Beacon at 7).
Goldman Sachs asserted that, except for certain critical requirements (e.g., eligible lenders are disqualified if they have been disbarred from participation in a Federal government contract), the provisions in the NOPR regarding the eligible lender should apply only to the lead lender. This is necessary, Goldman Sachs argued, because only a small number of lenders will be able to meet the standards set forth in the NOPR, e.g., will have the experience originating and servicing loans similar in size and scope to the projects that will be the subject of loan guarantee applications; or be able to demonstrate experience as the lead lender in other energy-related projects. Particularly as regards the expected financing needs of nuclear power projects, Goldman Sachs maintained that the potential lending pool should be kept as large as possible. (Goldman Sachs at 8).
DOE Response: The Department endorses the idea of maximizing the pool of Eligible Lenders and of allowing the use of loan servicers that may not be Eligible Lenders but that otherwise meet all applicable standards.
In addition, in response to comments that DOE finds persuasive, the Department has eliminated proposed section 609.11(a)(1) from the final rule. Furthermore, while DOE rejects Beacon's suggestion that the Department delete the entirety of section 609.11(a)(6) of the proposed regulations, we did expand the definition. While it is arguably true that the pool of servicers might be increased even further if section 609.11(a)(6) were completely eliminated, deletion of this provision altogether would not be consistent with DOE's desire to establish a program where there was a reasonable assurance of repayment in connection with guaranteed loans. We note, however, that in the final rule, section 609.11(a) and (b) do not apply to a loan servicer unless the servicer is also the Eligible Lender.
In response to WMPI's comments, DOE believes that today's final rule is flexible enough to support bond financing. Among other things, the definition of “Holder” is sufficiently broad to cover the issuers of that type of debt.
H. Federal Credit Reform Act of 1990 (FCRA)
FCRA provides that for any federal credit program, new direct loans and loan guarantees may not be made unless authority has been provided in advance in appropriations act(s). See 2 U.S.C. 661c(b). Title XVII authorizes the issuance of loan guarantees where the credit subsidy cost, calculated in accordance with FCRA, is paid either through appropriations or by the borrower receiving the loan guarantee from the Department. On February 15, 2007, Public Law 110-5 was enacted. That statute provides DOE with the necessary authority, consistent with FCRA and section 1702, to guarantee in the aggregate up to $4 billion in loans for Title XVII projects. The authority to issue guarantees, however, was limited to Borrowers who pay the applicable Credit Subsidy Cost. No general funds are available to pay Credit Subsidy Costs.
Public Comments: A number of commenters questioned DOE's view that authority in an appropriations act is needed for the issuance of Title XVII loan guarantees. These commenters pointed to a statement by the Government Accountability Office (GAO) that Title XVII itself provides adequate authority for DOE to issue loan guarantees without the need for any additional authority in an appropriations act, provided DOE employs the Title XVII “self-pay” authority. Specifically, by letter dated April 20, 2007, GAO indicated its belief that because Title XVII allows for Credit Subsidy Costs to be covered by appropriations or by a payment from the borrower, where the recipient of a loan guarantee fully funds the Credit Subsidy Cost for its loan guarantee, no appropriations act authority should be required. Some commenters added that if DOE plans to adhere to the view that appropriations act authority is required for all Title XVII loan guarantees, it must seek and obtain an amendment to Title XVII or sufficient appropriations act authority to allow the Title XVII loan guarantee program to succeed.
DOE Response: The Department does not interpret section 1702(b) of the Act as providing either budget authority or other authority to make any individual loan guarantee, as is required by FCRA. Instead, DOE reads the Act and FCRA in harmony, which means that while Title XVII authorizes DOE to carry out the loan guarantee program, the Department may not issue any loan guarantees until it has received budget authority or is otherwise provided authority to make guarantees in an appropriations act. While the Act authorizes payment from a borrower as an alternative source of funding, any such alternative source of funding does not relieve DOE from the necessity of obtaining authority in an appropriations act for the issuance of any loan guarantees, even in cases where the Credit Subsidy Cost will be paid by the borrower or project sponsor and no appropriations are used to pay such costs. Congress acted consistent with this interpretation of Title XVII and section 504 of FCRA when, in section 20320 of Public Law 110-5, it authorized a $4 billion loan guarantee limitation and required the use of the self-pay authority of Title XVII for the loan guarantee authority provided by Public Law 110-5.
In the absence of the Title XVII authorization for DOE to receive borrower-paid funds to pay for the Credit Subsidy Cost of a particular loan guarantee, DOE would not have the ability to defray the Credit Subsidy Costs for loan guarantees in that manner. Title XVII clearly authorizes those costs to be covered either with appropriated funds or with borrower paid funds. Furthermore, Title XVII and FCRA, read together, require DOE to obtain authority in an appropriations act to issue loan guarantees, even when employing the Title XVII self-pay authority.
