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[Senate Hearing 111-751]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-751

                         LOAN GUARANTEE PROGRAM

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   TO

  RECEIVE TESTIMONY ON THE U.S. DEPARTMENT OF ENERGY'S LOAN GUARANTEE 
 PROGRAM AND ITS EFFECTIVENESS IN SPURRING THE NEAR-TERM DEPLOYMENT OF 
                        CLEAN ENERGY TECHNOLOGY

                               __________

                           SEPTEMBER 23, 2010

                       Printed for the use of the
               Committee on Energy and Natural Resources

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Burr, Hon. Richard, U.S. Senator From North Carolina.............     3
Fertel, Marvin S., President and Chief Executive Officer, Nuclear 
  Energy Institute...............................................    58
Meyerhoff, Jens, President, Utility Systems Business, First 
  Solar, Tempe, AZ...............................................    34
Newell, Timothy, Senior Advisor, U.S. Renewables Group, Santa 
  Monica, CA.....................................................    24
Scott, Michael D., Managing Director, Miller Buckfire & Company, 
  LLC, New York, NY..............................................    41
Silver, Jonathan, Executive Director, Loan Programs Office, 
  Department of Energy...........................................     4

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    73

                              Appendix II

Additional material submitted for the record.....................   111

 
                         LOAN GUARANTEE PROGRAM

                              ----------                              

                      THURSDAY, SEPTEMBER 23, 2010

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. OK, why don't we get started here?
    The purpose of this hearing is to take an assessment of the 
Department of Energy's Loan Guarantee Program. This is a topic 
of great concern to members of this committee. It's also a 
complex subject. I appreciate the efforts of the witnesses to 
help us understand it.
    Unfortunately, though we invited the Office of Management 
and Budget to attend and comment on their role in the process 
they were either unable or unwilling to do so. They have not 
provided us with a witness today. We have asked them to submit 
written testimony for the record and will ask them to also 
respond to any questions that members of the committee and 
myself have for them at the end of the hearing.
    Since this is not the first hearing we've had on this topic 
I'll not go into great depth about the problems that we've had 
with implementing this program. In short, in the 5-years since 
the program was authorized 14 loan guarantees have actually 
been issued, all of them, in the last 14 months, ten of those 
within the last year. While the Department, under Secretary 
Chu's leadership, should be commended for its obvious 
commitment to getting this program moving it's impossible to 
ignore the enormous gap between our efforts and those of our 
competitors overseas.
    Just last week the New York Times had an extensive article 
on the aggressive support China is providing to new clean 
energy ventures which includes everything from rich tax credits 
to subsidized lands to exceptionally cheap capital. While we're 
arguing about whether or not we can afford to restore the $3.5 
billion that was withdrawn from the $6 billion program set up 
less than 2 years ago, they're offering support that is 
measured in the hundreds of billions. While I would not argue 
that we need to match their level of support in order to remain 
competitive there are many other reasons why companies would 
choose to locate in the United States.
    I would argue that we must lift the barriers that currently 
make it impossible to develop and manufacture new clean energy 
technologies here. I'm concerned that there are those, 
including some in the Administration, that view that financing 
is merely another benefit, like tax credits, to be cut when 
other needs dictate rather than as a remedy to a fundamental 
market failure that is acting as a barrier to domestic 
technology development. What I believe those skeptics fail to 
recognize is that though banks are often happy to finance the 
next factory of an established company or the tenth deployment 
of a developed technology, they have very little interest or 
inclination in participating in the first deployment of a 
technology.
    There is simply too much uncertainty both in the technology 
and in the market, too many other attractive investments to 
spend the significant time required to focus on new risks. As 
our international competitors have already recognized the 
government needs to step in in these circumstances. Biofuels is 
a good example.
    Although we passed laws that would seem to create a stable 
market for biofuels in the United States, companies are finding 
it impossible to get financing for large scale operations. 
Banks, investors and buyers won't commit unless they've seen 
commercial scale production and until completing technology--
competing technologies have sorted themselves out. The result 
is that our biofuels targets go unmet as companies remain stuck 
in the pilot projects stage of development.
    This is causing domestic companies to look elsewhere to 
develop and to subsequently manufacture their technologies 
beginning the cycle of further research and refinement and 
continued production there rather than here where the 
technology, in many cases, was originally developed. I believe 
it is this risk that we need to balance against any perceived 
risk of failure of a given project. Congress has repeatedly 
committed itself to taking on this market failure in 2005 
Energy bill, in the 2007 Energy bill, in the Recovery Act's 
funding and in this committee's bipartisan efforts to develop a 
robust successor program to the Clean Energy--in the name of 
the Clean Energy Deployment Administration.
    What I'd like to see us explore today is the level of the 
Administration's commitment to the effort, not just in the 
Department of Energy which I'm persuaded does have a commitment 
in this area, but at other key decision centers such as the 
Office of Management and Budget. The President said on many 
occasions that the American people will not be satisfied with 
second place in the race to develop clean energy technologies. 
Unless we fix this problem with financing I fear we are 
destining ourselves to be in second place, if that high in the 
ranking order.
    [The prepared statement of Senator Landrieu follows:]

    Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From 
                               Louisiana

    Mr. Chairman, thank you for holding this hearing on DOE's loan 
guarantee programs. I appreciate the opportunity to discuss their 
effectiveness and their impact on our country.
    The first loan guarantee program, often referred to as section 
1703, was authorized in the 2005 Energy Policy Act. I supported this 
piece of legislation because it does many good things, including 
authorize this program which helps innovative clean energy technologies 
that are typically unable to obtain conventional private financing due 
to high technology risks.
    Luckily, Louisiana has already benefited from this program. Red 
River Environmental Products in Coushatta, LA is the recipient of a 
$245 million DOE loan guarantee to build an activated carbon 
manufacturing facility. Activated carbon is the leading technology for 
reducing mercury emissions from coal-fired boilers and can reduce 
mercury emissions by up to 90 percent by absorbing the mercury.
    This is important to improving our environment and helping 
eliminate mercury pollution in our seafood.
    While Louisiana is grateful for this award, I am troubled to hear 
that there are approximately 170 other applicants in the pool that are 
frustrated with the slow approval process of awards and the lack of 
ability to review their rejected applications. I hope that those kinks 
can be worked out as quickly as possible to make this program more 
efficient, which in turn, should help create more jobs and investment 
in our economy.
    In addition, I recently learned of another problem with the DOE's 
administration of the loan guarantee program that I hope can be 
resolved quickly.
    The maritime industry informs me that DOE has taken the position 
that they do not need to abide by the Cargo Preferences Act when 
administering this program. Under that law, any U.S. financed project, 
including guarantees made by or on behalf of the U.S., must use U.S. 
flagged vessels for at least 50 percent of the goods shipped by water.
    I find it perplexing that DOE would take this position when the 
entire purpose of these loan guarantee programs is to spur domestic 
development and job creation. I'd like to understand why DOE believes 
utilizing foreign flagged vessels, which will not supply domestic jobs, 
is in the better interest of the U.S. I hope DOE can see the error of 
their position and change it immediately.
    Finally, I would like to speak to the other DOE loan guarantee 
program, the Advanced Technology Vehicle Manufacturing program, or 
ATVM.
    A very innovative company named V-Vehicle plans to re-quip a shut-
down plant in Monroe, Louisiana. This would transform communities in my 
state as the production facility would bring approximately 1,400 direct 
jobs and an additional 1,800 indirect jobs to Northeast Louisiana.
    The V-Vehicle car is a low cost, fuel-efficient vehicle that will 
meet aggressive emissions standards and the highest safety ratings. 
Every year, each V-Vehicle car will save over 5,700 pounds of CO2 and 
280 gallons of gas relative to the U.S. fleet average. In addition, the 
car will be a cost effective option for a range of customers.
    V-Vehicle had their original application denied, but I want to 
commend the DOE's ATVM program for reviewing their application, 
suggesting ways to improve their application and encouraging the 
company to re-submit an application.
    I understand that the company and DOE have made great progress on 
V-Vehicle's application and may be close to a decision in the coming 
weeks.  I am happy to hear of this progress, but I want to reiterate 
the importance and urgency of coming to a decision about this project 
so that we start putting people to work in Louisiana.

    The Chairman. Senator Burr.

    STATEMENT OF HON. RICHARD BURR, U.S. SENATOR FROM NORTH 
                            CAROLINA

    Senator Burr. Mr. Chairman, thank you. Thank you for 
calling this hearing. I want to take this opportunity to 
welcome all of our witnesses.
    I want to single out Michael Scott even though it's listed 
that it's New York. I just want to point out he's a North 
Carolinian. I like to claim them all when they come.
    Mr. Chairman, I was proud to work on the Department of 
Energy Loan Guarantee Program created in title XVII of the 2005 
Energy Policy Act. The goal of this title was to bring clean, 
innovative energy technology projects to market. Since 2005 the 
program has been slow to issue loan guarantees. I understand 
there may be an issue with credit subsidy costs applied at the 
Office of Management and Budget.
    In June I joined Senator Coburn in sending a letter to the 
President requesting his direct leadership in addressing this 
issue at OMB. For the purpose of informing my colleagues, let 
me just read one line from the letter. It's our understanding 
that much of the delay is the result of OMB's reliance on 
outdated CBO analysis that predates the program.'' I have yet 
to receive a response from that letter.
    It is absolutely essential that if we want a loan guarantee 
program, we've got to have a push from the top. I urge my 
colleagues to join with me in making sure that we overcome the 
obstacles, not just of this Administration at OMB, but every 
Administration at OMB. The Loan Guarantee Program was expanded 
in 2009 to rapidly deploy renewable energy and transmission 
projects.
    I'm interested in learning more about the job creations 
associated with those new initiatives. I look forward, very 
forward, to hearing the testimonies of all our witnesses. I 
thank the Chair.
    The Chairman. Thank you very much. We have 2 panels today.
    Our first panel is Jonathan Silver, the Executive Director 
of the Loan Programs Office in the Department of Energy.
    Jonathan, why don't you come ahead and give us your 
testimony?
    We will then have questions of you. Then we will call the 
second panel after we're finished with your testimony.
    Thank you for being here.

STATEMENT OF JONATHAN SILVER, EXECUTIVE DIRECTOR, LOAN PROGRAMS 
                  OFFICE, DEPARTMENT OF ENERGY

    Mr. Silver. Thank you, Chairman Bingaman. Good morning Mr. 
Chairman and members of the committee. Thank you for the 
opportunity to testify today. My name is Jonathan Silver, and I 
am the Executive Director of the Department of Energy's Loan 
Programs Office.
    I want to thank this committee for the significant role it 
has played in creating the various loan programs at DOE and for 
your ongoing support for clean energy investment through the 
American Recovery and Reinvestment Act. Your leadership has 
already resulted in the financing of numerous projects creating 
thousands of jobs and reducing millions of tons of 
CO2. The projects we fund through the Loan Programs 
are critical to our economy, our national security and the 
environment. After not quite 10 months as Executive Director, I 
am pleased to share with you the progress we have made to date, 
describe where we're headed and discuss how we can even more 
effectively deliver on the promise to help move America toward 
a new clean energy economy.
    My message today is simple: DOE's Loan Programs have 
improved, and old perceptions about the program do not 
accurately reflect the new reality. The programs have been 
criticized for being slow to push loans out the door, and 
earlier that was true.
    I should note that these projects are complex and, much 
like in the private sector, do take time to process. However, 
as noted in my written testimony, we have now implemented a 
number of important changes to improve the loan programs. These 
changes have made us more efficient, more transparent, and more 
effective.
    Prior to joining the Department of Energy last November, I 
spent over 25 years in the private sector, the last ten as a 
venture capitalist. The past year reminds me, at times, of my 
time in venture capital. We spent an awful lot of time in the 
startup mode, ramping up operations and instituting operational 
best practices, even as we raced and succeeded, I think, in 
financing a number of large, complex energy projects. We are 
now in a position to process applications at scale, and I 
believe the results are beginning to speak for themselves.
    As you noted, Mr. Chairman, when this Administration took 
office the Loan Programs had not issued a single conditional 
commitment for a loan guarantee since the program's inception 
in 2005. Under Secretary Chu's leadership, DOE issued its first 
conditional commitment in March 2009. Since then, the 
Department has issued conditional commitments to 13 more title 
XVII projects, 4 of which have reached financial close. We have 
also, at the same time, obligated billions of dollars in 
funding to 4 auto projects under the Advanced Technology 
Vehicle Manufacturing Program.
    Together the 14 title XVII projects represent loan 
guarantees totaling almost $13 billion in loan volume, 
supporting projects with total estimated costs of over 22 
billion. These projects are being built in 12 states. They 
represent an array of clean energy technologies from wind, 
solar, and geothermal, to nuclear, battery storage, 
transmission and more, and will create over 13,000 construction 
jobs and over 4,000 operating jobs.
    Cumulatively these 14 projects will produce almost 4 
gigawatts of clean power, equal to about eight large coal 
plants, and will avoid approximately 38 million tons of carbon 
dioxide every year, equivalent to the annual emissions from 
about 5 million American households. The 4-ATVM supported 
projects, which are located in eight different states, will 
create or save an additional 37,000 American jobs and save 
almost 275 million gallons of fuel per year.
    It is real progress--a sign, I think, that the changes we 
are making have worked. That is not, however, to suggest that 
there is not substantial additional work to be done.
    In fact, process improvements should never stop. We 
continue to refine our activities in response to both GAO 
recommendations, input from applicants and other interested 
parties and our own desire to achieve efficiencies. It is 
important that we get this program to work effectively.
    As Secretary Chu often notes, America's future prosperity 
may depend on our ability to lead the global transition to a 
clean energy future. The widespread deployment of large scale, 
innovative, clean energy technologies is critical to that 
global leadership. But only the private sector can provide the 
kind of massive sustained investment required to achieve our 
national energy goals.
    Congress has, for example, discussed a renewable 
electricity standard of 15 to 20 percent. It has been estimated 
that meeting a 20 percent renewable electricity standard by 
2020 would require aggregate capital expenditures of over $350 
billion, or an average annual investment of approximately $32 
billion. Government financing programs are essential to 
encouraging and facilitating investment at this scale.
    With traditional lenders having reduced their appetite for 
risk and the tax equity market, one of the principle sources of 
equity for renewable projects cut nearly in half since 2007, 
investors will continue to need help absorbing some of the risk 
inherent in funding innovative technologies. The loan programs 
do that. By lowering the cost of capital for clean energy 
projects, they encourage private sector investment that would 
not otherwise take place. They contribute to the growth of our 
domestic manufacturing base. They help us move toward a more 
stable, secure and sustainable domestic energy supply, and they 
create jobs.
    If we are serious about our national energy goals, the 
Federal Government must provide the incentives necessary to 
support meaningful, continued investment in clean energy--which 
includes a robust loan guarantee program. In my personal 
opinion this means that we need to ensure a stable and 
substantial level of funding for some years to come. Over the 
last year and a half, the Department Loan Programs have started 
delivering on the promise Congress envisioned in creating them. 
I look forward to working with the members of this committee to 
make them as efficient and effective as they can be.
    Thank you again for inviting me here today, and I look 
forward to answering any questions you may have.
    [The prepared statement of Mr. Silver follows:]

    Prepared Statement of Jonathan Silver, Executive Director, Loan 
                 Programs Office, Department of Energy

                              INTRODUCTION

    Chairman Bingaman, Ranking Member Murkowski, and members of the 
Committee, thank you for the opportunity to testify today. My name is 
Jonathan Silver, and I am the Executive Director of the Department of 
Energy's (DOE) Loan Programs Office (LPO). I want to thank you for your 
leadership in supporting clean energy investments. DOE's loan programs 
are a critical part of the Administration's commitment to transition to 
a cleaner, greener economy that will create jobs, protect our national 
security, and protect the environment.
    I welcome the opportunity to present the Administration's views on 
the loan programs. I am particularly excited to share with you the 
progress that we have made to date and additional changes we are making 
to continue that progress.
     global and domestic context in which the loan programs operate
    Before reviewing the specifics of the programs, I'd like to touch 
briefly on the broader context in which we operate. As Secretary Chu 
often notes, America's future prosperity may well depend on our ability 
to lead in the global transition to a clean energy future. Yet, 
according to a report by the Pew Charitable Trusts, while the U.S. had 
the world's highest GDP in 2009, we ranked eleventh in clean energy 
investment as a percentage of GDP.\1\ Allowing this gap to continue to 
grow will have serious implications not only for our global 
competitiveness, but also for our national security and the 
environment.
---------------------------------------------------------------------------
    \1\ ``Who's Winning the Clean Energy Race,'' 2010 Global Energy 
Profile, The Pew Charitable Trusts, at 10.
---------------------------------------------------------------------------
    The United States can and should retain a position of global clean 
energy leadership through the widespread and large-scale deployment of 
new and innovative clean energy technologies. Government policies, such 
as those proposed by this Administration can encourage and facilitate 
such deployment. But only the private sector can provide the type of 
massive, sustained investment that is required to achieve our national 
clean energy goals.
    Yet the private sector has not invested in clean energy at the the 
scale necessary to drive meaningful change. The economic crisis slowed 
the pace of investment in clean energy projects. Traditional lenders 
have pared back their appetite for risk, resulting in reduced liquidity 
in the market. Additionally, the tax equity market--one of the 
principal sources of equity for renewables projects--has shrunk by more 
than half since 2007.
    A fundamental impediment for investors in the clean energy space 
stems from the relatively high completion risks associated with clean 
energy projects, including, in particular, technology risk and 
execution risk. Private sector lenders have limited capacity or 
appetite to underwrite such risks on their own, particularly because 
large-scale clean energy projects are very capitalintensive and often 
require loans with unusually long tenors. Without the federal 
government's financial support--following a careful review of the 
underlying technology--many promising technologies may not get funded 
or reach commercial scale or scope.
    The Department of Energy's loan programs were designed to address 
these impediments. Loan guarantees lower the cost of capital for 
projects utilizing innovative technologies, making them more 
competitive with conventional technologies, and thus more attractive to 
lenders and equity investors. Moreover, the programs leverage the 
Department's expertise in technical due diligence, which private sector 
lenders are often unwilling or unable to conduct themselves.
    Simply put, achieving our nation's clean energy goals will require 
the deployment of innovative technologies at a massive scale, and the 
DOE loan guarantee program is an important element of federal policy to 
facilitate that deployment.

                    BACKGROUND ON THE LOAN PROGRAMS

    As you know, the LPO actually administers three separate programs: 
title XVII section 1703, section 1705--and also the Advanced 
Technologies Vehicle Manufacturing loan program, or ATVM. While my 
testimony today will focus primarily on the title XVII programs, I do 
want to briefly highlight ATVM's significant accomplishments to date.
    The ATVM program is charged with issuing loans to support the 
development of advanced vehicle technologies to help achieve higher 
CAFE standards, create jobs, and reduce the nation's dependence on oil. 
To date, DOE has committed and closed four ATVM loans, totaling $8.4 
billion, which will support advanced vehicle projects in eight states. 
According to information provided by the project's sponsors, these 
projects will create or save over 37,000 U.S. jobs. We anticipate 
making a number of additional ATVM loan commitments in the coming 
months. While the rest of my testimony will focus on the 1703 and 1705 
programs, I note that many of the same issues that are challenges in 
these programs also apply to ATVM.
    The 1703 and 1705 programs are often conflated, but they are in 
fact quite different in a number of important ways. 1703 was created as 
part of the Energy Policy Act of 2005 in order to support the 
deployment of innovative technologies that avoid, reduce, or sequester 
greenhouse gas emissions. Currently, the program has $18.5B in loan 
guarantee authority for nuclear power projects, $18.5B in authority for 
energy efficiency and renewable energy projects, $8 billion for 
advanced fossil projects, $4 billion for front-end nuclear projects, 
and $2 billion in mixed authority, following the reprogramming of $2 
billion from mixed to front end nuclear authority.
    The section 1703 program was designed to be cost-neutral to the 
government. To that end, the legislation directs DOE to charge fees 
sufficient to cover the program's administrative costs. 1703 has, so 
far, been executed as a ``self pay'' program, meaning that applicants 
pay the credit subsidy cost associated with any loan guarantees they 
received from DOE.
    The section 1705 program was created as part of the American 
Recovery and Reinvestment Act of 2009 (Recovery Act), to jumpstart the 
country's clean energy sector by supporting projects that had 
difficulty securing financing in a tight credit market. The 1705 
program has different objectives than 1703, and different programmatic 
features. Most notably, applicants under 1705 are not required to pay 
the credit subsidy costs associated with the loan guarantees they 
receive. Those costs are paid by DOE, using monies appropriated by 
Congress (though applicants still must pay application and other fees). 
Additionally, to qualify for 1705 funding, projects must begin 
construction no later than September 30, 2011. DOE's authority to issue 
guarantees under 1705 expires on that date, as well.
    Under the section 1703 program, DOE has offered conditional 
commitments for four projects so far, including nuclear power, front 
end nuclear, and two efficiency projects. Under 1705, we have issued 
conditional commitments to 10 projects so far, totaling over $4 billion 
in loan volume.
    Although we have, under 1703, the $18.5 billion in renewbles 
authority referenced above, there has been very little demand for 
renewables loan guarantees under that program. This may, in part, 
reflect the ability of renewable projects to apply for a guarantee 
under 1705.

                            RECENT PROGRESS

    These programs have made great strides since this Administration 
took office twenty-one months ago. At that time, DOE had yet to issue a 
single loan guarantee under the loan programs. In March 2009, under 
Secretary Chu's leadership, the title XVII programs issued the first 
ever conditional commitment for a loan guarantee. Since then, the 
Department has issued conditional commitments to 13 more title XVII 
projects, four of which have reached financial close--with more to 
follow soon.
    Together, these 14 projects represent loan guarantees totaling 
almost $13 billion, and have total project costs exceeding $22 billion. 
They are spread across 12 states, represent an array of clean energy 
technologies--including wind, solar, geothermal, transmission, battery 
storage, and nuclear. Project sponsors estimate these projects will 
create over 13,000 construction jobs, and over 4,000 operating jobs. 
Cumulatively, according to data provided by their sponsors, these 14 
projects will produce almost 4GW of clean energy capacity, and they 
will remove approximately 38 million tons of carbon dioxide from the 
air every year.
    These projects are not just noteworthy; they represent a real and 
significant contribution to the clean energy landscape in the United 
States.

                  RECENT IMPROVEMENTS TO LOAN PROGRAMS

    Our ability to underwrite 14 projects in the past 18 months is a 
function of the many improvements we have made to the loan programs. By 
better leveraging our existing resources and re-engineering our 
processes, we have been able to significantly reduce the amount of time 
it takes to review applications, to expedite the transaction approval 
process, and to provide greater transparency into our work. For 
example:

   We have increased our staff and are now able to process 
        applications more efficiently and effectively. As recently as 
        January 2009, the loan programs had only 16 federal employees. 
        Through aggressive recruitment efforts, we now have over 80 
        federal employees supported by a number of subject-matter 
        experts engaged on a contract basis.
   We created a new online portal for completing and submitting 
        applications electronically, which has both improved the 
        quality of applications and shortened the amount of time that 
        it takes to complete and process them. It used to take DOE up 
        to 2-3 months to complete the initial review of an application; 
        we can now complete that review in approximately 30 days, and 
        we are working to reduce that time period even more.
   We have developed a model for issuing more targeted and 
        understandable solicitations for applications, as exemplified 
        by our recently issued Manufacturing solicitation. We expect 
        simplified solicitations to result in better applications that 
        will more directly address the critical issues, and which can 
        be reviewed more efficiently and effectively by our staff.
   We have improved communication with applicants.
   We reorganized our staff into technology domain groups, to 
        create efficiencies and capitalize on the expertise of our 
        staff.
   We have worked creatively to ensure that projects seeking 
        loan guarantees can meet important and fast approaching 
        deadlines, including the year-end expiration date for the 
        section 1603 cash grant program, which is critical to many of 
        our projects, and the 1705 program's sunset date of September 
        30, 2011.

    In light of these many changes and improvements, the Loan Programs 
are well positioned to carry out the important mission we have been 
given by Congress and the Secretary. Over the last few months, we have 
significantly improved the pace at which we are processing 
transactions, and aim to do even better.
  the process of reviewing and approving a loan guarantee application
    I would like to take this opportunity to describe the process 
through which DOE reviews and approves loan guarantee applications. The 
loan programs accept applications only through targeted solicitations, 
so that we can award loan gurantees on a competitive basis. DOE 
currently has three open solicitations: the first seeks applications 
for renewable energy generation or transmission projects using 
innovative technology; the second is open to renewable energy 
manufacturing projects employing commercial technology; and the third 
is issued under our FIPP program, through which DOE partners with 
private sector lenders for renewable energy generation projects 
employing commercial technology.
    A loan guarantee goes through a number of stages as it moves 
through the review process. Those are: (1) Intake, (2) Due Diligence 
and Term Sheet Negotiation, (3) Credit Analysis and Review; (4) Deal 
Approval and Conditional Commitment, (5) Post-Conditional Commitment 
Due Diligence and Financing Documents Negotiation, and (6) Closing.
Intake
    Our Intake process has two phases, Part I and Part II. In Part I, 
an applicant submits only a summary application, which LPO reviews to 
determine if the proposed project is eligible for the program. In Part 
II, the applicant submits a more comprehensive application, which is 
analyzed to determine if the project warrants additional review and 
discussion and, possibly, negotiation of a term sheet. This two-part 
process was designed so that applications deemed ineligible in Part I 
could avoid paying the larger fees required for the full review.
Initial Due Diligence and Term Sheet Negotiation
    The second stage combines the initial due diligence and term sheet 
negotiation. Deals that are not rejected during the intake process move 
into full due diligence. The due diligence includes, among other 
things, a close examination of the technology, and an analysis of the 
financial model and plan for the project. The projects also undergo 
detailed legal, market, and environmental reviews, including an 
evaluation to determine if they are and will be in compliance with the 
National Environmental Policy Act (NEPA), the Endangered Species Act 
(ESA), Davis-Bacon labor requirements, and other state and local laws 
and regulations. It is during this work that the LPO deal team engages 
outside consultants and advisors with specialized expertise relevant to 
the project to assist with the transaction.
    After due diligence has proceeded to a point where discussion of 
substantive business issues makes sense, LPO begins an often lengthy 
negotiation with the applicant on the terms and conditions of the 
potential loan guarantee. In some instances, the proposed project must 
be significantly restructured to ensure that it is creditworthy and 
meets the statutory requirement of a reasonable prospect of repayment.
Credit Analysis and Review
    During the second phase, the LPO credit staff undertakes a 
comprehensive credit analysis of the proposed transaction. The credit 
team calculates an estimated credit subsidy score based on the agreed 
upon term sheet between the applicant and DOE. This credit subsidy 
score is calculated using a methodology approved by OMB. As part of 
this analysis, LPO credit staff reviews and scores every aspect of the 
transaction, including, but not limited to: pledged collateral, market 
risk, technology risk, regulatory risk, contractual foundation, 
operational risk, and recovery profile. The result is a credit subsidy 
range that incorporates all available information regarding the project 
and financing at the time.
Deal Approval
    Once the term sheet has been agreed upon between the applicant and 
the LPO, the transaction is submitted for the necessary approvals 
culminating in the Secretary determining whether to issue a loan 
guarantee.
    The first step in the approval process is the credit committee, 
which consists of senior DOE officials with significant financial and 
technical expertise. If the credit committee recommends the project for 
approval, the transaction is then presented to the Department's Credit 
Review Board (CRB), which consists of senior-level officials. Prior to 
presenting the deal to the CRB, LPO presents it to OMB and Treasury for 
review, consistent with statutory requirements. If CRB recommends 
approval of the deal, it is presented to the Secretary, who has the 
ultimate authority to approve loan guarantees.
    Following the Secretary's approval, LPO offers a conditional 
commitment for a loan guarantee. If the applicant signs and returns the 
conditional commitment with the required fee, it becomes a conditional 
commitment of the Department. This commitment is ``conditional'' 
because it is contingent on the applicant meeting a number of 
conditions precedent to financial close. These are articulated in the 
agreed-upon term sheet between the parties.
Post-Conditional Commitment Due Diligence and Financing Documents 
        Negotiation
    After conditional commitment, the LPO staff completes any remaining 
due diligence, ensuring that any conditions identified in the 
conditional commitment are met by the applicant prior to closing. The 
parties simultaneously draft and negotiate the final loan 
documentation. In some instances, the applicant is also negotiating the 
final project documents at the same time.
Closing
    Once all of the due diligence is completed and the necessary 
financing documents are agreed--and all other statutory, regulatory, 
and other requirements have been met--the LPO credit staff conducts a 
comprehensive credit analysis. This analysis is based on the final 
terms and conditions of the loan, and any other updated information, 
and results in the calculation of the project's estimated credit 
subsidy cost. OMB must review and approve the credit subsidy cost. Once 
the credit subsidy score is finalized, the project may move to a 
financial closing. At closing, the loan guarantee is obligated by DOE.
    After the guarantee is obligated and issued, the applicant often 
can immediately draw on the loan to support the proposed project. 
However, sometimes, there are additional conditions that must be 
satisfied under the financing documents before the loan may be 
disbursed.
      key considerations in analyzing a loan guarantee application
    DOE takes its responsibility to protect the US taxpayer seriously. 
DOE's review of each application includes a thorough review of all 
financial, technical, legal, environmental and other relevant data. 
DOE's internal review is complemented and supported by outside 
technical, legal, and financial consultants. Based on the results of 
this analysis, DOE identifies key risks and works diligently with 
applicants to mitigate those risks to the extent possible. There are a 
number of financial and technical features that help distinguish strong 
applications with respect to meeting eligibility requirements and 
creditworthiness.
Financial Attributes
   Ability to service the debt from operation cash flows.--A 
        critical component of any debt transaction is the ability of 
        the project to repay the debt on agreed upon terms from 
        operating cash flows. Applicants can prove this ability by 
        showing strong contracts with both their intended suppliers and 
        consumers. These contracts may provide a reliable source of raw 
        materials for the project, or may take the form of revenue 
        contracts such as off-take agreements for generation projects 
        or purchase orders for manufacturing projects. Applications 
        that do not include such agreements, even in draft form, may 
        not be compared favorably to those that do. The strongest 
        applications will provide agreements with third-parties that 
        also have strong credit profiles for a term that exceeds the 
        proposed tenor of the loan.
   Simplicity rather than complexity.--A project that has 
        numerous credit instruments, an abundance of sponsors, a 
        complex proposed capital structure may have strong economics, 
        but should be prepared for a longer period of due diligence 
        based on its complexity. Conversely, projects that have strong 
        equity participation that pledges to be involved in ongoing 
        project operations, straight amortizations and relatively quick 
        paybacks, improve project transparency and can speed loan 
        processing.
   Clear, flexible, well-defined financial model.--A 
        demonstrated ability to forecast the financial performance of a 
        project both during construction and operation is critical in 
        DOE's evaluation of a project. Each model should include 
        supporting documents that offer a thorough explanation of the 
        assumptions underlying the model and a robust ability to change 
        those assumptions to test sensitivities within the model. 
        Although each project will have different characteristics, an 
        example of key elements in the financial model include the 
        following:

    --Detailed construction budgets--applications that do not provide 
            detail for the construction phase of their project 
            typically fail to contemplate the total cost of the plant 
            as a single item, may fail to provide for reserves or 
            contingencies, and often face an increased risk of cost 
            overrun.
    --Identification of resources--Strong applications clearly identify 
            and account for all resources necessary for their projects 
            to become fully and profitably operational, including 
            capital goods, raw materials, O&M requirements, and 
            decommissioning. o Market and competition--The model should 
            also provide information on the intended market for their 
            products and detailed information on potential and existing 
            competitors in those markets. This information should 
            include assumptions around market sizing, average prices, 
            market segmentation, and both historical and projected 
            macro and micro economic trends that may affect the 
            intended market.
    --Proposed capital structure, including sources of equity--A strong 
            financial model will also detail the intended capital 
            structure of the proposed transaction and will identify the 
            proposed sources of equity for the project. The model 
            should show a capital structure that is fully able to 
            support the project, irrespective of DOE's involvement with 
            a loan guarantee. Equity is a piece of this capital 
            structure, and therefore significant equity participation 
            is a requirement for all projects in the Loan Programs. 
            Each applicant should clearly substantiate each source and 
            the terms behind their equity support.

   Proven leadership by management.--Each applicant should have 
        a management team that can demonstrate successful relevant 
        experience for their project. This experience may include 
        operating within the project's development stage, industry/
        technology sector, or intended markets and regulatory 
        frameworks. Projects that show seasoned, successful, relevant 
        experience will be viewed more favorably than those that do 
        not.
   Strong development and operational relationships.--Another 
        key component for each project is the contractual relationships 
        with the partners that will help design, develop, construct and 
        operate the project. Strong EPC (engineering, procurement, and 
        construction) and O&M contracts (operations and maintenance) 
        often provide for liquidated damages and performance guarantees 
        by the contractor, which reduces the risk of default by the 
        borrower. While strong EPC and O&M contracts may not be 
        included in every project, an application that lacks these 
        elements may be deemed weaker than comparable applications in a 
        given technology that includes these agreements.
   Intellectual Property.--Strong applications will demonstrate 
        both clear rights to the intellectual property necessary to 
        implement the project, and an understanding that such rights 
        must be assigned to DOE as collateral in the event of default. 
        By assigning the IP rights to DOE in a default scenario, DOE 
        may continue operating the project at its discretion, which 
        mitigates some of the default risk associated with a particular 
        transaction.
   Site selection, permitting and environmental review.--
        Applicants should identify the potential sites for their 
        projects, as whether the site is on public or private land can 
        affect the federal nexus with regard to environmental reviews. 
        Applicants should also demonstrate control over project 
        site(s), or document the steps necessary to assume control. In 
        addition, applicants should fully meet all permitting 
        requirements, particularly those of NEPA (National 
        Environmental Policy Act) and all state, local, and tribal 
        authorities. The timely acquisition of the relevant federal, 
        state, local, and tribal permits may be needed to implement a 
        project within their projected timelines. More guidance on NEPA 
        and the environmental requirements for loan guarantees may be 
        found on the Program website at (http://
        loanprograms.energy.gov).
Technical Attributes
   Pilot / Demonstration Data.--In general, applicants 
        proposing innovative projects should be able to submit a 
        minimum of 1,000 to 2,000 hours of operating data from a 
        demonstration facility that uses the same technology as 
        proposed in the project application.
   Engineering reports.--Strong applications include an 
        engineering report that discusses the technology in the 
        specific context of the proposed project, rather than a report 
        that addresses the technology only generally.
   Technological advantages.--Applications required to satisfy 
        section 1703 should discuss and highlight how the technology, 
        as proposed in the project, constitutes a new or significant 
        improvement over existing competing technologies in the 
        commercial marketplace today.
   Mitigation of technology risk.--Strong applications, 
        particularly those proposing innovative projects, will discuss 
        how to mitigate technology risk. They will present alternative 
        scenarios in the vent that critical technologies fail or do not 
        perform as expected (e.g., warranties, production or 
        performance guarantees, performance bonds, etc.).

                  CHALLENGES FACING THE LOAN PROGRAMS

    Despite the improvements referenced above, we are aware that there 
remains frustration in the Congress and in the private sector that the 
programs move too slowly. While we have made significant improvements, 
we continue to work to simplify the process and complete deals more 
quickly. However, there are a number of factors that affect the 
timeline. Some of these constraints are inherent to the types of deals 
that we do, while others are programmatic or statutory in nature.
    First, the deals processed by the loan programs are often large and 
complex, sometimes involving billions of dollars and an array of 
diverse parties. As a result, to ensure necessary protection of 
taxpayer resources, significant due diligence and negotiations are 
required. Indeed, even in the private sector, the due diligence and 
negotiations surrounding such transactions are measured in months, not 
weeks. The renewables projects for which LPO has issued conditional 
commitments have an average total project cost of over $600 million--
and this does not include the multi-billion dollar nuclear projects for 
which we have issued conditional commitments under 1703. Moreover, as 
government lenders, the projects we support must, unlike those financed 
in the private sector, also meet NEPA, Davis-Bacon, and other 
regulatory requirements and guidelines.
    Second, as a loan guarantor, DOE is only one of several parties to 
each transaction. At each stage in the process--from due diligence to 
negotiation to closing--we require the cooperation of the borrowers, 
the project sponsors, various other project participants, and, in some 
cases, other lenders. Not surprisingly, the parties often have separate 
interests that are not perfectly aligned, and any one party can slow 
down the process significantly, if it so chooses, or if contractual, 
legal, or other obstacles, outside its control, arise.
       pending legislative proposals regarding the loan programs
    I would like to touch briefly on potential legislative changes that 
could improve our Loan Programs. The Administration has proposed 
several changes which we believe would facilitate better program 
execution. Specifically, the Administration supports legislation that 
would:

   Provide that subsidy costs for modifications to title XVII 
        loan guarantees can be paid from a combination of borrower 
        payments and appropriated funds.
   Expand the 1705 program to include energy efficiency 
        technologies and systems.
   Permit project applicants and sponsors to submit more than 
        one application for a given technology under 1705. This 
        amendment will broaden the pool of projects eligible for the 
        program--which is consistent with the stimulative intent of 
        1705.
   Clarify that an eligible project may be located on two or 
        more non-contiguous sites in the United States. Some phased, or 
        bundled, projects do not apply for the programs under the 
        mistaken belief that they are ineligible. This change will 
        provide assurances to the sponsors of such projects and remove 
        a perceived application barrier that has proved problematic.

                               CONCLUSION

    Over the last year and a half, the Department's Loan Programs have 
started delivering on the promises Congress made in creating and 
funding them. We are making a serious contribution to our clean energy 
goals, and we look forward to continuing that trend. That being said, 
it is important to recognize that the loan programs represent only one 
of a variety of potential approaches to providing federal support for 
clean energy. Moving forward, we must think about enabling private 
sector clean energy financing in a comprehensive manner, ensuring that 
our limited resources are deployed in the most effective and 
coordinated manner possible. Only then will we be able to create an 
environment where the private sector will invest in clean energy 
technologies at the scale needed to reach our national clean energy 
goals.
    Thank you again for inviting me here today, and for allowing me to 
submit this statement for the record. I look forward to responding to 
your questions.

    The Chairman. Let me start with a few questions. One of the 
issues that has been raised when we've had other hearings on 
this is the comparison of this Loan Guarantee Program to what 
we have already in place with OPIC, the Overseas Private 
Investment Corporation, with Eximbank and with the Department 
of Agriculture. It seems as though the involvement of OMB in 
reviewing the loans made by those other agencies is 
substantially less than it is in connection with the loans that 
your office is trying to guarantee.
    What is your understanding of the difference in OMB 
involvement? Any difference that does exist how can it be 
explained or justified?
    Mr. Silver. Thank you, Mr. Chairman, for that question. I 
should say first that I am not an authority on the mechanisms 
by which OMB and the Export/Import Bank and OPIC do their work. 
But I will say that my observation is that those programs are 
of much longer standing than ours and consequently some of the 
growing pains that perhaps we have experienced in this process 
have already taken place.
    Ours is a new program, and as such, we have worked hard to 
streamline our own activities and the activities of the 
interagency processes as well. We do the work on the 
transactions and then work with OMB and other agencies to 
review those projects because the Federal Government as a whole 
has a strong fiduciary obligation to the taxpayer and the 
interagency review process is used to ensure that that work is 
done properly.
    The Chairman. To get down to a specific, in my state 
there's a company named Sapphire that has made application for 
a loan guarantee to the Department of Agriculture for an algae 
based production. They'll soon break ground on a commercial 
facility. As I understand it USDA has provided a loan guarantee 
to the company and they were not able to access anything 
similar from the Department of Energy.
    Why would that be? Can you give us any comparison there as 
to, again, why your office is unable to provide assistance to 
that kind of project where the Department of Agriculture is 
able to?
    Mr. Silver. I cannot speak specifically to any individual 
transaction that we may or may not have in house, but I will 
say that we share a common set of objectives with the 
Department of Agriculture in issuing loan guarantees. However, 
we do have certain programmatic differences between the 2 
programs and we examine projects somewhat differently.
    Among the features I would point out that are unique to the 
programmatic mix here is that we must ensure that each of the 
projects that we fund has a reasonable prospect of repayment 
and it is one of the items that is of significance as we 
evaluate projects.
    The Chairman. I think you also, in your testimony, you 
mention that before deals are presented to the Secretary there 
has to be a review consistent with statutory requirements. 
Title XVII requires consultation before a loan can be issued. 
The Federal Credit Reform Act charges OMB with coordinating 
cost estimates.
    Is there some other statutory requirement that brings about 
the increased scrutiny of OMB in these areas that I'm just not 
aware of? Those are the only 2 so called statutory requirements 
I'm aware of.
    Mr. Silver. No, Senator, I think you are completely 
correct. The statutory requirement for review focuses 
principally around the final assessment of and calculation of 
the credit subsidy cost and our analysis of it. Historically, 
we have worked, perhaps more closely, within the interagency 
process, earlier in that process. As we have stood up this 
program, a number of policy issues have arisen through the work 
we have done on projects. It has been, I think, wise for us to 
ensure that we could reach agreement across agencies as to how 
we would proceed.
    The interagency process does, from time to time, include 
queries which do affect cashflows in and out of the Federal 
Government. So in that respect OMB would have a role to play. 
But you are correct in pointing out that there is a more active 
interagency process here than perhaps a statutorily required.
    The Chairman. Senator Burr.
    Senator Burr. Mr. Silver, thank you for your testimony.
    In that opening statement you stressed not only the 
importance of the loan guarantee program but specific 
projections on what the need is for us to accomplish this 
transition. Now, the temporary section 1705 program created in 
2009 was funded with $6 billion. Since that period we've 
diverted $2 billion to Cash for Clunkers. We've diverted 1.5 
billion to the State Bailout bill which leaves just $2.5 
billion in that original fund in 1705.
    Does the Department or the Administration intend to request 
a refill for part or all of the funding that's been taken out 
of section 1705 program?
    Mr. Silver. We have resources in hand now, Senator, 
sufficient to process the applications that are in the pipeline 
and robust applications that we expect to come in. It will not 
surprise you to learn that there are more applications in the 
larger applicant pool than for which we have resources. We are 
working with the White House and with Congress to figure out 
the best ways to address those issues as we go forward.
    Senator Burr. Given the types of projects involved in the 
program and the length of time it does take for new 
applications to be considered, do you believe that such 
appropriations should qualify as emergency funding?
    Mr. Silver. I believe that the projects that we are funding 
and will fund in the future are of critical importance to the 
future of the American clean energy economy. They create large 
numbers of jobs. They have meaningful impacts on our 
environment.
    I would like to respond later, if I may, to you in writing, 
sir, with respect to whether or not that would qualify as an 
emergency funding requirement.
    [The information referred to follows:]

    The Administration believes that honest budgeting is a key to 
fiscal discipline and that the bar for emergency funding designations 
should be a high one. The Administration also believes that the 
projects that have received financing through the Loan Programs Office 
will have an important and positive impact on our clean energy economy, 
in terms of job creation, economic competitiveness, energy security, 
and our environmental legacy, and continues to support clean energy 
through the regular budget process. The Administration is monitoring 
the Loan Guarantee Program and will continue to seek appropriate 
funding levels to ensure the program can achieve its objectives.