Section 20320 of Public Law 110-5 does three things: (1) It provides a loan guarantee volume limitation of $4 billion; (2) it requires that borrower self-pay the Credit Subsidy Cost; and (3) it prohibits the use of general fund appropriations for such costs. In enacting Public Law 110-5, Congress acted consistently with the Administration's view that authority in appropriations acts is required in advance before a loan guarantee can be issued. Therefore, for the $4 billion authorized by Public Law 110-5, DOE will implement the program with self-pay authority. Furthermore, DOE intends to continue to implement the Title XVII program through the self-pay authority provided by the Act and has no current intention to seek appropriations to pay Credit Subsidy Costs for any project.
I. Default and Audit Provisions
Title XVII, sections 1702(g) and 1702(i), require DOE to promulgate regulations to address default and audit requirements (42 U.S.C. 16512(g), (i)). Sections 609.15 and 609.17 of DOE's regulations, respectively, address these requirements. These provisions will apply to all loan guarantees issued under the Title XVII program.
Public Comments: USEC expressed concern that the Department's assertion of audit authority could be interpreted as requiring application of the Federal Acquisition Regulations (FAR). (USEC at 6) Other parties were concerned that after-the-fact audits could reduce the amount of project costs and the extent of the guarantee coverage. According to Bechtel, in particular, such a requirement would make the guarantee a conditional commitment. (Bechtel at 5-6) These parties pointed out that in project financing, an independent engineer is customarily used to review and certify costs prior to each loan disbursement and they recommended this approach be adopted in DOE's regulations. In Bechtel's view, once a disbursement is made, the guarantee should be unconditional and not subject to reduction in a post-disbursement audit. (Bechtel at 5-6).
Goldman Sachs recommended that the final rule clearly provide for the guarantee to be available in the case of defaults other than non-payment of principal and interest without the need for a DOE determination of material effect. Goldman Sachs maintained that as proposed, the rule would prevent lenders from making a demand on the guarantee in the case of defaults other than non-payment of principal and interest unless DOE agrees, and would potentially decrease the pool of lenders willing to participate. Goldman Sachs also recommended the adoption of a “well-defined, market-based, and court-tested” mechanism for handling default and suggested that DOE look to the monoline insurance market which provides credit enhancement to capital markets transactions. (Goldman Sachs at 4-5)
DOE Response: DOE clarifies that the final rule and the Title XVII loan guarantee program are not subject to the FAR. The Department also clarifies that the audit provisions do not render the loan guarantees conditional, but that the need to retain audit authority is necessary to prevent fraud and abuse and should in no way be construed as limiting the enforceability of the Title XVII Loan Guarantee.
DOE does not accept Goldman Sachs' recommendation that DOE give up its right to approve claims on the guarantees in the event of defaults for circumstances other than non-payment of principal and interest. Inasmuch as DOE likely will be the largest risk taker in any project receiving a Title XVII guarantee, the Department is not being unreasonable in insisting that it have a say about what event can accelerate payments under the Loan Guarantee Agreement.
However, the Department has revised section 609.15(e), which requires lenders to provide supporting documentation to justify a payment demand, to specify that requirements will be provided in the Loan Guarantee Agreement. Also, DOE clarifies that proposed section 609.15(b) is not intended and should not be read to preclude demands for failure to pay principal and interest where there has been a default other than a payment default. A non-payment default can become a payment default if such default is not cured within the time specified in the Loan Guarantee Agreement and the debt is accelerated and thus causes the entire amount of the loan to become immediately due and payable. DOE will retain the audit provision in section 609.17(b) which permits DOE, in the course of conducting an audit, to exclude from or reduce project costs that are determined to be unnecessary or excessive. As indicated above, such an audit provision is necessary in order to protect the Federal government against the possibility of fraud or abuse.
J. Tax Exempt Debt
Section 103(a) of the Internal Revenue Code (IRC), 26 U.S.C. 103(a), provides that “gross income” does not include interest on any state or local bond, with certain exceptions. Section 149(b) of the IRC, 26 U.S.C. 149(b), provides that the section 103(a) exclusion from gross income “shall not apply to a state or local bond if such bond is federally guaranteed.” Section 149(b) in effect converts tax exempt debt to taxable debt when such debt is guaranteed by the Federal government. Accordingly, DOE proposed in section 609.10 of the NOPR to prohibit the Department from directly or indirectly guaranteeing tax exempt obligations.
Public Comments: The Nuclear Utilities stated that section 609.10's prohibition against issuing any loan guarantees that finance directly or indirectly any tax exempt debt is unnecessarily broad, and appears to establish new policy that negates provisions of current law on tax exempt financing. The Nuclear Utilities focused on several exceptions in 26 U.S.C. 149(b)(3)(A), which permit loan guarantees to apply to tax exempt debt obligations under certain conditions, and request that the final rule provide that loan guarantees may be issued for debt obligations if they qualify under such a statutory exception in existence at the time of loan guarantee agreement is executed. Specifically, they request that the prohibition in section 609.10(d)(7) of the NOPR should be amended by adding the proviso, “unless such debt obligations fall within one of the exceptions enumerated in 26 U.S.C. 149(b)