    Senator Burr. I only asked the question because you were 
very specific about one, the importance of the program.
    Two, the future funding needs given that we have that 
degree of clarity I think it's important that we understand 
this is probably than a line item of our budget and not 
necessarily an addition to a supplemental bill.
    Let me just ask you, have you personally had conversations 
with OMB relative to additional funding needs?
    Mr. Silver. We speak regularly with all of our interagency 
partners on the projects in the pipeline and the cash 
requirements that will be required to support them, yes.
    Senator Burr. Has OMB to date rejected any request for 
additional funding to the program?
    Mr. Silver. These are ongoing discussions and we are trying 
to figure out the best path forward.
    Senator Burr. But have there been specific requests for 
additional funding from OMB by the Department?
    Mr. Silver. The budget process is an ongoing process, as 
you know. The FY11 submission is here. I think it reflects the 
joint considered opinion of both the Department and the Office 
of Management and Budget. The FY12 budget is under discussion.
    Senator Burr. So one could conclude from that that if the 
`011 budget were passed based upon what the request was there 
would be no additional need for funds in section 1705?
    Mr. Silver. As I said before, Senator, there are more 
applications in the pool than we have resources to fund at this 
point.
    Senator Burr. I realize that but you--with ongoing 
conversations at OMB you reverted back to the 2011 proposal is 
here. It has yet to be acted on by Congress therefore I assume 
that the `011 proposal took into account all the applications 
and all the needs that you thought you had for the 2011 budget.
    Mr. Silver. I think the FY11 budget reflects the 
President's priorities.
    Senator Burr. Mr. Silver, it's now been 5 years since the 
first of the Department's Loan Guarantee Programs were created. 
In that time, as you said, a total of 14 conditional guarantees 
have been given and 4 loans have actually gone out the door. 
Can you help by naming for us the top factors, in your view, 
that have caused the greatest slow down in the distribution of 
loan guarantee funds under the 2005 Energy bill, section 1703?
    Mr. Silver. The process by which we review applications 
does not differ substantially between 1703 and 1705, although 
there are different policy objectives and different 
programmatic objectives.
    To summarize we take each application received through a 
solicitation through an intake process, review it for 
eligibility, conduct early due diligence, ask applicants for 
additional materials, and conduct a more robust due diligence 
which includes technical, legal, financial, market and other 
kinds of issues, which leads to a negotiation process, which if 
successful and mutually agreeable, leads to taking an 
application through the approvals process.
    There are challenges in each one of those activities.
    Initially the intake activity took us about 3 to 4 months. 
We have been able to bring that down into the one to 2 week 
timeframe through some of the changes I outlined in my written 
testimony.
    The due diligence process takes a certain amount of time 
and is driven, to a certain extent, by the complexity of the 
transaction itself and by the uniqueness of the underlying 
technologies.
    The negotiation process is driven principally by the 
variety of and number of stakeholders at the discussion. We are 
but a counter party in those negotiations, but to the extent 
that projects are robust and do not need to be redesigned, 
which is yet another element in the time it takes, we can move 
relatively quickly through to an approval process.
    In the approval process, as I alluded to earlier in 
response to the chairman's questions, there is an interagency 
process that reviews these transactions for any policy issues 
that may arise, as well as to ensure that the transactions are 
as robust as we can make them.
    Once through the approval process, they go for a final 
recommendation of approval to the Secretary. But that is 
actually the issuance of a conditional commitment, not the loan 
guarantee itself. Very frequently in these transactions and 
this is also true, based on my experience in the private 
sector, there are what we call CPs or conditions precedent to a 
financial close. These are items that the applicant must 
accomplish or achieve before we can reach financial close.
    The easiest example I can give you, Senator, is that when 
we would make a conditional commitment to a nuclear power 
project, one of the conditions precedent to a final close is 
the issuance of a permit by the Nuclear Regulatory Commission. 
So there is an extended period of time, whatever it is, that is 
required until those CPs are met. Assuming the CPs are met, 
there is a good deal of legal documentation that then flows 
back and forth before the issuance of the loan guarantee.
    We have been able, over the last 10 or 12 months, to drive 
that process down for what I would describe as relatively 
straight forward transactions to about a 5 to 6 month 
timeframe. Any complexity adds another level of diligence and 
of transactional interaction, if you will, which would cause an 
extension of that. That is one of the reasons that we spend as 
much time as we do now, during the intake process, helping 
candidates identify the best kinds and strongest kinds of 
proposals.
    Senator Burr. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Mr. Silver, thank 
you for meeting with me. I'm going to reflect a number of the 
same concerns we talked about.
    You can have a debate about whether there ought to be loan 
guarantees and whether you ought to have the program. But what 
all sides can agree on, I think Senator Burr touched on it as 
well, that when you're going to have them, you need a process 
that is transparent and coherent. It seems to me we've got a 
long way to go to get that in place.
    Particularly you can't have different people saying 
different things, which is what has happened at the Department 
particularly with the project you and I have been discussing in 
Eastern Oregon at Shepherd's Flat. This will be the world's 
biggest wind farm, not the biggest in the United States, the 
biggest in the world. I'm particularly concerned about some of 
the permitting issues that have arisen so that we can 
understand what the policy is going to be at the agency with 
respect to permitting.
    When Shepherd's Flat ran into some issues with respect to 
siting, they were resolved. They were with the Department of 
Defense, as you know. It's our understanding that the 
Department simply stopped working on the project's loan 
application.
    Now you're from the private sector, great qualification for 
this job. You know time is money. Stop working costs money.
    Instead of going ahead and making sure the loan package was 
ready to go when these issues were resolved and they were. The 
Department just stopped working and the company just sort of 
stands there in suspended, you know, animation. The reason I 
ask this, it's my understanding that on other projects 
financing did move forward even before all the permits were 
resolved.
    So I'm left having the prospect of additional efforts, as 
you know with renewable energy, to try to explain to 
constituents how the country isn't going to have a double 
standard with respect to permits. That some permits get to go 
forward expeditiously, excuse me, some financing gets to go 
through forward expeditiously even before all of the issues are 
resolved and others are held up. So could you lay out for me, 
so that everybody's going to understand what the standard is 
with respect to permits and how that affects your process of 
going forward?
    Mr. Silver. Yes, Senator. Thank you. Let me take your 
question in the order in which you asked it.
    We completely agree, and we share your concern about and 
desire for transparency. We have done a lot in the last year to 
ensure that the program is as transparent as possible.
    We meet regularly with companies, as you know. We meet 
regularly with constituency groups and others that are 
interested in the program. We have a brand new Web site that 
has gone up this week that provides for anonymous feedback 
about the program, and many of the changes that we have 
implemented have been the result of an ongoing dialog with 
stakeholders. By definition, applicants know where they are in 
the process with us post the part one filing because we are in 
negotiations with them and talking to them and meeting with 
them on a regular basis.
    I would also say that the solicitations under which an 
applicant applies clearly spell out the mechanics by which, and 
the criteria by which, we will judge the applications in that 
particular solicitation. So we do everything we possibly can in 
accordance with the solicitation language to ensure that every 
candidate and every applicant is treated not only fairly, but 
in exactly the same way. Unique projects have unique features 
and unique circumstances. While I can't speak to the specifics 
of any individual project, I can say that we make every effort 
to ensure that projects move as quickly as they possibly can.
    One of the things that can hold projects up relates to 
permitting. Permitting has different levels of degree of 
impact, if you will. Among the many things we've done to ensure 
that the permitting, as a mechanism, is not a problem is to 
streamline our own NEPA process.
    We have designed MOUs with BLM's, California and Nevada 
arms in order to speed up and facilitate those reviews, and we 
do everything we possibly can to ensure that nothing can get in 
the way of a transaction moving forward. In fact, I would make 
reference to my prior comment about conditions precedent. Very 
frequently we now build transactions in such a way that, while 
the successful completion or receipt of a permit is a condition 
precedent to a final close, an applicant is still permitted to 
receive a conditional commitment in advance.
    Senator Wyden. My time is up. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Udall.
    Senator Udall. Thank you, Mr. Chairman. Good morning, Mr. 
Silver.
    Let me turn to some testimony, written testimony that will 
follow yours. Mr. Fertel, who is here representing the Nuclear 
Energy Institute, he criticizes the one size fits all 
methodology for determining the credit subsidy cost. In 
particular he takes aim at the recovery rate used saying that 
the recovery rate chosen, 55 percent, is an arbitrary number 
and has no basis in actual market experience with financial 
structures.
    He believes that the methodology used by the Executive 
branch, by the DOE, inflates the credit subsidy cost well 
beyond the level required to compensate the Federal Government 
for the risk taken in providing a loan guarantee initially. Can 
you respond to that, I think, legitimate concern?
    Mr. Silver. Let me take a step back, Senator, in attempting 
to answer your question and describe for a moment the credit 
subsidy cost mechanism itself.
    Credit subsidy cost is, to a certain extent, an insurance 
premium paid which represents the potential for the recovery of 
a default at the period at which it occurs on post-default 
cashflows. As a result, it needs to identify and include and 
incorporate both what I would call preconstruction risks, as 
well as post-construction risks, and it needs to do that by 
looking at internal risk rates and recovery rates.
    As a result, the recovery rate is a part of the overall 
algorithm that drives the credit subsidy score, and I will also 
say that it is an important part. The use of an anchor rate of 
any kind is actually a good idea and is regularly used in the 
private sector as a way to ensure that projects of similar 
shape, kind, size and complexity, start from a common baseline. 
Typically what happens then is that projects are notched up or 
notched down on the basis of unique features of a particular 
transaction.
    The goal is to ensure that an anchor rate is both flexible 
enough to be used by a generic set of projects and yet specific 
enough to a particular sector that it is a meaningful base from 
which to notch. As we look at many of the ways we can continue 
to improve and address challenges in the program, one of the 
things we should be looking at is the constant effort to 
improve and upgrade our models and the inputs to those models, 
and certainly a recovery rate would be part of that.
    Senator Udall. I appreciate the care with which you are 
focused on taxpayer dollars. I also would agree with Senator 
Wyden, time is money. The nuclear industry is eager to prove 
that they can build projects and provide base load power as we 
look for more carbon reduction in our emissions. So anything 
that can be done to respond to the concerns that Mr. Fertel is 
going to talk about later, I would really appreciate it.
    Mr. Silver. I appreciate that. We have, as you know, 
provided financing for the first nuclear power facility in the 
last several decades. It is common knowledge that there are a 
number of other projects that are in active due diligence in 
our pipeline, and I am hopeful that we will be able to reach 
resolution there in one fashion or another in the near term.
    Senator Udall. Let me turn to the 1603 cash grant program. 
Mr. Meyerhoff, who is here representing First Solar, he'll 
recommend a lining that 1603 cash grant program with a loan 
guarantee program. Could you comment on that? Do those programs 
currently interact?
    How could they be improved or how could we better encourage 
that kind of energy development?
    Mr. Silver. First I think it's important to say, Senator, 
that 1603 is not a program that the loan guarantee program 
administers directly, and so we have no direct authority or 
responsibility for that. That being said, it is also true that 
the vast majority of our applicants are interested in and/or 
have made application for or qualify for 1603 grants, and those 
are often integral to the projects that they are interested in 
undertaking.
    We are highly sensitive to the timeframes with respect to 
1603, and have continued to make some additional changes in 
order to move as many projects through as possible. There are 
several mechanisms by which an applicant can qualify for a 1603 
grant, only one of which requires the closure of the Loan 
Guarantee Program's activities to the extent it is relevant to 
that transaction.
    They can also purchase goods and services equal to a 
specific percentage of the project in hand. But it is a time 
deadline that is of great urgency and great importance to our 
applicants. We are very keenly aware of it.
    In all honesty Senator, if there are candidates whose 
applications rest on 1603, and 1603, in turn, for some reason 
rests on a loan guarantee, they would be well advised to ensure 
that they are not only working with us, but looking for 
alternative sources of potential financing as well. We will do 
everything we possibly can to move the applications that are 
now in the pipeline through the process in a timely fashion, 
but there are more applications than that behind them.
    Senator Udall. Thank you.
    The Chairman. Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman.
    Mr. Silver, as you pointed out this program for a number of 
years was moribund in terms of the number of loans that--
guarantees that it provided. So I appreciate the leadership 
that you've shown and the fact that there are actually projects 
now that are being guaranteed and going out the door. However 
as you also acknowledge there's still an incredible amount of 
frustration out there among companies that have great ideas, 
good business plans that are operating and could really use the 
kind of assistance that this program can provide.
    One of those companies in New Hampshire has raised a 
concern about a particular sector of new energy technologies. 
It has to do with DOE's interpretation of the phrase, 
``reasonable prospect of repayment.'' It's been cited as a need 
for project developers to have a fixed price, long term off-
take contracts.
    What I'm hearing from folks in the biofuels industry is 
that this has created a bias against biofuel projects because 
unlike the power sector, this type of contract doesn't really 
exist in the liquid fuels marketplace. So have you thought 
about how to handle these kinds of projects and whether DOE can 
take a different approach that might improve the Loan Guarantee 
Program for biofuels projects?
    Mr. Silver. Day and night. Yes, Senator, thank you. You 
raise the very important question of how to address emerging 
technologies whose business ecosystems, for lack of a better 
phrase, either do not fit the traditional model or have not yet 
evolved to fit the more traditional model.
    We have, as you know, received a number of biofuels 
applications through the various solicitations. I think as many 
as 15 percent of the applications we have received are in and 
around the biofuels space. No one is keener than I, and I speak 
for my organization as a whole, to find ways to make these 
projects possible.
    You have identified, and so I won't repeat, the challenges 
that these projects face. But project finance is a very narrow 
and very specific kind of financing tool, which requires, in 
order to meet a hurdle of a reasonable prospect of repayment, 
at least some visibility into the cashflows which will serve to 
handle the repayments against the amortization schedules. In an 
industry in which there is both commodity price risk, because 
what is being produced is essentially a commodity, and, as you 
identified, no long term off-take agreements, it is hard to 
make those jive.
    We have met regularly with the biofuels industry and 
industry leaders, as well as with companies and applicants in 
our portfolio, in an effort to find ways to ensure or to 
facilitate our ability to do that. We are working with industry 
leaders now on challenges around volumetric guidelines and 
other things in an effort to make that happen. I will say that 
a reasonable prospect of repayment does not require a complete 
visibility in repayment, but it requires some visibility in 
order to match those cashflows.
    We are also working in a joint agency effort with the 
Department of Agriculture, and looking at ways that we may be 
able to streamline those projects as well. I should say also 
that we have one or 2 biofuels projects in advance due 
diligence now, and I am cautiously optimistic that we will be 
able to issue a loan in this area in the relatively near 
future.
    Senator Shaheen. Good. Certainly if there's any way that we 
can be helpful with that, I think we would be--a number of us 
on the committee would be very interested.
    Another concern that I've heard from companies is that some 
of the requirements are duplicative and one sided. In 
particular is the fact that when they're entering into the 
application process they have to hire engineers, financial 
consultants, various people as independent contractors to 
verify what they're doing. Then when they get to the due 
diligence phase of the project, they have to rehire those folks 
and are concerned about whether there's any way to streamline 
that--those outside costs.
    Mr. Silver. The issue of cost, I know, is on everyone's 
mind and is particularly relevant to smaller companies, and to 
the extent that you are referencing biofuel companies, which 
tend to be smaller, those fees are important as well. I need to 
point out that the program is a self-sustaining program and a 
net zero cost program for the Federal Government. So, as a 
result, we are required to assess fees in order to provide our 
work, our services.
    I will say that by comparison with the private sector and 
the fee schedules that I am aware of, and I think am aware of 
most them in the private sector, these are roughly comparable 
for projects of roughly comparable size. That comment does not 
address your redundancy question.
    Senator Shaheen. Right.
    Mr. Silver. We are working on ways of bringing the due 
diligence process into a more coherent process even as we 
speak. I agree with you that there has been some redundancy in 
that process. The need to hire outside consultants is actually 
driven, to a certain extent however, by our need to ensure that 
each project is competed fairly.
    Senator Shaheen. Right. Mr. Silver, I probably wasn't 
clear. It's not the need to hire those consultants, it's the 
redundancy issue that has been raised with me. You acknowledge 
that that is a concern. So hopefully you will continue to work 
on that.
    Thank you.
    Mr. Silver. You have my commitment.
    The Chairman. Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman. This 
is a really important hearing. So thank you very much for 
bringing us together.
    Mr. Silver, thank you for the work that's been done. I 
mean, you really--this Administration has really taken a 
program that wasn't moving at all and has begun to move it. 
That's very, very important.
    As we are all indicating though and I know you realize 
this, there's a lot more to do. There's a lot more potential. 
There's a lot of jobs and new technologies.
    One of the things that I'd like you to speak about in 
coming to this from the private sector and talking about 
comparable fees in the private sector or you know, looking at 
credit ratings and so on is how we really balance the need, of 
course, to have the taxpayers' interests protected. But have 
something that isn't just the private sector because if it's 
exactly like the private sector we don't need it frankly. I 
mean that's--bottom line is that and I speak particularly from 
manufacturers right now who are unable to achieve investment 
grade credit ratings because of the effects of the recession.
    I'm in a position right now where, you know, they are being 
turned down for loans that frankly involve technology that is a 
little more risky than what they could get the financing for in 
the private sector but reflect exactly the goals of what we are 
trying to do in terms of jump starting, commercializing these 
kinds of technologies and creating the jobs of the future. So, 
I'm wondering a couple of things. In order to mitigate the risk 
and advance clean energy technologies how much flexibility do 
you feel you have in that area in terms of really, you know, 
the credit rating issues and so on to be able to deal with 
risk?
    Also, it's my understanding that DOE also provides 
guarantee rates that are below the statutory 80 percent maximum 
which can prevent applicants, especially manufacturers, from 
obtaining the credit they need to move the project forward. So 
can you advise me whether the decision on the level of loan 
guarantee percentage to be offered is made by DOE or OMB?
    Mr. Silver. Thank you, Senator. A slew of questions I will 
try to address sequentially.
    With respect to your first concern, or an overarching 
concern perhaps, about constraints, I think this actually also 
would relate back to my earlier answer to you, Senator.
    Senator Shaheen. Right.
    Mr. Silver [continuing]. One of the fundamental differences 
between this program and the mechanism or the mechanics by 
which the private sector would make a set of investments is 
that the mandate that each project have a reasonable prospect 
of repayment causes us to treat each project on a stand alone 
basis.
    In the private sector, as I think you will hear from the 
later panel, particularly those who are involved in the private 
equity part of the next panel, will talk to you, I'm sure, 
about portfolio theory and portfolio management theory which is 
the ability to balance gains and losses in a portfolio across 
the range of projects in that portfolio. What we are producing 
in the Loan Guarantee Program looks like a portfolio but is in 
fact an amalgam of individual projects. What we lack, 
therefore, is any beta in the portfolio.
    So one of the fundamental changes/differences between the 2 
is the ability to look across your portfolio, to manage risks 
in the portfolio which causes you, by extension, to be able to 
take certain kinds of more aggressive postures when you know 
what the shape of your portfolio looks like.
    You asked also about manufacturing. Let me offer one 
perhaps misimpression. An investment grade rating is not 
required for applications, except in the FIPP Program.
    In the FIPP solicitation, a subset if you will of the 1705 
solicitation, it is required because those are lender-sponsored 
investments rather than equity sponsored investments. These are 
transactions that come in through lenders themselves, and so 
the investment grade criteria there drives the lender 
decisionmaking as much as it drives ours. But an investment 
grade rating is not required in any other part of our 
application process.
    It is true that we have statutory authority to go to 80 
percent, and it is also true that we have done so. To the 
extent that your interest or question focused, however, on 
manufacturing, typically, and this is true in the private 
sector as well, you would not see coverage ratios that high. 
You would not see guarantees at that level. Typical 
manufacturing coverage ratios are in the 40 to 60 percent 
range. We have, to a certain extent, mirrored our behavior 
against private sector best practices.
    Senator Stabenow. I realize my time is up, Mr. Chairman, 
but just on that point. Again, I didn't realize that we were 
marrying the private sector as we put forward these programs. 
Because, again, the question is then why don't we just use the 
private sector.
    I thought there was a gap and in fact I know there's a gap 
that we are trying to fill that is different. So the reason we 
put in the 80 percent was to be different, to create--to be 
willing to take on a little more risk because of the jobs, 
because of the need to move in this new direction, because the 
financing wasn't available. In fact in the chairman's 
legislation that we passed out of here creating a whole new 
clean energy development authority was to do commercialization 
because there's not a willingness to finance the first 
commercialized product, the fifth maybe, the fourth maybe, but 
not the first.
    So, so I would just urge you that--and Mr. Chairman, I 
think it's just really important discussion to have about the 
role of DOE verses the private sector because by definition we 
are taking on more risk. Because of a public need to move into 
a new area of the economy to create jobs. So, I think this is 
an ongoing discussion we really need to have.
    Thank you, Mr. Chairman.
    Mr. Silver. Senator, you raise a very important point, and 
I will take it as a personal responsibility to go back and 
review our work in this area to ensure that we are providing as 
much capacity as we can. I would only respond by saying that 
when I use the word mirroring I meant from a range perspective.
    In point of fact, we are undertaking and underwriting 
transactions that the private sector would not touch at all 
because they are inherently risky by virtue of being first to 
market; these are innovative kinds of projects that wouldn't 
get financing elsewhere.
    The Chairman. I would just underscore the point that 
Senator Stabenow made. I do think the whole idea behind this 
loan guarantee was to have the government come in and take on 
risk where the private sector was not willing to. By doing so 
encourage companies to manufacture and create jobs here rather 
than being enticed to go somewhere else to manufacture and 
create jobs. I think that's our goal here in the Congress as I 
understand it. I hope we can see this program fulfilling a 
larger role in accomplishing that in the future.
    Senator Burr, did you have additional questions?
    Any other? Senator Shaheen.
    Senator Shaheen. It's not really a question. But it is to 
go back to a point that you raised and several other people 
raised about the role of OMB as in approving these loan 
guarantees. I would hope that as a committee we could take a 
very hard look at that. If there's something that is taking 
longer about that process than in some other programs, as you 
pointed out, that we would try to get to the bottom of that and 
see if we can't expedite that process so that the Loan 
Guarantee Program and DOE can go forward.
    The Chairman. I agree.
    Senator Stabenow, did you have another point?
    Senator Stabenow. Yes. Thank you, Mr. Chairman, I did on 
that point.
    In fact it's my understanding that the Energy Policy Act 
that we passed in 2005 which established the original DOE Loan 
Program did not require OMB to review loan guarantee 
applications. But that the Federal Credit Reform Act of 1990 
directs OMB to coordinate the cost and estimate of a loan 
guarantee. So given that difference is it OMB or is it DOE that 
decides whether the applicant's credit is too risky or too 
costly to accept?
    How do we reconcile that?
    Mr. Silver. It is the Department of Energy's Loan Programs 
Office that determines through the Loan Guarantee Program which 
applications pass from Part One to Part Two, which go through 
due diligence and what the negotiations of the underlying 
transaction are. As part of that process our credit team 
develops an assessment of what the likely credit subsidy score, 
or specifically in this case our credit subsidy range would be 
called a Gate Two range, would be as part of that process 
before a conditional commitment. We do interact, you know, in 
the interagency process before a conditional commitment to 
ensure that we have flushed out all the public policy issues 
that may be of relevance in any particular project, and also to 
understand, I think, on an interagency basis that we have 
designed and built the best possible project that we can.
    But it is an advisory role that other agencies serve. The 
Office of Management and Budget has a statutory role, as you 
point out, in the final calculation and determination of that 
credit subsidy score at financial close, and we engage with 
them again there as those conditions precedent are met.
    I did speak a little earlier to this point, and I would 
like to underscore it again, that while I think there have been 
some growing pains in this process, we are working to fix them 
inside our program and in the interagency process as well, and 
I think we are making very good headway.
    The Chairman. Senator Burr has another point.
    Senator Burr. My colleague has stirred an answer from you 
that I understood. But I've got to ask you to answer it 
specifically. Does OMB have the ability to trump a 
recommendation for a loan guarantee that the Department of 
Energy is after?
    Mr. Silver. The Secretary of Energy awards loan guarantees 
and----
    Senator Burr. Does he require--is he required to get OMB 
sign off on any loan guarantee?
    Mr. Silver. That's a yes and no answer, Senator, I'm afraid 
in the sense that there is a meaningful and important role that 
OMB plays in the review of and calculation of final credit 
subsidy score----
    Senator Burr. Mr. Silver----
    Mr. Silver. That's required.
    Senator Burr. I understand the interagency process, but and 
I'm not suggesting this is limited to this Administration. It 
is my understanding that OMB has the ability to say no. Is that 
your understanding?
    If so, the loan guarantee does not go forward?
    Mr. Silver. We have never run into that situation. This is 
an active discussion and dialog that takes place on an 
interagency basis.
    Senator Burr. Ok. Thank you.
    The Chairman. Mr. Silver, thank you very much for your 
testimony. We appreciate it. We will remain in touch and 
continue to work with you to try to see that this program that 
you administer works as well as all of us want it to.
    Mr. Silver. Thank you, Senator. Thank you for your time.
    The Chairman. Ok. Why don't we bring the second panel 
forward?
    Tim Newell, who is Senior Advisor with U.S. Renewables 
Group in Santa Monica, California.
    Jens Meyerhoff, who is President of the Utility Systems 
Business Group with First Solar.
    Michael Scott, who is the Managing Director of Miller 
Buckfire and Company in New York.
    Marv Fertel, who is the President and CEO of the Nuclear 
Energy Institute.
    Thank you all for being here. Why don't we start with you, 
Mr. Newell?
    If you could, each of you give us 5 or 6 minutes of your, 
sort of summarize your testimony for us. We'll include your 
full testimony in the record and then we'll have some questions 
once we've heard from all the witnesses.
    Mr. Newell, why don't you go ahead?

STATEMENT OF TIM NEWELL, SENIOR ADVISOR, U.S. RENEWABLES GROUP, 
                        SANTA MONICA, CA

    Mr. Newell. Mr. Chairman, thank you. Thank you to the 
members of the committee for the opportunity to testify today 
on an issue that we think is vitally important to the renewable 
energy industry.
    My name is Tim Newell. I'm Senior Advisor to the U.S. 
Renewables Group where I also serve as Managing Director for 
the USRG Renewable Finance.
    USRG is a private equity firm that focuses exclusively on 
investing in renewable energy. Based in California, USRG is a 
leading investor in companies that develop, build and operate 
projects in both the fuels and the power fuels that produce 
clean, renewable energy and in the infrastructure that supports 
that production. Our investments cover a wide range of 
renewable technologies including solar, wind, geothermal, 
biomass, biofuels, hydropower and energy storage. Collectively 
our portfolio companies are either operating renewable energy 
facilities or in development of renewable energy facilities in 
over 30 states across the country right now.
    I'm here today because we believe the Department of 
Energy's Loan Guarantee Program is a crucial part of U.S. 
energy policy and as well as an important component of our 
country's overall economic policies particularly with respect 
to supporting a U.S. competitiveness in world energy markets.
    USRG has a significant amount of firsthand experience with 
the DOE Loan Guarantee Program. We participated both with the 
original section 1703 program as well as with the more recent 
1705 program and both with the innovative program and the 
commercial program or FIPP. I believe that we've been in 
position to see and experience both the programs challenges as 
well as its considerable promise.
    In every economy energy is a critical resource. Is 
regulated and subsidized by governments, all forms of energy. 
In the U.S. in addition to the Loan Guarantee Program our main 
policy mechanisms for supporting renewable energy development 
are tax credits that serve to lower the cost of developing and 
operating renewable energy facilities, supply site incentives 
essentially. While state level renewable portfolio standards 
and to a less extent state level fuel standards combined with a 
national renewable fuel standard to increase demand for 
renewable energy.
    There are however 2 areas in which there are glaring 
deficiencies and which add to deter investment in renewable 
energy.
    The first is a specific policy deficiency. The lack of a 
national renewable electricity standard to provide a 
predictable national market for renewable power production in 
the United States, that is a problem that we believe could and 
should be fixed and would urge Congress to move as 
expeditiously as possible to do so. We appreciate your 
leadership in that, Mr. Chairman.
    The second is a more systemic problem is the on again/off 
again nature of U.S. renewable energy policy in which investors 
see policy supports put in place and either withdraw it or 
allow it to expire. To see the impact this kind of policy 
reversal on renewable energy markets, we need only to look at 
the U.S. biodiesel industry which has been severely damaged 
over this last year by the failure of Congress to extend the 
dollar a gallon biodiesel tax credit after it expired at the 
end of 2009. The result is that the growth of this important 
renewable fuel sector was halted and more than 20,000 green 
economy jobs were put at risk. This should not have happened. 
Congress should act immediately to restore that credit.
    Looming on the horizon is a similar threat though much 
larger in scale. Since it was put in place in 2009 the section 
1603 Treasury Grant Program in which grants are provided in 
lieu of tax credits for investments in renewable energy 
production facilities has been an extremely effective program. 
An extremely effective mechanism for attracting private sector 
investments in clean energy projects in the U.S. Yet without 
further Congressional action this section 1603 Treasury Grant 
Program will expire at the end of this year. Again changing the 
financial equation for renewable energy projects across our 
nation at a time when economic conditions are still acting as a 
headwind for this industry, which brings us back to the 
Department of Energy's Loan Guarantee Program.
    When the program was launched with much fanfare in 2009 it 
was funded by $6 billion in appropriated funds. We're talking 
about the 1705 program here. It was a level investment that we 
believe would support 60 billion to 100 billion of lending to 
clean energy projects depending on how you calculated the 
subsidy costs.
    Now less than 2 years later the DOE Loan Program has seen 
its funding cut by nearly 60 percent. That cut will translate 
into tens of billions of dollars less that will be available to 
support renewable energy development. It's important to 
recognize the critically important role that a program can play 
and I appreciate the discussion in the last panel about the 
role of the program verses the role of the market.
    I would offer 2 examples from USRG's own portfolio to 
illustrate that.
    Solar Reserve which is a portfolio company of ours builds 
large utility scale solar power plants. It's concentrated solar 
power technology.
    Fulcrum BioEnergy is a portfolio company of ours whose 
technology converts municipal solid waste into ethanol.
    These are just 2 companies among many here in the U.S. that 
are on the front line of commercializing clean energy. But with 
the support of DOE loan guarantees to build their first 
commercial projects these 2 companies alone have the potential 
to go on using commercial financing to produce over 8,000 
gigawatt hours annually of clean renewable energy, more than 
one billion gallons annually of renewable fuels, $20 billion in 
new investments across the country supporting over 115,000 
jobs. That's just 2 companies as well as providing leadership 
for the U.S. in global renewable energy markets. This is the 
real promise of the DOE Loan Guarantee Program is to be able to 
take companies like that and move them across the gap from--
through their first projects and on into commercial markets.
    In my written testimony I've included a number of specific 
recommendations for strengthening the Department of Energy's 
Loan Guarantee Program. The highlights of those recommendations 
include at the top replace the 3.5 billion in funding that's 
been diverted from the Loan Guarantee Program. It's very 
important.
    Second, extend the commence construction date for the 
current section 1705 DOE Loan Guarantee Program by 2 years or 
modify the section 1703 Program to allow appropriated funds to 
cover subsidy costs and to incorporate the authorities provided 
in section 1705 including the ability to finance commercial 
projects through a FIPP type structure as well as accommodating 
the previous solicitations that have been made under 1705.
    Third is provide increased access to the program for small 
renewable energy developers. This is very important because the 
small to medium size developers often face greater barriers to 
access to financing than you'll have with the large developers. 
They're an important part of our renewable energy ecosystem, if 
you will.
    Fourth, and there's been some discussion on this, we need 
to clarify OMB's role with the program. I appreciate Mr. 
Silver's judiciousness in having that discussion. I think we 
have more straight forward views about that issue. We would 
support the chairman's legislation to limit OMB review of DOE 
Loan Guarantees and put some clarity and structure around that.
    Five, we think it's important that we provide for a 
permanent renewable energy financing mechanism such as CEDA, to 
support U.S. leadership in renewable energy.
    Thank you, Mr. Chairman and the committee. I'm happy to 
answer any questions you may have.
    [The prepared statement of Mr. Newell follows:]

 Prepared Statement of Timothy Newell, Senior Advisor, U.S. Renewables 
                        Group, Santa Monica, CA

    Mr. Chairman, Ranking Member, members of the committee, thank you 
for the opportunity to testify today on an issue of vital importance to 
the renewable energy industry.
    My name is Tim Newell, and I am Senior Advisor to the US Renewables 
Group (USRG), where I also serve as a Managing Director for USRG 
Renewable Finance. US Renewables Group is a private equity firm that 
focuses exclusively on investing in renewable energy. Based in 
California, USRG is a leading investor in companies that develop, 
build, and operate projects that produce clean renewable energy--both 
electricity and fuels--and the infrastructure that supports that 
production. Our investments cover a wide range of renewable 
technologies, including solar, wind, geothermal, biomass, biofuels, 
hydropower, and energy storage. Collectively, USRG's portfolio 
companies are currently either operating or developing renewable energy 
projects in more than 30 states across the U.S.
    I am here today because we believe the Department of Energy's loan 
guarantee program to be a crucial part of US renewable energy policy, 
as well as an important component of our country's overall economic 
policies--particularly with respect to supporting US competitiveness in 
global energy markets.
    USRG has significant first-hand experience with the DOE Loan 
Guarantee Program. Directly and through our portfolio companies, we 
have participated in both the original Sec. 1703 program and the more 
recent Sec. 1705 ARRA-created program, and have engaged in both the 
innovative technology program and the commercial program (FIPP). I 
believe that we have been in a position to see and experience the 
program's challenges--as well as its considerable promise. In the 
spirit of strengthening what we believe is a critical program in 
support of our industry, I would like to offer some observations, 
recommendations, and areas of inquiry regarding the loan guarantee 
program that we believe merit consideration by the Committee.

                US GOVERNMENT RENEWABLE ENERGY POLICIES

    Before doing that, however, I would like to step back for a moment 
and consider the loan guarantee program more broadly within the context 
of the US government's renewable energy policy. As major investors in 
renewable energy projects, we are keenly aware of the importance of 
government programs that provide incentives to build commercial scale 
renewable projects in the U.S. In every economy in the world, energy is 
considered a critical resource whose development and production is 
regulated and supported by government. Renewable energy markets, with 
their emerging technologies and promise of clean sustainable growth, 
are particularly policy-driven.
    In the U.S., in addition to the DOE Loan Guarantee Program, the 
most critical of these incentives at the federal level include the 
investment tax credits and production tax credits offered to renewable 
energy projects--including the Sec. 1603 grants in lieu of credits 
program that has been so successful, and which unfortunately is 
scheduled to expire at the end of 2010.
    These incentives essentially act to encourage the supply of 
renewable energy in the U.S., by providing support for the construction 
and operation of renewable energy production facilities. They operate 
against the backdrop of policies at both the federal and state level 
that are intended to increase demand for renewable energy--including 
Renewable Portfolio Standards governing electricity purchases in a 
majority of US states, and to a lesser extent state Renewable Fuel 
Standards covering fuel consumption; as well as the federal Renewable 
Fuel Standard (RFS). Collectively, these policies and incentives work 
on both the supply side and demand side to leverage billions of dollars 
of private investment in clean and renewable energy projects across the 
United States.
    From the point of view of the investment community, therefore, 
there is much that is encouraging about current US policies to promote 
renewable energy development. But there are two areas in which there 
are glaring deficiencies which act to deter investment.
    The first of these is a specific policy deficiency--namely the lack 
of a national Renewable Electricity Standard (RES) to provide a 
predictable national market for renewable power production in the 
United States. This is an issue familiar to this Committee, and one on 
which the Chairman and the Committee have shown significant leadership. 
The solution is straightforward--the Senate should take up and pass S. 
3813, the Renewable Energy Electricity Promotion Act of 2010 as 
introduced this week by Chairman Bingaman.
    The second deficiency is more systemic. It has to do with the ``on 
again, off again'' nature of U.S. renewable energy policy. Investments 
in renewable energy are by their nature long term investments. 
Renewable energy projects often take years to develop, and require 
large amounts of capital to be committed for many more years. Yet too 
often investors have seen U.S. policymakers put incentives for 
renewable energy production in place, only to reverse them or let them 
expire a relatively short time later.
    To see the impact of this kind of policy reversal on renewable 
energy markets we need only to look at the U.S. biodiesel industry, 
which has been severely damaged over the last year by the failure of 
Congress to extend the $1/gallon biodiesel tax credit after it expired 
at the end of 2009. The result? The growth of this important renewable 
fuels sector was halted, and more than 20,000 green economy jobs were 
put at risk. This should not have happened and Congress should act 
immediately to restore the credit.
    Looming on the horizon is a similar threat, though larger in scale. 
Since it was put in place in 2009, the Sec. 1603 Treasury Grant program 
in which grants are provided in lieu of tax credits for investments in 
renewable energy production facilities has been an extremely effective 
mechanism for attracting private sector investments into clean energy 
projects in the U.S. Yet without further Congressional action, the Sec. 
1603 Treasury Grant program will expire at the end of this year, again 
changing the financial equation for renewable energy projects across 
our nation at a time when economic conditions are still acting as a 
headwind for the industry. A recent study by the American Council of 
Renewal Energy estimated that failure to extend Sec. 1603 would 
threaten more than 100,000 jobs across the U.S. This should not happen, 
and Congress should act to prevent it by extending the Sec. 1603 
Treasury Grant program for at least two years.
    Which brings us back to the Department of Energy's Loan Guarantee 
Program. When the program was launched with much fanfare in 2009, it 
was funded by $6 billion in appropriated funds--a level of investment 
that would support $60 billion to $100 billion of lending to clean 
energy projects. Less than two years later, the DOE Loan Program has 
seen its funding cut by nearly 60%, with $3.5 billion of its 
appropriation rescinded and diverted to other programs. This should not 
have happened, and Congress should act immediately to restore funding 
for this critical program.

                      A GLOBAL RACE FOR LEADERSHIP

    Why is this important? From investment and production tax credits, 
to grants in lieu of tax credits, to Department of Energy loan 
guarantees, these incentives are needed to help propel America's effort 
to compete with China, Germany, Spain and other countries that are 
investing heavily in renewable technologies. But, as several recent 
reports reveal, we are falling behind. This is a race we are no longer 
winning. Other nations are committing billions of dollars to clean 
technology and renewable energy for both environmental and economic 
reasons.
    As a recent Pew Charitable Trust study (``Who's Winning the Energy 
Race: Growth, Competition and Opportunity in the World's Largest 
Economies''), for example, reported:

          Relative to the size of its economy, the United States' clean 
        energy finance and investments lag behind many of its G-20 
        partners. For example, in relative terms, Spain invested five 
        times more than the United States last year, and China, Brazil 
        and the United Kingdom invested three times more. In all, 10 G-
        20 members devoted a greater percentage of gross domestic 
        product to clean energy than the United States in 2009. 
        Finally, the Unites States is on the verge of losing its 
        leadership position in installed renewable energy capacity, 
        with China surging in the last several years to a virtual tie.

    A similar report (``Out of the Running? How Germany, Spain and 
China Are Seizing the Energy Opportunity and Why the United States 
Risks Getting Left Behind'') by the Center for American Progress, 
succinctly concluded, ``China, Germany, and Spain are forging ahead on 
the path to a clean-energy future while the United States lollygags.''
    From the standpoint of a major U.S. investor in clean and renewable 
energy projects, this is unacceptable. Here we are, the country that 
invented the photovoltaic cell, that developed the most efficient solar 
thermal technology, that patented and produced LED lighting and 
numerous other energy efficient or renewable technologies falling 
behind our international rivals. We need to do better.
    With regard to the DOE Loan Guarantee Program, there has been much 
attention given to delays by the program in making loan guarantee 
decisions. To be fair, our firm has experienced its own share of 
frustrations, especially early on when the program was critically 
hampered by a lack of personnel generally and a specific lack of 
seasoned project finance professionals.
    examples from usrg portfolio: solarreserve and fulcrum bioenergy
    As we examine the loan program, though, it is important to 
recognize the critically important role that the program can play, and 
I would offer two examples from USRG's portfolio to illustrate.
    SolarReserve, based in Santa Monica, CA, is in the business of 
building large utility-scale solar power plants with the potential to 
replace traditional coal-fired and natural gas-fired power plants. A 
SolarReserve power plant captures and focuses the sun's thermal energy 
with thousands of tracking mirrors (called heliostats) in a two square 
mile field. A tower resides in the center of the heliostat field, and 
the heliostats focus concentrated sunlight on a receiver which sits on 
top of the tower. Within the receiver, the concentrated sunlight heats 
molten salt to over 1000 degrees Fahrenheit. The heated molten salt 
then flows into a thermal storage tank where it is stored, maintaining 
98% thermal efficiency, and eventually pumped to a steam generator 
which drives a standard power turbine to generate electricity--allowing 
a SolarReserve power plant to capture the energy of the sun during the 
day, and generate electricity into the evening or even through the 
night as needed. In this way, a SolarReserve power plant is similar to 
a standard coal-fired power plant, except it is fueled by clean and 
free solar energy. SolarReserve's technology was originally developed 
here in the U.S. for our country's space program, and then--with the 
support of this Committee--adapted and demonstrated for terrestrial use 
by the Department of Energy.
    Today SolarReserve has applications pending with the Department of 
Energy for loan guarantees to support the company's first two 
commercial projects in Nevada and California. Should those loan 
guarantees be approved and the projects built, they would provide 
thousands of jobs in rural areas hard hit by the recession. But the 
catalytic effect would extend far beyond those communities. With its 
first two projects built and operating with proven economics, 
SolarReserve would be in position to access commercial lending to build 
additional power plants. Beyond its lead projects, SolarReserve 
currently has 18 projects under development in the United States with 
the potential to deliver approximately 8,100 gigawatt hours of annual 
electricity production, generating more than $14 billion of aggregate 
investment, and accounting for approximately 90,000 direct, indirect, 
and induced jobs. The projects have been sited in underdeveloped 
regions in Arizona, California, Colorado, Nevada, and New Mexico, many 
of which are experiencing high unemployment. Globally, SolarReserve is 
targeting projects in Europe, North Africa, South Africa, the Middle 
East, and Australia.
    Fulcrum BioEnergy, headquartered in Pleasanton, CA, has as its 
mission to create a clean, low-cost and sustainable source of domestic 
transportation fuel that is produced from an abundant and renewable 
feedstock: municipal solid waste--in other words, trash. Using advanced 
but proven thermochemical technology to convert municipal solid waste 
into ethanol, Fulcrum is leading the next generation of cellulosic 
ethanol production.
    Like SolarReserve, Fulcrum has an application pending with the DOE 
Loan Guarantee Program to support the construction of its first 
commercial plant. Like SolarReserve, that plant would provide much-
needed jobs for a community where those are in short supply. And like 
SolarReserve, with that plant built and operating Fulcrum would be in a 
position to access commercial lending markets to build additional 
projects. Fulcrum already has a development program to produce more 
than 1 billion gallons of biofuels from projects in 20 different states 
around the U.S. Collectively, the projects would represent over $8 
billion of private capital investment in the U.S. economy, and account 
for more that 36,000 jobs. Moreover, by converting waste into biofuels, 
Fulcrum would afford large and medium sized communities in the U.S. the 
opportunity to turn their own garbage into transportation fuel and 
reduce their reliance on imported petroleum to drive their cars.
    SolarReserve and Fulcrum BioEnergy are but two companies among many 
here in the U.S. that are on the front lines of commercializing clean 
energy. With the support of DOE loan guarantees, though, these two 
companies alone have the potential to produce over 8,000 gigawatt hours 
of clean renewable electricity, more than1 billion gallons of renewable 
fuels, over $20 billion in new investments supporting 115,000 green 
economy jobs, and leadership in global renewable energy markets. This 
is the real promise of the clean energy economy that the DOE Loan 
Guarantee Program has the potential to bring about for our country.

              STRENGTHENING THE DOE LOAN GUARANTEE PROGRAM

    Mr. Chairman, as you have stated previously, the DOE loan guarantee 
program is a powerful tool for meeting our energy security needs, 
especially in the area of commercial clean and renewable energy 
projects. It is a tool, however, that has been hampered by the Office 
of Management and Budget and $3.5 billion in rescissions. Clearly, the 
program should have its funding returned, the role of OMB clarified, 
and the Program's mission extended.
    As this committee is well aware, DOE's loan guarantee program, 
especially the Sec. 1705 program included as part of American Recovery 
and Reinvestment Act of 2009, not only got off to a very slow start, 
but has been hurt by delays in making loan guarantee decisions. I 
believe in giving credit where due, though. Over the last year, my firm 
has seen a major transition in the operation of the DOE Loan Guarantee 
Program under Jonathan Silver, including the much-needed addition of 
seasoned project finance professionals with extensive energy financing 
experience.
    The proof of that change is striking. Not too long ago, we would 
have expected to wait at least three months for approval by DOE of a 
``Part I'' loan guarantee application. Last month, our most recent Part 
I application was reviewed and approved in only six working days. That 
is progress you can measure. Our experience is consistent with the 
conclusions of the Government Accountability Office which last July 
issued a report detailing shortcomings of DOE's management of the 
program, but also noted that DOE has ``increased the Loan Guarantee 
Program's staff, expedited procurement of external reviews, and 
developed procedures for deciding which projects should receive loan 
guarantees.''

            THE ROLE OF THE OFFICE OF MANAGEMENT AND BUDGET

    This is not to say that the program has worked well since the 
beginning, when there was insufficient staff and capacity to allocate 
funds quickly and effectively. On February 19, 2009, in the midst of a 
financial crisis that had essentially paralyzed the financial markets 
needed to support renewable energy development, we were encouraged when 
Secretary Steven Chu announced in a press release that the Department 
of Energy would be taking bold new steps to expedite the deployment of 
ARRA funds--especially loan guarantees. In his statement, Secretary Chu 
anticipated moving quickly to finalize guidelines for providing loan 
guarantees by summer of 2009. By March, the Department of Energy had 
drafted and provided to the Office of Management and Budget a set of 
much-anticipated and much-needed proposed modified regulations to 
govern the loan program. Then, for the next six months, we and others 
in our industry watched in consternation and frustration as DOE and OMB 
failed to reach agreement and the proposed streamlining of the program 
failed.
    Beyond OMB's involvement in DOE loan guarantee regulations, loan 
guarantee applicants must wait for OMB approval to finalize their 
application and receive a term sheet, although the role of the OMB in 
these reviews is not clear. Renewable energy trade associations and 
members of Congress are still seeking to fully understand OMB's role in 
evaluating these applications and why OMB appears to be a major cause 
of delay in issuing these guarantees. OMB's level of involvement and 
review times appear to exceed that of other federal loan guarantee 
programs.
    Further, we are concerned that decisions which appear to have been 
initiated by the Office of Management and Budget have seriously 
undermined the financial capacity of the program through rescissions 
totaling $3.5 billion--$2 billion which was used to fund the 
Administration's ``cash for clunkers'' program and more recently $1.5 
billion used to help fund legislation to aid states and localities. 
These rescissions have reduced the available loan authority to less 
than $25 billion, even as DOE receives more requests for loans in 
excess of its lending authority. The total amount of subsidy costs that 
DOE stated in the solicitations of $4.75 billion exceeds the $2.5 
billion of subsidy cost now allocated to the program by $2.25 billion.
    It is our understanding that as of August, DOE had 81 separate 
renewable energy infrastructure and transmission projects either in its 
final ``due diligence'' phase of review or in its Part II review. Of 
these 81 projects, there were 26 in the final ``due diligence'' phase 
that were applying for $12 billion in loans. Doing the math, if these 
loan requests were to be completed at the Department's pledged rate of 
four per month, those loan requests will likely use up all funding for 
this program by February--nearly seven months before this program's 
September 2011 expiration.
    According to DOE the remaining 55 renewable energy projects, which 
are seeking $15 billion in guaranteed loans, have completed the first 
phase of the loan review process and are in Part II. These projects 
have been under review at DOE for many months, and applicants have in 
many cases paid multi-million dollar fees. Tens of billions of dollars 
in additional investment proposed by applicants in Part I have almost 
no hope of receiving a loan guarantee at this time.

                            RECOMMENDATIONS

    To address these problems and strengthen the DOE Loan Guarantee 
Program, we urge Congress to do the following:

          1. Replace the $3.5 billion in funding that has been diverted 
        from the DOE Loan Guarantee Program.

            At a minimum, Congress should immediately replace the $1.5 
        billion that was most recently rescinded from the program. To 
        that end, we strongly support the provisions in the most recent 
        version of the so-called Tax Extenders bill announced by 
        Chairman Baucus that would refund $1.5 billion to DOE's Sec. 
        1703 Loan Guarantee Program, and make important changes to that 
        program--and, as appropriate, to the Sec. 1705 program--to 
        provide needed additional flexibility, including:

   Defray credit subsidy costs. Allow appropriated funds or 
        private capital to be used to defray credit subsidy costs for 
        federal loan guarantees under Sec. 1703;
   Allow multiple projects/sites. Eliminate the restriction on 
        project developers of one loan guarantee per applicant, per 
        innovative technology. Instead, allow a project developer to 
        submit multiple applications for multiple projects employing 
        the same technology, and/or permit an applicant to submit a 
        single application for a qualifying projects on multiple, 
        noncontiguous sites;
   Provide flexible hiring authority. Grant ``Direct Hire 
        Authority'' to the DOE Loan Guarantee Program for consultants 
        and temporary employees, enabling DOE to maintain the personnel 
        resources needed to quickly and efficiently process loan 
        guarantee applications;
   Eliminate credit rating requirement for small projects. 
        Allow the Secretary of Energy to exempt loans smaller than $100 
        million from the requirement that the projects receive a credit 
        rating; and
   Limit administrative fees.

            Refunding the $1.5 billion to Sec. 1703, together with the 
        changes in authorities discussed above for that program and/or 
        for Sec. 1705--many of which were originally included in S. 
        3746 introduced by Chairman Bingaman and cosponsored by 
        Senators Shaheen, Boxer, and Feinstein--would address important 
        shortcomings of the Sec. 1703 Loan Guarantee Program and allow 
        it to serve as a vehicle for ongoing support for financing 
        renewable energy projects beyond the expiration dates that were 
        incorporated into ARRA.
            In strengthening the Sec. 1703 program, Congress should 
        also make clear that the program may be used to support 
        projects that use commercial technologies rather than limiting 
        the program to emerging innovative technologies. To avoid 
        unnecessary delays in financing projects, Congress should make 
        it clear that the Sec. 1703 Loan Guarantee Program is 
        authorized to continue extending loan guarantees under the 
        terms of solicitations previously issued under through the Sec. 
        1705 program. Of particular importance in our view is the 
        Financial Institutions Partnership Program (FIPP) solicitation 
        which allows DOE to issue loan guarantees for commercial 
        projects which are backed by private lenders--thus encouraging 
        and leveraging private capital rather than relying solely on 
        government funding through the Federal Financing Bank. Put 
        another way, uniquely under the FIPP model, DOE's Loan 
        Guarantee Program is serving to catalyze the capital markets to 
        increase investments in renewable energy projects. And with the 
        evolution of a secondary market in DOE-backed securities, we 
        are seeing the creation of an on-ramp for long-term investors 
        to enter into the renewable markets--an especially critical 
        development for smaller/medium sized renewable energy projects.

          2. Extend the ``Commence Construction'' date for the current 
        Sec. 1705 DOE Loan Guarantee Program by two years.

            In our opinion, the DOE Loan Guarantee Program (Sec. 1705) 
        and the Treasury Grant Program (Sec. 1603) are currently the 
        two most important mechanisms for U.S. government support of 
        renewable energy deployment--and both programs are scheduled to 
        expire in the relatively near future. Both of these programs 
        should be extended to provide much needed certainty for project 
        developers and financiers, as well as spurring clean energy 
        jobs.

          3. Limit OMB review of DOE loan guarantees.

            We believe that DOE has taken great strides to strengthen 
        their ability to assess and process loan guarantee applications 
        in a timely way based on commercial terms and risk analysis. 
        That progress will be lost, however, if DOE loan guarantee 
        recommendations are subject to what is essentially a second 
        underwriting process at the Office of Management and Budget--
        adding unnecessary time delays and uncertainty. Mr. Chairman, 
        we would support the provisions of your bill S. 3759 which 
        would limit OMB's time to comment on any application the 
        Secretary of Energy submits for review to 30 days. We believe 
        this is a necessary change.

          4. Support small business lending through the DOE Loan 
        Guarantee Program.

            Smaller renewable energy projects are potentially an 
        important engine for economic growth, jobs, and building a 
        clean energy infrastructure in many regions of the country--
        especially in those regions which may not be able to support 
        large utility-scale energy projects due to limited solar 
        resources, wind resources, fuels feedstocks, etc. However 
        developers of small renewable energy projects have faced a 
        particularly challenging financing environment during the 
        recent economic downturn.
            DOE's Loan Guarantee program--particularly the FIPP--is in 
        a position to offer much needed assistance to small renewable 
        energy project developers. The FIPP could and should be a 
        particularly useful mechanism for attracting private capital to 
        provide lending to smaller energy projects. The challenge is 
        that smaller developers often may not be in a position to 
        invest the resources--both financial and personnel--that it has 
        typically required to navigate the federal loan guarantee 
        process. I would like to take this opportunity to commend the 
        leadership of Jonathan Silver and his staff at Department of 
        Energy for their focus--and real accomplishments--with respect 
        to improving the accessibility of DOE's Loan Guarantee Program 
        for small renewable energy projects. His team at DOE has made 
        huge progress in streamlining the application process to 
        encourage private lenders to finance those smaller projects.
            Even with the impressive progress made by DOE to support 
        lending to small renewable energy projects, many smaller 
        borrowers remain concerned about both the time frames and cost 
        of the federal loan guarantee process. Additional steps 
        Congress should consider to improve access to the program for 
        small developers include:

   Streamline NEPA requirements for small projects. NEPA 
        remains the most significant barrier in terms of time delays 
        for small projects. We would recommend the Congress consider 
        limiting NEPA's application for projects smaller than $200MM, 
        or to clarify and/or expand the categorical exemptions for 
        projects such as rooftop solar or ground mount solar 
        installations below a certain size.
   Eliminate the need for credit ratings for projects under 
        $100mm. The minimum cost for rating agencies to provide ratings 
        is $175,000 which is a high cost for a small project. Given the 
        relatively smaller risk footprint of smaller projects within 
        DOE's loan guarantee portfolio, it would seem reasonable to 
        eliminate that requirement. We wholeheartedly endorse the 
        Chairman's previous legislative support for this needed change.
   Reduce administrative, diligence, and loan costs for small 
        energy projects. DOE could eliminate or reduce the DOE 
        application fee and the 50 bp facility fee for small projects 
        without significantly impacting the cost to the government of 
        the loan program. DOE could also mitigate duplicative diligence 
        costs by using common counsel and consultants with the lender 
        applicant. Standardizing contract terms--not just form of 
        guaranty but also acceptable security documents, tax equity 
        intercreditor terms etc.--could also significantly reduce costs 
        and speed processing times.
   Consider exempting smaller projects from Davis Bacon 
        requirements. It would seem reasonable to set a size threshold 
        for applying Davis Bacon requirements to renewable energy 
        projects seeking loan guarantees. A small business exemption in 
        this area would have a meaningful impact for smaller projects, 
        without significantly affecting labor markets.

          5. Provide for a permanent renewable energy financing 
        mechanism to support US leadership in renewable energy.

            While there are venture capitalists to assist start-ups and 
        there are private equity firms like ours to help finance 
        commercial projects, there is often little to bridge the divide 
        between development of clean technologies and commercial 
        deployment. At its best, that is the role that DOE's Loan 
        Guarantee Program was designed to fulfill, albeit temporarily. 
        I applaud the Chairman and this Committee for your leadership 
        in proposing the establishment of a permanent Clean Energy 
        Deployment Administration (CEDA) to support the development and 
        commercial deployment of new clean energy technologies. From 
        the perspective of the renewable energy investment community, 
        establishing CEDA is a no brainer.
            This past July, the Clean Energy Group published a report, 
        Accelerating Climate Technologies: Innovative Market Strategies 
        to Overcome Barriers to Scale Up, which concluded ``(1) the 
        barriers to rapid diffusion of new climate technologies are too 
        great for the private sector alone to surmount and (2) targeted 
        public sector interventions are needed all along the technology 
        development pathway to overcome specific technical, financial, 
        and market barriers.'' In other words, establish CEDA.
            Another important reason to establish CEDA is international 
        competitiveness. Our major competitors in Asia--China, Japan 
        and South Korea--and in Europe--Germany and Spain--recognize 
        the long-term importance of investing in clean energy 
        technology. While the United States remains the world leader in 
        developing advanced clean energy technologies, we are falling 
        behind as these nations continue to invest public funds to 
        support research, development and commercialization of clean 
        and renewable technologies. CEDA is a critical component of the 
        kind of clean energy competitiveness strategy that the United 
        States must have to compete with other nations moving 
        aggressively to capture global clean tech market share.
                      questions for consideration
    In addition to the recommendations above, there are some additional 
areas of inquiry that I would recommend to the Committee. These 
questions include:

          A. Does the DOE LGP benchmark its financing terms against 
        those that might otherwise be available from the commercial 
        market?

            For example, does DOE LGPO explicitly consider commercially 
        available loan terms for debt-to-equity ratios, repayment terms 
        ``tail'' (the buffer between the maturity of the loan and the 
        revenue-generating contract maturity), cash-sweeps (if 
        applicable for contracted revenue projects), or distribution 
        restrictions? Many other US government lending agencies that 
        support project finance transactions adhere to an explicit 
        ``prudent lender'' threshold to offer terms not more aggressive 
        (or conservative) than the commercial market, unless those 
        terms relate specifically to program guidelines (e.g., OECD 
        Consensus Rules in the case of US Ex-Im Bank).

          B. How does the DOE LGP approach the structural integration 
        of Congressionally authorized incentives for renewable energy 
        projects with its loan guarantee structures, specifically in 
        the case of Investment Tax Credits or MACRS accelerated 
        depreciation?

            USRG understands that a number of applicants have been 
        informed that the DOE LGP discourages capital structures--
        commonly deployed in commercial finance for renewable and other 
        tax-incentivized energy projects--that would permit an 
        application with no or limited federal tax capacity from taking 
        advantage of ITC benefits not otherwise addressed in the 1603 
        ITC Cash Grant program (currently set to expire for projects 
        that have not commenced construction before Dec. 31, 2010) and 
        of MACRS accelerated depreciation. The rationale for this 
        advice from the DOE LGP to applicants is claimed to be the 
        complexity of marshaling such capital structures through the 
        DOE LGP approval process. This would seem to put innovative 
        energy projects seeking support through the DOE LGP at a 
        significant disadvantage in maximizing the incentives 
        authorized by Congress for such projects.

          C. Is the intention of Congress in authorizing the DOE LGP 
        through Sec. 1703 and amended by Sec. 1705 being frustrated by 
        an excessively complex and lengthy approval process?

            Currently, the Program does not feature any explicit 
        approval timeline requirements. The advice from the DOE Loan 
        Guarantee Program office to applicants is that approvals to the 
        Conditional Commitment stage should be expected to take a 
        minimum of six months. This lengthy approval cycle reflects 
        multiple levels of approvals within DOE and includes additional 
        reviews by OMB with input from other Federal agencies or 
        departments. Does this approval process negatively affect the 
        DOE Loan Guarantee Program's ability to offer ``prudent 
        lender'' terms and to incorporate tax efficient capital 
        structures?

          D. Should Congress clarify the relative importance of DOE 
        extending loan guarantees to truly innovative technologies?

            The way in which Congress structured the LGP created a 
        paradoxical situation. On the one hand, Congress has 
        established the Loan Guarantee Program to incentivize 
        innovative technologies. On the other hand, it requires a 
        ``reasonable prospect of repayment'', a goal that seems 
        reasonable but that in practice seems to be interpreted by OMB 
        in such a way as to require very low risk projects and near-
        certain cash flows. This has created confusion throughout the 
        industry and within DOE as to the proper way to extend loan 
        guarantees to the best innovative projects.
            Mr. Chairman, this concludes my testimony on the Department 
        of Energy's Loan Guarantee program. I appreciate the 
        opportunity to appear before the Committee, and would welcome 
        the chance to address any questions that you or members of the 
        Committee may have.

    The Chairman. Thank you very much. Mr. Meyerhoff, please go 
right ahead.

    STATEMENT OF JENS MEYERHOFF, PRESIDENT, UTILITY SYSTEMS 
                BUSINESS, FIRST SOLAR, TEMPE, AZ

    Mr. Meyerhoff. Thank you very much, Mr. Chairman and 
committee members for the opportunity to talk about the DOE 
Loan Guarantee Program today.
    The program is of significant important to the industry and 
to First Solar as the largest PV manufacturer in particular as 
it provides significant liquidity to finance large scale solar 
photovoltaic infrastructure investment.
    As it provides lending terms commensurate with the useful 
life of these generation assets.
    As it provides cost of capital that allow renewable energy 
electricity cost to scale toward grid parity.
    No. 4 as it provides a very important migration vehicle in 
order for our industry to scale into institutional life 
infrastructure financing.
    My name is Jens Meyerhoff. I'm the CEO of First Solar and 
the President of First Solar Utility Systems Business Group.
    First Solar is the world's largest manufacturer of 
photovoltaic panels.
    First Solar was built on a proprietary U.S. developed thin 
film technology that has afforded the clear cost leadership in 
the global U.S.--in the global photovoltaic market.
    We have grown our company over the past 5 years from less 
than $100 million profitably to over $2 billion in 2009. Today 
we employ over 5,000 people of which 1,500 associates work here 
in the United States. Next to being the largest manufacturer of 
PV solar panels, we've also become the largest developer of 
photovoltaic generation assets with a pipeline of over 2.2 
gigawatt of contracted projects in the United States alone. 
This pipeline represents an infrastructure investment need of 
over $6 billion. This pipeline also represents 10,000 man years 
of employment, construction work and manufacturing work.
    Out of this pipeline we today have 4 projects representing 
about 1.6 gigawatts in the application processes for both the 
1703 and 1705 programs. Let me allow you to give a little bit 
of an overview of how we view and try to utilize these 
programs.
    The 1703 program obviously designed to commercialize 
innovative technologies. For us innovation happens 
predominately around a grid friendliness and energy yield 
driven out of our already commercialized module technology. To 
give you an idea, in Europe alone we have over 2 gigawatt of an 
installed base that represents about $8 billion of 
infrastructure investment to date. So under the 1703 program as 
it requires involvement of technical advisors which was earlier 
discussed as it requires already participation of rating 
agencies, we see this as an important learning and incubation 
vehicle and as a first step toward commercialization of 
institutional financing for solar PV.
    Then as you look at the 1705 program, the 1705 program for 
us takes it to the next step as it requires already a 
commercial lender to underwrite the loan.
    As it creates a bifurcate of capital structure with 2 
tranches. One being guaranteed through the DOE Loan Guarantee 
Program. The other being a free floating commercial tranche.
    This allows us in a controlled way now to access 
institutional markets with investment grade rated photovoltaic 
power plant investment opportunities and drives important 
cycles of learning that ultimately will increase liquidity to 
finance these systems in totality. I would encourage members of 
this committee to also maybe look at Europe because in Europe 
this was done the same way. Both the German Reconstruction Bank 
and the European Investment Bank provided similar financing 
aids in the early stages which today has grown to a very 
efficient commercial lending and infrastructure financing 
market for products in that part of the world.
    Our experience overall in the DOE Loan Program I would say 
generally has been--we have been moving forward. We really 
appreciate the support of the DOE staff and Mr. Silver's 
leadership. But we've also seen, I think, our fair amount of 
challenges.
    It took a long time, especially for all the 1705 program to 
be articulated and to be clearly understood how the program 
would actually work. The negotiations between the DOE and the 
commercial lenders that ultimately would be underwriters were 
lengthy and essentially delayed the implementation of the 
program probably by over a year which obviously took critical 
time out of the program. The program's transparency is not very 
high and I think we talked about this already in this room this 
morning. But more importantly the program is not extremely 
predictable.
    If you think about an application under 1703 or 1705 can 
cost a company anywhere between $2 and $5 million. Now First 
Solar is a very well capitalized company. For us $2 to 5 
million is an investment that is easily taken.
    However for younger emerging companies this is a very 
significant amount of money. The money effectively is put at 
risk. It is put at risk with respect to the credit decision 
which would be a risk I think appropriate.
    But it has also put at risk from a timing point of view 
because the 1705 program has an expiration date. So unless 
funding--there's a funding deadline of September 2011, so which 
means that the overall timeline including the permitting of a 
project for example, the conditions precedent as were earlier 
stated, these are not highly predictable for any type of power 
plant development. So for a company you can lose it all.
    So the question was earlier made with respect to well why 
would people go and opt for other programs like Eximbank 
financing, for example was mentioned. These programs are 
predictable. They're returnable. They don't have a sunset date 
to them.
    Another challenge in the programs has been the aspect of 
commercial negotiation. They're very clear lending standards 
established in Europe and a very clear credit assessment has 
been established around photovoltaic generation assets that 
have lent to high leverage ratios. Those leverage ratios at 
times are 80 to 85 percent. Debt service coverage ratios of 1.2 
to 1.25 are being tolerated.
    What we're seeing in the process here is a fairly lengthy 
commercial negotiations and we're nowhere near a 1.2 or 1.25 
ratios. We're operating north of 1.4 which provides obviously 
additional credit resilience. But it's not exactly clear how 
those decisions are being made.
    I heard earlier the mentioning of a portfolio approach. I 
believe it is very difficult to implement a portfolio approach 
in project finance because project finance is about financing a 
specific project. So for us if there's a portfolio approach of 
multiple projects behind our own project that would make it 
very difficult, I think, to be predictable.
    So the other challenge that we obviously seen is the 
removal of funds, the rescission of funds from the program. 
Obviously has created a significant ripple wave. Just to give 
you an idea as those decisions are made they create a lot of 
cycles within a company like First Solar because we have to 
determine what it means to our application. We have to 
determine and assess a risk of the overall financing of these 
very large programs. So that's been very, very disruptive to 
the process.
    So now as we look forward I would also like to state that 
we have seen definite improvement in our application progress. 
I'd like to commend Mr. Silver for a lot of the hard work that 
has been done. I would say we've definitely seen more traction 
in the last few months. So which would state that a lot of the 
challenges we've been having or part of the challenges have 
been based on cycles of learning. We're doing something new 
here. I think it's an exchange, an open exchange. I think a lot 
of mutual learning cycles have been achieved.
    Now as we look forward in order for these programs, I 
think, to truly fulfill their capabilities similar to what we 
have seen--what we've seen in Europe we would recommend A, 
either an extension of the 1705 program because we've lost a 
lot of time in the front. So receiving some of the time back 
would be very important. We would like to consider whether we 
would move away from the funding deadline to an application 
deadline because that way programs that have passed through the 
application gates are predictable and can be executed and don't 
battle in addition to substance, right, battle just with the 
heart with a heart timeline.
    So to give you an idea maybe of one more time about the 
pipeline and it's if we were about to apply, file an 
application and that application was on a project based on 
private land somewhere in California we would have all 
environmental permits completed within the State of California. 
Filing those applications would require us a redundant effort 
of getting a full NEPA environmental permit that takes very 
extensive time. So the answer likely would be today that we 
would not be filing that application because we would likely 
miss that September 2011 timeline.
    So we would like the program's funds to be restored like 
Mr. Newell, I think made the same statement.
    We'd like to consider the calculation of the subsidy cost 
to be at least revisited. I would tell you I mention just for a 
solar loan has financed about $8 billion worth of solar PV 
renewable infrastructure in Europe. I am not aware today of a 
single default in any of those financings. Again, those 
financings were executed at significantly higher leverage 
ratios.
    So the risk profile around these generation assets is well 
understood in Europe. I encourage us to take learning. We don't 
have to reinvent the wheel. We can take a lot of learning out 
of that market and transfer it over.
    I think the last comment I wanted to make deals with the 
1603 Treasury Grant. It was earlier my written testimony was 
cited in an earlier question. I want to clarify the point we 
want to--we were about to make.
    A. The 1603 program, the grant program in lieu of the 
investment tax credit provides the equity component to the 
project financing. If that equity component doesn't work 
effectively due to not enough tax appetite by the investor 
we're constraining the build out of renewable energy on the 
equity side regardless of how well the lending side has been 
optimized. So we need to think about both programs being in 
place because they're highly synergistic.
    In addition as it relates to the economic benefits and this 
is where I think we not only have to drive term but we also 
have to align the economics. Under the grant program the 
cashflows flow through the project entity. Under the ITC the 
cashflows flow through the corporation, invisible to the 
project.
    We have seen the DOE taking the stands that if the 
cashflows flow through the project entity they in part will be 
reclaimed to repay the DOE guaranteed debt effectively reducing 
the leverage and debt quantum. So effectively one project 
cannibalizes to some degree the other program and we would like 
that to be reconsidered and to be thought through whether that 
that is actually in the spirit of the 2 programs in harmony.
    That concludes my remarks.
    [The prepared statement of Mr. Meyerhoff follows:]

   Prepared Statement of Jens Meyerhoff, President, Utility Systems 
                    Business, First Solar, Tempe, AZ

    Chairman Bingaman and members of the committee, thank you for the 
opportunity to appear today before the Committee to offer my 
perspective on the U.S. Department of Energy's Loan Guarantee Program. 
Before I begin, however, Mr. Chairman, please let me acknowledge and 
thank you for your leadership in bringing federal resources to bear in 
helping develop solar power in the U.S.

                              INTRODUCTION

    I am Jens Meyerhoff, President of the Utilities Systems Business 
group and CFO of First Solar. First Solar is the world's largest 
manufacturer of thin film photovoltaic (PV) solar modules. In addition, 
First Solar is North America's largest developer of utility-scale PV 
solar power plants. First Solar's mission is to deliver clean, 
affordable and sustainable energy by continuously improving efficiency 
and lowering costs.
    First Solar welcomes the opportunity to discuss the importance of 
the Department of Energy (DOE) loan guarantee program in enabling 
deployment of renewable energy, as it provides:

   Liquidity to an emerging infrastructure asset class, 
        enabling early stage large-scale solar deployment;
   Financing terms commensurate with the long lived nature of a 
        solar PV power plant;
   Cost advantages that allow renewable energy sources to scale 
        faster towards grid parity; and
   An important bridge vehicle to open institutional capital 
        markets not yet available to solar PV generation assets through 
        both the Section 1703 and 1705 Loan Programs.

    I'll begin by offering a brief background on First Solar. I will 
then discuss the pivotal role that loan guarantees can play in 
financing renewable energy projects, followed by First Solar's 
experience with the DOE loan guarantee program. Finally, I will offer a 
few suggestions for further enhancing the programs going forward.

                         FIRST SOLAR BACKGROUND

    First Solar is traded on the Nasdaq exchange and is today the only 
renewable energy company included in the S&P 500 Index. First Solar's 
net sales grew from $48 million in 2005 to $2.1 billion in 2009. Our 
company is headquartered in Tempe, Arizona, and manufactures PV modules 
in Perrysburg Ohio, as well as Germany and Malaysia. With 5,500 
employees worldwide, First Solar employs and some1,500 associates in 
the U.S.
    Between 2005 and 2009, First Solar scaled its annual solar module 
production capacity from 20 to over 1,100 megawatts. First Solar has 
invested in excess of $1 billion in its proprietary thinfilm technology 
and manufacturing capacity. This has afforded us a highly 
differentiated market position as the lowest cost producer in the 
industry. As a result, First Solar is capable of providing solar 
electricity at a cost between $0.12 and $0.16 per kilowatt-hour.
    First Solar recently passed a milestone of 2,500 MW of installed 
generating capacity worldwide, representing infrastructure investments 
of over $8 billion. Most of this generating capacity is located in 
Europe, due in large part, to progressive policies favoring the 
deployment of renewable energy technologies, including government-
backed financing programs and long-term price subsidies. In 2009, over 
90 percent of First Solar's modules were sold outside of the United 
States. However, over the past two years, First Solar has been 
aggressively turning its attention to U.S. markets for renewable 
energy. First Solar has invested approximately $750 million in the U.S. 
to acquire multiple solar project development portfolios. First Solar 
now has a 2,200 MW pipeline of advanced stage, utility-scale solar 
projects in North America, driving infrastructure investments in excess 
of $6 billion.
    These are advanced projects, with long-term Power Purchase 
Agreements (PPAs) with creditworthy investor owned utilities. Most are 
in the late stages of permitting, or have already received their 
environmental permits. For example, First Solar's 290 MW Agua Caliente 
project, located in Yuma County, Arizona, has already started early 
stages of construction. Most projects in the portfolio will start 
construction between late 2010 and 2012. A list of First Solar U.S. 
projects is attached as Appendix A.*
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    * Document has been retained in committee files.
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    These projects are beneficial to the environment, to their utility 
power purchasers, and to the local economy. To offer an example, once 
completed, the 230 MW Antelope Valley Solar Ranch One project, located 
in northern Los Angeles County, will produce enough clean energy to 
meet the annual consumption needs of approximately 750,000 local homes. 
A project of this scale will offset approximately 3.5 million metric 
tons of CO2 over the 25 year term of the PPA with Pacific Gas & 
Electric Company, the equivalent of taking 75,000 cars off the road 
over 25 years.
    Each of First Solar's large advanced stage projects in development 
will employ between 250 and 450 construction workers over a period of 
about 2-3 years. That's more than 1,500 jobs over the next four years 
associated with our advanced stage project pipeline. These projects 
will also create local tax revenues and substantial secondary economic 
benefits, providing a much needed boost for the communities in which 
they are located.

  ROLE OF THE LOAN GUARANTEE PROGRAM IN TRANSITIONING TO SUSTAINABLE 
                            SOLAR FINANCING

    The Department of Energy Loan Guarantee Program can play a key role 
in supporting industry growth by reducing financing costs, providing 
liquidity and longer debt terms and fostering the development of robust 
private capital markets to finance large solar projects, the same way 
that similar programs have shown effectiveness in Germany and Europe 
through debt programs guaranteed or directly financed by their 
development banks.
    The DOE Loan Guarantee Program provides some important benefits to 
allow the solar PV industry to migrate towards institutional capital 
markets:

   The innovative 1703 program allows the deployment of new 
        technologies with less operating history. Such technologies 
        usually are unable to obtain investment grade ratings and 
        therefore are subject to higher debt cost, limited liquidity 
        and shorter debt tenures. The 1703 program effectively offsets 
        these shortfalls through direct lending by the Federal Finance 
        Bank. Since the 1703 program still requires a rating, it 
        fosters the early engagement and learning by the rating 
        agencies and independent technical advisors.
   The 1705 program provides the next step in the migration 
        process as it creates a hybrid of government guaranteed debt 
        and a commercially underwritten loans. It requires the 
        applicant to raise capital in the public markets, but in a 
        controlled and supported way. The two tranches of capital allow 
        for broad market access and liquidity, the lower cost of the 
        government guaranteed tranche allows for enhancement of the 
        overall credit through more conservative leverage ratios at the 
        total project level, providing access to the institutional bond 
        market. The program incubates the dialog and marketing of solar 
        PV bonds to the classical infrastructure investor and lender, 
        creating important cycles of learning around a new asset class.

    As multiple projects and technologies have passed through this 
stepped approach, capital markets will be opening up and allowing for 
liquidity flow to solar PV generation assets similar to the way 
traditional generation assets are being financed today.

             OBSERVATIONS AND OPPORTUNITIES FOR IMPROVEMENT

    We are pleased to inform you that we are working with the DOE to 
finance an unprecedented construction volume of utility-scale PV 
projects. To date, we have submitted applications for four U.S. 
projects to the DOE's Loan Guarantee Programs for innovative and 
commercial technologies, amounting to over 1,600 MW. These are very 
large projects located in the U.S. Southwest. Each one in itself is 
larger than any other solar PV project that exists in the world today.
    Although the projects are economically and environmentally viable, 
we believe that these DOE programs are a necessary financing bridge 
until the financial markets in the U.S. are prepared to fund solar 
projects at this scale without risk-sharing with the DOE. First Solar 
has financed over $8 billion in projects worldwide, and we have found 
that markets in Europe have been similarly enabled by government 
programs.
    This is a global industry in which technologies are evolving 
rapidly. First Solar is trying to utilize the DOE's innovative program 
to enable combinations of innovative solar technologies to better 
integrate solar power into the utility grid.
    While our experience in working with the DOE Loan Guarantee Program 
staff has been positive, we are concerned about the following:

   Despite significant efforts of DOE staff and decision 
        makers, the program has been slow to start. The alignment 
        process between the DOE and commercial underwriters was lengthy 
        and created a great deal of confusion.
   The time consuming process required to conduct environmental 
        reviews under NEPA in connection with DOE's loan guarantee 
        commitments has slowed the projects, especially those being 
        developed on private land, and threatens to delay the 
        construction start for many projects beyond the September 30, 
        2011 qualification deadline.
   Commercial negotiations with the DOE appear lengthy and the 
        DOE takes at times positions that are frankly more conservative 
        than what we are used to seeing from commercial lenders. We 
        recognize that some of this is due to a learning curve and, 
        based on recent trends, we are hopeful of further improvement 
        and an ultimate standardization of terms.
   The roles and responsibilities of all participants in the 
        application process seem to be undefined are not transparent to 
        applicants.
   Industry confidence was shaken a few weeks ago when $1.5 
        billion was rescinded from the program raising questions about 
        whether there will be adequate funding for existing 
        applications and future solicitations. In fact, in a letter 
        dated August 26, 2010, to Senate Majority Leader Reid and 
        Appropriations Committee Chairman Senator Inouye, Senators 
        Feinstein and Boxer noted that an additional 81 applications 
        are in the pipeline for processing requesting approximately $27 
        billion in loans. The Senators expressed their concern that 
        DOE's loan authority will likely be exhausted by February 2011. 
        We support legislation introduced by Senator Baucus as part of 
        the so-called ``Tax Extenders'' effort. The Baucus provision 
        would restore credit subsidy funding of $1.5 billion to the 
        Section 1703 program.
   Under the 1705 program, projects that cannot close loans 
        before September 2011 are not eligible. This time-based 
        approach controls eligibility at the back end of the 
        application process after time and money have been spent rather 
        than at the front end.

    Based on our experience the predictability, efficiency and value of 
these programs could be further improved by:

   Considering an extension of the 1705 program, so it has time 
        to fulfill its potential for opening long-term scalable capital 
        markets of large scale solar PV. The current expiration date of 
        September 2011, when combined with the lengthy implementation 
        period creates significant realization risk to projects.
   The cost of a DOE application under both 1703 and 1705 
        programs range between $2.0 and $5.0 million. These are 
        significant commitments, especially for smaller emerging 
        companies. Revise the concept of a funding deadline to an 
        application deadline, so projects in the application process 
        are grandfathered and the application cost are not at risk due 
        to timing, but only subject to project substance.
   Continue to strive for commercially acceptable terms as they 
        relate to credit risk and cash flow usage.
   Establish clear accountability through the application 
        process for all participants in terms of execution timelines 
        during the process and measure compliance. Senator Bingaman has 
        introduced legislation (S. 3759) to limit OMB's time to comment 
        on any application the Secretary of Energy submits for review 
        to 30 days. Such firm timelines throughout the entire process 
        would greatly enhance predictability of the program.
   Restore the full funding of the program.
   Integration of the treasury grant program and the DOE loan 
        programs in terms of availability and economics.

    To summarize, based on our experience: (1) the predictability, 
efficiency and value of these programs could be significantly improved 
by grandfathering projects in the application queue and/or extending 
the program so that it has time to fulfill its potential; (2) continue 
to strive for commercially acceptable terms; establish clear 
accountability throughout the application process; (3) restore full 
program funding; and (4) align the Treasury Grant Program and the DOE 
Loan Program in terms of availability and economics.

                 EXTEND EXPIRING TREASURY GRANT PROGRAM

    While it is not part of the DOE Loan Guarantee Program, we want to 
take this opportunity to highlight our industry's need for extension of 
the Treasury's important 1603 Cash Grant program.
    The Section 1603 Treasury Grant Program represents the equity side 
of our industry's liquidity challenge. The current tax code makes it 
impossible for certain investors to participate, and the securitization 
of equity is impossible. The Treasury Grant Program reduces these 
constraints enough to significantly broaden the capital base for large 
scale solar PV programs. However, enabling large scale financial 
investors such as mutual funds, insurance companies and pension funds 
to participate requires a certain lead time. In our mind the DOE Loan 
Guarantee Program and the Treasury Grant Program are synergistic and 
rely to a certain degree on each other.
    The importance of the Treasury Grant Program can be summarized in 
three key points:

   Liquidity in the equity markets is increased, which makes 
        projects like ours viable.
   The cost of capital is reduced and--therefore cost of 
        renewable energy--by creating competing capital classes with 
        differing return requirements.
   The program provides the equity component of project finance 
        on a cash return basis.

    A recently published white paper produced by US PREF analyzed the 
state of the tax equity markets and determined that tax equity remains 
severely constrained. A copy of the white paper* is attached as 
Appendix B.
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    * Document has been retained in committee files.
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    First Solar joins others in our industry, small and large, to 
extend our thanks to Congress for establishing this program. However, 
the Treasury Grant Program will expire at the end of this year, just as 
it is critically needed to bring projects on line and attract investors 
for new development projects. It is vital that this important program 
be extended though December 31, 2012.

                               CONCLUSION

    The benefits of the DOE loan program can be summarized as follows:

   Significant increase in debt liquidity.
   Important financing bridge, until the U.S. financing markets 
        fully develop for utility-scale solar projects.
   Encourages development of innovative renewable technologies, 
        including those which help utilities to integrate solar power 
        projects into their grids.
   Reduces the cost of capital, which indirectly reduces the 
        cost of renewable power.

    A strong US solar industry is critical to our energy security and 
economic recovery. The Federal government should provide transitional 
incentives of sufficient duration and impact to ensure that those jobs 
are created in the United States.
    We encourage Congress to act now to extend vital programs scheduled 
to expire and to remain committed to longer-term programs necessary to 
attract the global capital and investment required to sustain a growing 
renewable energy sector.
    We look forward to working with Congress to craft solutions to 
create jobs and reestablish America's leadership in solar manufacturing 
and deployment.

    The Chairman. Thank you very much. Thank you.
    Mr. Scott.

   STATEMENT OF MICHAEL D. SCOTT, MANAGING DIRECTOR, MILLER 
             BUCKFIRE & COMPANY, LLC, NEW YORK, NY

    Mr. Scott. Thank you. Mr. Chairman, members of the 
committee, thank you for the opportunity to testify today. My 
name is Michael Scott and I head the U.S. Government investment 
banking business at Miller Buckfire in New York. I'm pleased to 
provide my views on the title XVII Loan Guarantee Program, the 
significant implementation obstacles that title XVII has faced 
and solutions to these obstacles.
    The road map that I lay out is one that the President can 
act on and allows title XVII to be implemented to achieve its 
original purposes as well as the policies and priorities of the 
President, Congress and the American people. Title XVII is a 
very powerful policy tool that is unique and important in the 
current economic environment especially with the U.S. 
Government facing the stresses and difficult choices involved 
with our significant budget deficits. Thoughtful implementation 
of title XVII can drive economic growth through the development 
of private sector, clean energy infrastructure projects that 
are built and fully paid for by the private sector.
    Provide significant short term and long term jobs in 
construction, manufacturing and operations.
    Drive significant new investment in our domestic supply 
chain, manufacturing base and supporting industries such as 
iron and steel.
    Develop environmentally clean and secure domestic energy 
capacity.
    Correct the private market failure to finance clean, 
innovative energy technologies.
    Provide well qualified project sponsors with confidence 
that credible projects can receive a Federal loan guarantee 
through a reasonable and predictable process.
    Create and foster America's leadership and development in 
the deployment of clean energy technologies.
    The failure of title XVII to become a meaningful Federal 
credit program is directly related to the decisions of the past 
Administration in OMB in establishing the process, procedures 
and rules that govern the program today. While DOE is the 
program agency for title XVII OMB's role and responsibility for 
Federal credit places it at the center of success or failure of 
title XVII or any other Federal credit program. To be clear, 
OMB owns Federal credit.
    They are responsible for implementing the Federal Credit 
Reform Act which includes the calculation of the Federal credit 
subsidy.
    They have significant input and final say on the rules and 
regulations implementing any Federal credit program.
    They have tremendous influence on and responsibility for an 
agency's budget.
    They have significant influence on the tools that can be 
helpful in executing Federal credit programs such as the use of 
the Federal Financing Bank.
    The impediments to a fully functional title XVII rests 
largely with administrative decisions of the past. The 
President and his team can correct these problems by providing 
specific leadership and direction to the agencies whose 
responsibilities impact the successful execution of title XVII.
    I would summarize the key solutions that the President can 
deliver administratively as implementing the Federal Credit 
Reform Act in a manner that is literally faithful to the 
language of the statute particularly involving the calculation 
of the Federal Credit Subsidy payment required from the 
borrower under section 1702(b)(2).
    Amending the final rule to correct provisions that are 
inconsistent with the statute, Congressional intent, the 
Federal Credit Reform Act and OMB circulars pertaining to 
Federal credit programs, eliminating maximum loan guarantee 
authorization levels in their inclusion in appropriation acts 
as this approach is inconsistent with the borrower pay 
provision of section 1702(b)(2).
    Establishing a contractual credit subsidy downgrade fee as 
a way to address CBO's concerns that the credit subsidy 
calculation will underestimate the long term costs to the 
taxpayer and therefore require the CBO scoring convention that 
directs a taxpayer funded appropriation of 1 percent of the 
loan guarantee authorization level sought.
    Finally issuing an executive order pertaining to title XVII 
to provide unambiguous direction to the agencies responsible 
for its implementation. This also serves to provide credible 
project sponsors, investors and the supply chain confidence 
that title XVII will be a reasonable, predictable and available 
Federal credit program.
    All of these actions including amending the final rule are 
within the President's authority and can take place reasonably 
quickly.
    I am pleased to answer any questions that you may have.
    [The prepared statement of Mr. Scott follows:]

   Prepared Statement of Michael D. Scott, Managing Director, Miller 
                 Buckfire & Company, LLC, New York, NY

    1Chairman Bingaman, Ranking Member Murkowski, Members of the 
Committee, thank you for the opportunity to testify today. My name is 
Michael Scott and I head the U.S. Government investment banking 
business at Miller Buckfire.
    I appear before you today to provide my views on subjects related 
to the Department of Energy's (``DOE'') Title XVII loan guarantee 
program. In this testimony, I will cover background on the history and 
operation of Federal loan guarantees, the role of the Federal Financing 
Bank and the unique innovative clean energy infrastructure loan 
guarantee program that the Energy Policy Act of 2005 created in Title 
XVII. I will also provide my thoughts on the ability of the Federal 
Credit Reform Act of 1990 to protect the taxpayer from financial loss, 
the significant implementation obstacles that Title XVII has faced 
since passage of the Energy Policy Act of 2005, solutions to these 
obstacles as well as the implications of operationalizing Title XVII 
for the priorities of President Obama, Congress and the American people 
pertaining to jobs, the economy, clean and secure domestic energy 
capacity, and the environment.
    I served for almost five years as a Senior Advisor at the 
Department of the Treasury where I was responsible for, among other 
things, Federal credit policy, the evaluation, negotiation, and 
execution of Federal loan guarantees and direct loans as well as the 
management and oversight of the Federal Financing Bank. In my prior 
role at Treasury, I was one of the principal people who decided how and 
in what manner the large one-off Federal credit programs (such as the 
Air Transportation Stabilization Board, the Rural Economic Development 
Loan and Grant Program in the 2002 Farm Bill, the Alaska Natural Gas 
Pipeline Loan Guarantee Program and Title XVII of the Energy Policy Act 
of 2005) were executed during the September 2001 to July 2006 time 
period. This required me to be deeply involved with OMB on Federal 
Credit Reform Act issues pertaining to the individual Federal credit 
programs as well as the Federal Financing Bank. In conjunction with 
OMB, Treasury plays a significant role in new programs as it has policy 
interests in Federal credit and debt management and because of the fact 
that the Federal Financing Bank is often used to finance Federal loan 
guarantees, including those related to Title XVII. I was as often 
ensuring that deals got done as ensuring that deals did not. Contrary 
to the perception that Federal credit is similar to private sector 
financings and that all that is needed is enabling legislation, new 
Federal credit programs are complicated, rely on a knowledgeable and 
willing Executive Branch for execution, and face many institutional 
obstacles from both OMB and Treasury. Most Federal credit is 
concentrated in long-established and/or entitlement type programs that 
do not require the proactive input of the agencies' senior policy 
officials. The new one-off Federal credit programs are rare enough that 
very few senior officials ever have the chance or need to understand 
the full range of applicable statutes or the tools and issues that 
impact their execution. As we have seen in the implementation of Title 
XVII since late 2006, the President and his Administration can be ill-
served by this asymmetrical knowledge of Federal credit between the 
institutional organs of government and the elected and appointed 
officials.

                 BACKGROUND ON FEDERAL LOAN GUARANTEES

    The U.S. Government generally establishes Federal credit programs 
(loan guarantees and direct loans) for one of several reasons. The most 
common is to correct a private market failure to extend adequate or 
reasonable access to credit and then to provide a path forward to 
correct the market failure. This is the fundamental rationale and 
structure of the Title XVII loan guarantee program. The other reasons 
include targeted efforts to support national priorities or national 
emergencies. Setting aside the credit or capital programs provided 
under the Housing and Economic Recovery Act of 2008, the Emergency 
Economic Stabilization Act of 2008, or the various programs established 
under Federal Reserve authorities to address the financial market 
crisis, the vast majority of pre-crisis Federal credit is concentrated 
in housing, education, rural development and small business. It is 
typically the case that these programs have been in existence for 
decades or generations and are generally characterized by a large 
number of homogeneous transactions involving relatively small dollar 
amounts per loan. In all of these Federal credit programs, with the 
sole exception of Sec. 1703 projects under Title XVII, the U.S. 
Government pays for the ``credit subsidy costs'' by appropriating those 
amounts required as calculated by the Federal Credit Reform Act of 
1990.
    Prior to the Federal Credit Reform Act of 1990, the costs of 
Federal credit programs were only evaluated and appropriated at the 
time of default. This approach did not provide legislators or 
policymakers with the true budget impact of a Federal credit program 
and was inconsistent with the budgeting process in the non-credit 
spending programs of the U.S. Government. Since enactment of the 
Federal Credit Reform Act of 1990, the U.S. Government has calculated 
the net present value of the long-term costs (also known as the 
``credit subsidy costs'') of Federal credit (loan guarantees or direct 
loans). In addition to the obvious cash flows of a transaction and the 
timing of those cash flows adjusted for the probability of default and 
recovery amounts, the credit subsidy calculation also considers the 
contractual and structural protections of the transaction. These 
protections may include, among others, parent or third-party 
guarantees, access to take-or-pay contracts or State PUC rate recovery 
mechanisms, or subordinated structures.
    In those instances where the Federal Financing Bank is providing 
the financing pursuant to an agencies loan guarantee, the resulting 
transaction is considered a direct loan. This requires the credit 
subsidy calculation under the Federal Credit Reform Act of 1990 to be 
performed under the requirements for a direct loan. The most 
significant difference between the calculations of the credit subsidy 
cost of a loan guarantee as compared with that of a direct loan is that 
the cash flows derived from the interest rate spread above the Federal 
Financing Bank's costs of funds (which is the Treasury rate for a given 
maturity) is generally considered an inflow to the U.S. Government. 
This inflow serves to reduce the overall credit subsidy costs that need 
to be appropriated. In the case of the Title XVII program where the 
borrower is paying the full cost of the obligation under 
Sec. 1702(b)(2), this inflow would serve to lower the credit subsidy 
amount that the borrower is required to pay to the Department of the 
Treasury.

                 THE ROLE OF THE FEDERAL FINANCING BANK

    The Federal Financing Bank Act of 1973 created an instrumentality 
of the U.S. Government under the general supervision of the Secretary 
of the Treasury. It was established to coordinate agency borrowings and 
the Federal credit and debt management policies of the U.S. Government. 
By statute, it is authorized to purchase or sell any obligation issued, 
sold or guaranteed by a Federal agency. In practice, the Federal 
Financing Bank finances agencies such as the U.S. Postal Service, the 
FDIC, the NCUA, as well as the loans guaranteed by DOE, the Department 
of Education's HBCU program, and the USDA's Rural Utilities Service. 
The Federal Financing Bank has often been used as an instrument of 
Federal credit policy by Treasury and OMB to constrain program agencies 
and insert additional controls on Federal credit programs. At other 
times, OMB has objected to the availability of the Federal Financing 
Bank in Federal credit programs and barred its use by limiting the 
definition of eligible lender in legislation to ``non-Federal'' 
entities.
    As mentioned previously, one of the most significant benefits to 
using the Federal Financing Bank to finance guaranteed loans (whether 
for the U.S. Government in those Federal credit programs where the 
taxpayer is funding the appropriation or in the case of Sec. 1703 
projects where the borrower is paying the full cost of the credit 
subsidy) is that the credit subsidy amount will be lower as a result of 
the cash inflow to the U.S. Government from the interest spread that 
the Federal Financing Bank earns above its cost of funds. Use of the 
Federal Financing Bank will marginally lower the net credit risk 
exposure of the U.S. Government because loan guarantees that are 
financed by the private sector are financed at a higher interest rate 
than the Federal Financing Bank and therefore the U.S. Government is 
guaranteeing that higher interest rate.
    The Federal Financing Bank also provides certainty of transaction 
execution in all market conditions, which is an important benefit for 
both the borrower and the U.S. Government. During the recent financial 
market crisis, we saw significant periods where entire classes of loans 
guaranteed by the U.S. Government either could not trade or could not 
be traded at levels that one would expect of an obligation guaranteed 
by the U.S. Government. Dislocations in the private markets for U.S. 
Government guaranteed loans or securities backed by these loans provide 
counterproductive signals to market participants, can significantly 
impede the objectives of the underlying Federal credit programs, and 
can potentially have implications in the markets for Treasury's debt 
issuances.

 TITLE XVII HISTORY, CONGRESSIONAL INTENT AND PROGRAM EXECUTION (2005-
                                 2010)

    It is important to consider the original purposes of Title XVII and 
how Congress structured the section to achieve these purposes. In Title 
XVII, Congress recognized that there was a private market failure to 
finance innovative clean energy technologies that reduce greenhouse gas 
emissions and that this market failure encompassed a broad range of 
technologies. Congress also recognized the importance of getting these 
innovative clean energy technologies constructed and into operation, 
however, given the costs of the various technologies, the U.S. 
Government was unlikely to have the budget dollars necessary to 
appropriate to this program in amounts sufficient to achieve the 
purposes of the program. In Title XVII, Congress provided a path to 
finance enough projects to get a technology into ``general use'', at 
which point the market failure is presumed to be corrected. The 
definition of ``general use'' in the Final Rule is three commercial 
projects of a particular technology in the same general application as 
the proposed project, each operating for five years.
    Congress provided two options to pay for the cost of the loan 
guarantees under Sec. 1702(b) which reads:

          ``(b) Specific Appropriation or Contribution.--No guarantee 
        shall be made unless--

          (1) an appropriation for the cost has been made; or
          (2) the Secretary has received from the borrower a payment in 
        full for the cost of the obligation and deposited the payment 
        into the Treasury.''

    Sec. 1702(b)(1) is the traditional approach to Federal credit where 
the U.S. Government pays for the cost of the loan guarantee through an 
appropriation with the cost of the loan guarantee being measured in 
accordance with the Federal Credit Reform Act of 1990.
    Sec. 1702(b)(2) is the ``borrower pay'' alternative where the 
borrower pays the full cost of the loan guarantee with the cost of the 
loan guarantee being measured in accordance with the Federal Credit 
Reform Act of 1990.
    Given the budget constraints of the U.S. Government, both the prior 
and current Administration have opted for the Sec. 1702(b)(2) 
``borrower-pay'' option for the credit subsidy costs to fund Sec. 1703 
projects. In providing the ``borrower pay'' option in Sec. 1702(b)(2) 
as a substitute for a taxpayer funded appropriation, and requiring that 
the ``cost of the obligation'' be measured by the standards in the 
Federal Credit Reform Act, Congress was structuring a program that 
would not impact the Federal budget, would fully compensate the U.S. 
Government for the risks that it was assuming, and would be of 
sufficient size to get clean energy technologies into general use.
    The American Recovery and Reinvestment Act of 2009 amended Title 
XVII to add a temporary loan guarantee program under Sec. 1705 for 
renewable energy and power transmission projects. These ``shovel 
ready'' projects must commence construction by September 30, 2011. The 
credit subsidy costs for projects under Sec. 1705 are paid for by the 
U.S. Government through appropriations.
    Since the passage of the Energy Policy Act of 2005 that provided 
the Title XVII loan guarantee program, we saw the effects of an 
unwilling Executive Branch that published a flawed Final Rule in 2007 
and that operationally executed the program in a manner that was 
inconsistent with the relevant statutes as well as the Congressional 
intent of the program. President Obama and his team are burdened with 
this operational legacy from the prior Administration.
    To understand the potential size of the Title XVII program, from 
August 2006 through August 9, 2010, DOE issued eight solicitations for 
various eligible technologies. According to a July 2010 report from 
GAO, these solicitations generated requests for $174.7 billion in loan 
guarantees. Given that the DOE cannot guarantee more than 80% of the 
project costs, and in fact is frequently directing borrowers to even 
lower percentages, the applications represented an estimated $250 
billion in total project costs. As of August 12th, DOE has closed on 
$695 million of guarantees, all of which have been through the 
Sec. 1705 portion of the program that was created under ARRA. As 
previously mentioned, the credit subsidy costs of Sec. 1705 projects 
are paid for with U.S. Government appropriations.

             FEDERAL LOAN GUARANTEES FOR SEC. 1703 PROJECTS

    Sec. 1703 provides ten broad categories of eligible clean energy 
technology projects that must avoid, reduce, or sequester greenhouse 
gases and employ new or significantly improved technologies. The 
variety of technologies and the purposes for which they are used, 
necessarily result in differing business models, financial 
requirements, contributions to the statutory objectives, technology 
risks and financial prospects. However, Title XVII provides the ability 
to execute the program in a technology neutral manner. This can occur 
by implementing the program under the borrower pay provisions of 
Sec. 1702(b)(2), where the only statutory limit on loan guarantees is 
driven by the amount of time that it takes to get a technology into 
``general use'' and the borrowers willingness to pay the credit subsidy 
and administrative costs. Whereas if Title XVII is executed under the 
requirements of Sec. 1702(b)(1) and the U.S. Government needs to 
appropriate taxpayer dollars, decisions on the allocation of maximum 
loan guarantee levels for each technology become necessary.
    Regardless of the mechanism used to pay for the credit subsidy 
costs of the program, each project is subjected to the same statutory 
and rule requirements that protect the taxpayer and fully price the 
risk that would be assumed for projects that receive a loan guarantee. 
For example, the statute requires the project sponsor to have at least 
20% ``skin in the game'' as DOE cannot guarantee more than 80% of the 
project costs. Each application is subjected to an extensive due 
diligence process by the U.S. Government, a rating agency as well as by 
the project sponsor. The terms and conditions of the individual 
projects are supposed to be fully reflected in the calculation of the 
credit subsidy under the Federal Credit Reform Act of 1990. These 
calculations have been employed for a wide variety of Federal credit 
programs and when employed on a project basis, as opposed to a 
portfolio basis, ensure that all relevant factors of the individual 
projects are considered. On June 22, 2007, then CBO Director Orzag sent 
Chairman Obey a letter that commented on the ability of the Rural 
Utilities Service to implement a loan guarantee program that would be 
designed to result in ``no net cost'' to the U.S. Government. CBO 
expressed concerns that programs that utilized a single average rate 
would be very difficult to manage to the ``no net cost'' to the U.S. 
Government and then proceeded to lay out the structure and process of a 
program that could achieve the objective of ``no net cost.'' The most 
significant recommendation is to establish the credit subsidy fee based 
on each individual project.
    It is important to understand the issues and process that one 
undergoes with DOE which applies to all technologies. After an 
extensive review process of the technology and business plan of a 
project sponsor, that includes an initial project rating by a rating 
agency (for those projects exceeding $25 million) as well as a full 
evaluation by the U.S. Government, DOE decides whether or not to offer 
a ``term sheet'' to a prospective project sponsor. Once the ``term 
sheet'' is agreed to by both the DOE and the project sponsor, a 
``conditional commitment'' is issued. During this phase of the process, 
the DOE and OMB will provide the project sponsor with a nonbinding 
estimate of the credit subsidy costs that they will be required to pay 
at closing. The ``conditional commitment'' will detail the conditions 
precedent required for closing, which include all contractual, 
statutory and regulatory requirements. In addition to these 
requirements, at a time no later than 30 days prior to the fulfillment 
of the conditions precedent and scheduled closing, the final project 
business plan will have been evaluated by a rating agency to determine 
the actual rating for the project, and the project sponsor will submit 
all of this to DOE and OMB for evaluation, compliance with the 
conditional commitment, as well as the calculation of the actual credit 
subsidy costs.
    The time period between the ``conditional commitment'' and the 
period just before the financial closing provides uncertainty for those 
costs that have not been contractually set. However, these costs will 
be substantially confirmed prior to closing and the development of the 
final business plan will ensure that the full costs of the project are 
used to determine the actual credit subsidy costs. For the project 
sponsor and its investors, who will have invested significant sums of 
their own before any financial closing on a Federal loan guarantee, the 
final business plan will either confirm the financial viability of the 
project or the need to cancel the project and therefore not close on 
the Federal loan guarantee. As it relates to post-closing cost 
overruns, prior Title XVII commitments required that any post-closing 
cost overruns be paid for with new equity from the project sponsor.
    For a variety of reasons, the actual closing on the conditional 
commitment will be a very complicated process. It will be complicated 
because satisfaction of the conditions precedent is often only 
achievable with the passage of significant time. However, this interim 
period will provide better and up-to-date information (that may be 
neutral, favorable or unfavorable) that will drive the final business 
plan and the rating agency process that will ultimately factor into the 
calculation of the actual credit subsidy costs. While there are some 
Final Rule based issues that add ambiguity into the actual closing that 
are neither normal nor customary in either the private markets or in 
Federal credit programs, the broad process contributes significant 
protections to the taxpayer.
    Labor has an important role in Title XVII projects and has taken 
proactive steps to provide cost certainty, work quality, and the 
availability of a highly skilled workforce for these important 
projects. For example, the Building and Construction Trades Department 
of the AFL-CIO has entered into Project Labor Agreements with a number 
of Title XVII project sponsors selected for due diligence by DOE. These 
agreements will help project sponsors control the labor and quality 
costs of the projects and focus all participants on bringing high 
quality projects in on-time and on-budget. This will also materially 
contribute to reducing the overall risk of the projects to the U.S. 
Government.
    The detailed Project Labor Agreements are designed to supply the 
highly skilled and trained workforce needed for these complex and 
crucial clean energy infrastructure projects. They include the 
establishment of multi-craft training centers located near or on the 
new sites, rearranging traditional apprenticeship parameters so that 
apprentices arrive on the job with productive skills from the first 
day, the development of special training partnerships with vendors and 
suppliers to certify all workers on the installation of their 
particular components, and the development of programs to train a local 
workforce for careers in the construction, operation and maintenance of 
these new clean energy facilities.

   PROTECTING THE TAXPAYER AND THE FEDERAL CREDIT REFORM ACT OF 1990

    Historically, the U.S. Government pays for the cost of credit 
subsidy directly with appropriations of taxpayer funds. The one 
significant exception to this is in Title XVII where Congress 
specifically authorized the borrower to pay ``in full for the cost of 
the obligation'' in lieu of a taxpayer funded appropriation. As 
previously discussed, the vast majority of pre-crisis Federal credit is 
extended in homogeneous transactions characterized by high volumes and 
relatively low dollar amounts, concentrated in housing, education, 
rural development and small business. Because the U.S. Government pays 
for the credit subsidy costs of these transactions, the mechanics of 
the calculation and the underlying assumptions used by OMB are of less 
import to the borrower. As a result, OMB makes a number of simplifying 
assumptions which may be appropriate for the U.S. Government when 
broadly seeking to implement the purposes of Federal Credit Reform Act. 
However, this approach can be quite costly to the borrower when the 
transactions themselves are highly customized and part of a unique 
self-pay program. As a result, it is very important that in 
implementing the Federal Credit Reform Act, OMB and DOE do so in a 
manner that is literally faithful to the language of the statute and 
that recognize the highly customized and unique nature of each project.
    One concern in executing any Federal credit program is whether or 
not the Federal Credit Reform Act of 1990 provides an accurate 
calculation of the net present value of the long-term costs to the U.S. 
Government of extending the credit. In considering the accuracy of the 
calculation of credit subsidy across those special one-off Federal 
credit programs such as Title XVII, experience generally shows that the 
initial credit subsidy cost, calculated either by OMB or CBO, are more 
conservative than the actual history of the program. The Air 
Transportation Stabilization Board (``ATSB''), the $10 billion loan 
guarantee program for airlines after the September 11th attacks was 
originally expected to produce a positive credit subsidy in the 30% to 
35% range (a positive credit subsidy ``costs'' the U.S. Government, a 
negative credit subsidy ``makes money'' for the U.S. Government.) The 
ATSB made six loan guarantees, three of which subsequently filed for 
Chapter 11 bankruptcy protection. Even with one $20 million loss due to 
the post-loan guarantee bankruptcy of ATA, the ATSB netted 
approximately $300 million through fees and the exercise of warrants 
after issuing $1.6 billion in Federal loan guarantees, resulting in a 
negative credit subsidy of over 18% for the overall program. In 
considering the credit subsidy costs of the TARP program, Table 4-8 on 
page 41 of the Analytical Perspectives, Budget of the United States 
Government, Fiscal Year 2011 (http://www.whitehouse.gov/omb/budget/
fy2011/assets/econ_analyses.pdf) provides a further example of this. 
This is not to say that the credit subsidy calculation cannot be wrong, 
but it is to say that the Federal Credit Reform Act is a very good tool 
to measure the net present value of the long-term cost to the U.S. 
Government of any Federal credit program, has a good reputation over 
the 20-years since enactment, and absent extreme carelessness on the 
part of the program agency and OMB, is going to properly protect the 
taxpayer.
    As it relates to the calculation of the credit subsidy costs, I 
would offer that single point estimates in either the minimum or 
maximum forms are not supportable suppositions. To follow such a 
directed outcome would reject the relevance and reliability of the 
Federal Credit Reform Act in calculating the credit subsidy costs and 
put the U.S. Government in the untenable position of calculating the 
credit subsidy costs outside of the statutorily required calculation 
under Sec. 1701(2) of Title XVII.
    Properly and faithfully implemented, the Federal Credit Reform Act 
considers all of the cash flows over the entire lifetime of the loan 
including fees, defaults, recoveries and contractual and structural 
protections. This analysis over the entire lifetime of the loan is 
important as the maximum term of a loan guarantee under Sec. 1702(f) is 
the lesser of 30 years or 90 percent of the useful life of the projects 
assets. The ``entire lifetime of the loan'' analysis that is required 
under the Federal Credit Reform Act is substantially different from the 
scoring of non-credit spending programs of the U.S. Government. In 
these non-credit spending programs, there is no attempt to analyze, 
measure or otherwise calculate the costs beyond the 10-year budget 
window. To the extent that the spending program continues beyond the 
10-year budget window, the taxpayer is fully exposed to those costs and 
liabilities.

                       THE TITLE XVII OPPORTUNITY

    The President and Congress have a very powerful policy tool in 
Title XVII that is unique and important in the current economic 
environment, especially with the U.S. Government facing the stresses 
and difficult choices involved with our significant budget deficits. 
Thoughtful implementation of Title XVII can:

          1. drive economic growth through the development of private 
        sector clean energy infrastructure projects that are built and 
        fully paid for by the private sector;
          2. provide significant short-term and long-term jobs in 
        construction, manufacturing and operations;
          3. drive significant new investment in our domestic supply 
        chain manufacturing base in supporting industries such as iron 
        and steel;
          4. develop environmentally clean and secure domestic energy 
        supply capacity;
          5. correct the private market failure to finance clean, 
        innovative energy technologies;
          6. provide well qualified project sponsors with confidence 
        that credible projects can receive a Federal loan guarantee 
        through a reasonable and predictable process; and,
          7. create and foster America's leadership in the development 
        and deployment of clean energy technologies.

    The reason that Title XVII is so powerful lies in the fact that the 
President does not need new legislative authority or new appropriations 
to make the program work. The legislation for Title XVII provides all 
of the authority that the Executive Branch needs to execute the 
program. Unlike all other Federal credit programs where the U.S. 
Government pays for the credit subsidy and administrative costs of the 
programs, Title XVII provides that the credit subsidy (Sec. 1702(b)(2)) 
and the administrative (Sec. 1702(h)) costs are fully paid for by the 
borrower and substitutes the borrower payments for the appropriations. 
This means that the Federal budget is not affected by the issuance of 
the loan guarantees under Sec. 1703 and that the level of risk assumed 
by the U.S. Government is fully compensated for as measured by the 
Federal Credit Reform Act. The calculation for this risk is completed 
in the same manner as if this was a traditional Federal credit program 
where the U.S. Government paid the credit subsidy costs.
     what are the key impediments to a fully functional title xvii?
    The failure of Title XVII to become a meaningful Federal credit 
program is directly related to the decisions of the prior 
Administration and OMB in establishing the process, procedures and 
rules that govern the program today. While DOE is the program agency 
for Title XVII, OMB's role and responsibility for Federal credit places 
it at the center of success or failure of Title XVII or any other 
Federal credit program. To be clear, OMB owns Federal credit. They are 
responsible for implementing the Federal Credit Reform Act, which 
includes the calculation of the Federal credit subsidy, they have 
significant input and final say on the rules and regulations 
implementing any Federal credit program, they have tremendous influence 
and responsibility for an agency's budget, and they have significant 
influence on the tools that can be helpful in successfully executing 
Federal credit programs, such as the use of the Federal Financing Bank.
    The impediments to a fully functional Title XVII rest largely with 
administrative decisions of the past. The President and his team can 
correct these problems by providing specific leadership and direction 
to the agency's whose responsibilities impact the successful execution 
of Title XVII. The President can correct the impediments by:

          1. Implementing the Federal Credit Reform Act in a manner 
        that is literally faithful to the language of the statute, 
        particularly involving the calculation of the Federal credit 
        subsidy payment required from a borrower under Sec. 1702(b)(2);
          2. Amending the Final Rule to correct rules that are 
        inconsistent with the statute, congressional intent, the 
        Federal Credit Reform Act, and OMB Circulars pertaining to 
        Federal credit programs;
          3. Eliminating maximum loan guarantee authorization levels 
        and their inclusion in Appropriation Acts as this approach is 
        inconsistent with the ``borrower pay'' provision of 
        Sec. 1702(b)(2);
          4. Discontinuing the Financial Institution Partnership 
        Program (``FIPP'') whose function is inconsistent with Title 
        XVII and negatively impacts the targeted technologies and 
        sponsors;
          5. Establishing a contractual ``credit subsidy downgrade 
        fee'' as a way to address CBO's concerns that the credit 
        subsidy calculation will underestimate the long term costs to 
        the taxpayers and therefore require the CBO scoring convention 
        that requires a taxpayer funded appropriation of 1% of the loan 
        guarantee authorization levels sought; and
          6. Issuing an Executive Order pertaining to Title XVII to 
        provide unambiguous direction to the agencies responsible for 
        its implementation. This also serves to provide credible 
        project sponsors, investors and the supply chain confidence 
        that Title XVII will be a reasonable, predictable and available 
        Federal credit program.

    Each of these issues is addressed separately below.

     FAITHFUL IMPLEMENTATION OF THE FEDERAL CREDIT REFORM ACT AND 
            CALCULATING THE BORROWER PAID CREDIT SUBSIDY FEE

Key Concerns in Properly Calculating Federal Credit Subsidy
    For the U.S. Government, an accurate calculation of the credit 
subsidy fee is important because:

          1. It is required under the Federal Credit Reform Act of 
        1990;
          2. It is a requirement of Sec. 1701(2) and Sec. 1702(b)(2) of 
        Title XVII;
          3. It ensures that the U.S. taxpayer is compensated for the 
        risks that they are assuming in providing for a loan guarantee;
          4. It ensures that the Administration is properly protected 
        through a thoughtful and statutorily rigorous methodology; and,
          5. An accurate calculation will provide project sponsors, the 
        Administration, Congress and the American people with the full 
        potential of the Title XVII loan guarantee program to achieve 
        the economic, environmental and domestic energy objectives and 
        policies of the President and Congress.

    For the borrower, an accurate calculation of the credit subsidy fee 
is important because the borrower is required to pay upfront for the 
full cost of the obligation as calculated by the Federal Credit Reform 
Act and therefore it should be done so in a manner that is faithful to 
the relevant statutes, rules, regulations, OMB Circulars, and 
transaction specific facts. The credit subsidy affects the overall 
costs of the investment and borrower's need to have confidence that 
whatever the final outcome, the amount that they would be charged 
reflects the statute and their particular project.
Critical Definitions and Requirements of the Federal Credit Reform Act
    There are several critical definitions and requirements that impact 
the credit subsidy calculation and therefore are important to be aware 
of. Specifically:

          1. Sec. 502(5)(A) defines the term ``cost'' as meaning ``the 
        estimated long-term cost to the Government of a direct loan or 
        loan guarantee or modification thereof, calculated on a net 
        present value basis, excluding administrative costs and any 
        incidental effects on governmental receipts or outlays.''
          2. The term ``direct loan'' is relevant here as a Federal 
        Financing Bank financing converts a ``Loan Guarantee'' into a 
        ``Direct Loan'' and therefore triggers the calculation of the 
        credit subsidy cost under the provisions of Sec. 502(5)(B) 
        which reads: ``The cost of a direct loan shall be the net 
        present value, at the time when the direct loan is disbursed, 
        of the following estimated cash flows: (i) loan disbursements; 
        (ii) repayments of principal; and (iii) payments of interest 
        and other payments by or to the Government over the life of the 
        loan after adjusting for estimated defaults, prepayments, fees, 
        penalties, and other recoveries; including the effects of 
        changes in loan terms resulting from the exercise by the 
        borrower of an option included in the loan contract.
          3. The discount rates used to calculate the net present value 
        is established in statute. Sec. 502(5)(E) reads ``In estimating 
        net present values, the discount rate shall be the average 
        interest rate on marketable Treasury securities of similar 
        maturity to the cash flows of the direct loan or loan guarantee 
        for which the estimate is being made.''

Important Differences between Title XVII and other Federal Credit 
        Programs
    As previously discussed, most Federal credit programs involve 
longstanding programs characterized by a large number of transactions, 
relatively small dollar amounts per transaction, and the U.S. taxpayer 
being responsible for paying the Federal credit subsidy as calculated 
under the Federal Credit Reform Act through an appropriation. Because 
the U.S. Government pays for the credit subsidy costs of these 
transactions, the mechanics of the calculation and the underlying 
assumptions used by OMB are of less import to the borrower. As a result 
of the nature of these programs, certain calculation shortcuts that are 
perfectly acceptable from a broad portfolio perspective and that are 
administratively more efficient are certainly reasonable, particularly 
when the U.S. Government is responsible for the Federal credit subsidy 
appropriation. However, this approach can be quite costly to the 
borrower when the transactions themselves are highly customized and 
part of a unique self-pay program.
    Title XVII provided that the Federal credit subsidy appropriation 
required could be funded by U.S. Government provided (taxpayer) 
appropriations as it is in all other Federal credit programs through 
Sec. 1702(b)(1), or alternatively could be funded by the borrower 
paying the same amount upfront through Sec. 1702(b)(2). Congress 
established the alternative approach of Sec. 1702(b)(2) because it 
understood that the limited budget dollars available for a new Federal 
credit program would not be sufficient to achieve the statutory 
objectives of Title XVII given the number and types of technologies 
eligible under Sec. 1703. Importantly, by enacting a later and more 
specific law, the provisions of Title XVII supersede conflicting 
provisions of previously enacted laws, most relevant in the instant 
case, the Federal Credit Reform Act.
    Implementing under the borrower pay provisions of Sec. 1702(b)(2) 
inherently requires the recognition of the unique characteristics of 
each project. This requires a literally faithful interpretation of the 
Federal Credit Reform Act.
  concerns about omb's approach to calculating federal credit subsidy
    There are a variety of concerns about whether OMB is calculating 
the Federal credit subsidy in a manner that is literally faithful to 
statute. There are a lot of inputs and assumptions that are required to 
be made in the modeling of the spreadsheet that feeds OMB's Credit 
Subsidy Calculator. While the following are not a complete listing of 
the issues, they do represent significant concerns that are 
particularly important in a statutorily faithful calculation.

          1. The cash flows to the U.S. Government from project 
        sponsors are not fully incorporated into the model that OMB is 
        using for Title XVII. These concerns center on several areas:

            a. The interest spread above the Federal Financing Bank's 
        cost of funds (which is the Treasury rate for a given maturity) 
        should be treated as a cash flow to the U.S. Government;
            b. Fees collected from the borrower that are not 
        specifically cost based should be treated as a cash flow to the 
        U.S. Government;
            c. Recovery values should be fully analyzed, valued and 
        treated as a cash flow to the U.S. Government. This represents 
        a significant issue because:

                  i. As outlined in the DOE/OMB Report to the 
                Committees on Appropriations entitled ``Credit Subsidy 
                Methodology'', OMB established a ``base recovery rate'' 
                that could be notched up or down according to a 
                ``number of factors'';
                  ii. In practice, OMB has adopted a base recovery rate 
                of 55% for all projects, regardless of individual 
                project-specific factors;
                  iii. Recovery values will vary on a project-by-
                project basis. This is due to the technology, nature 
                and structure of the project, the project sponsors, 
                contractual differences, as well as other factors. 
                Recovery values need to be considered in a project-
                specific context as there are likely to be multiple 
                sources of recoveries for any particular project. 
                Examples of different sources of recovery include:

                    1. From the sale of the underlying asset serving as 
                the collateral;
                    2. From sponsor commitments to inject new equity 
                based on contractual commitments;
                    3. From commitments from the project's technology 
                and/or EPC contractors to cover certain obligations, 
                such as cost overruns or other contingencies;
                    4. From other collateral provided to the U.S. 
                Government, such as cash collateral accounts; and,
                    5. From other contractual or structural protections 
                agreed to by the project sponsor.

    One concrete example of multiple sources of recovery occurred 
during the execution of the ATSB. The Board hired a variety of 
valuation experts to provide opinions on a range of collateral that the 
ATSB ultimately became contractually entitled to. These experts opined 
on items that would generate recovery cash flows to the U.S. Government 
such as aircraft, real estate, simulators, equipment, gates, routes, 
slots, warrants and contractual provisions. The retention of these 
experts and use of their valuations provided the ATSB with a sound and 
supportable basis to make recovery valuation estimates and incorporate 
the data into the credit subsidy calculation.

          2. The discount rates used in OMB's Credit Subsidy Calculator 
        model reflect the assumptions used in the President's Budget 
        and not the actual ``average interest rate on marketable 
        Treasury securities of similar maturity to the cash flows of 
        the direct loan or loan guarantee for which the estimate is 
        being made'' as directed in Sec. 502(5)(E). This is 
        particularly meaningful as the loan guarantees are being 
        financed by the Federal Financing Bank based on the Treasury 
        rate for a given maturity at the date of disbursement.
            As OMB recognized in a March 11, 1998 letter to GAO 
        pertaining to a GAO report on credit reform (GAO/AIMD-98-14), 
        ``subsidy rates are highly dependent on the interest rate that 
        is used to discount the cash flows. A change in the discount 
        rate will cause the subsidy rate to change, even if the cash 
        flows are unaffected.''
            Recognizing the importance of the discount rates and the 
        statutory language and intent that the Federal Credit Reform 
        Act provides, it is critical that this component be faithfully 
        executed. In the instant case of Title XVII, this is especially 
        important because the Federal Financing Bank is the required 
        lender where the U.S. Government is guaranteeing 100% of the 
        guaranteed obligation (see Final Rule at Sec. 609.10(d)(4(i)). 
        The importance is clear as the Federal Financing Bank is 
        providing financing based on the Treasury rate for a given 
        maturity at the time of disbursement. A faithful interpretation 
        of the discount rate required under the Federal Credit Reform 
        Act would suggest that the discount rate employed would be 
        equal to the base Treasury rate that the Federal Financing Bank 
        is using in its financing to the borrower. Utilizing the 
        Treasury rate assumptions in the President's budget would 
        generally be acceptable as long as the borrower's interest 
        payment cash flows to the U.S. Government are modeled off the 
        same Treasury rate assumptions.
          3. OMB is providing guidance and direction to DOE (and 
        indirectly to applicants) that is inconsistent with the 
        underlying statutes and rules. Specifically, the Final Rule and 
        the relevant solicitations provide for a non-binding estimate 
        of the Federal credit subsidy costs of a proposed project but 
        recognize that the final Federal credit subsidy amount can only 
        be determined near the date of financial closing and 
        disbursement. Common language in the solicitations says ``The 
        final Credit Subsidy Cost determination must be made at or 
        prior to the closing on the Loan Guarantee Agreement and may 
        differ from the preliminary estimate of the Credit Subsidy 
        Cost, depending on project-specific and other relevant factors 
        including final structure, the terms and conditions of the debt 
        supported by the Title XVII guarantee and risk characteristics 
        of the project.'' This is consistent with the requirements of 
        the Federal Credit Reform Act of 1990, Title XVII, the Final 
        Rule and the relevant solicitations. However, OMB has suggested 
        that the non-binding estimate of the Federal credit subsidy is 
        actually an amount that the final credit subsidy required will 
        not be below. This is problematic for four reasons:

          a. It is not consistent with the Federal Credit Reform Act 
        requirement that the credit subsidy cost be determined at the 
        ``date of disbursement'';
          b. It suggests that changes in the final business plan, 
        project rating or transaction structure (whether positive, 
        negative or neutral) are not relevant to the final credit 
        subsidy cost calculation;
          c. The existing assumptions and inputs to used to calculate 
        the Federal credit subsidy estimates have not been faithful to 
        the Federal Credit Reform Act; and,
          d. It is important for project sponsors and other 
        stakeholders to know that there is a statutory and fact-based 
        framework that will be followed with respect to the calculation 
        of the credit subsidy payment required and that positive or 
        negative factors that arise after the term sheet but before 
        financial closing will be fully considered in accordance with 
        the law.

    The faithful implementation of the Federal Credit Reform Act is a 
very time sensitive and critical issue, particularly for those project 
sponsors in the due diligence queue at DOE. The reason is that the non-
binding Federal credit subsidy cost estimates that OMB and DOE provide 
project sponsors, gives the sponsor its first look at the expected 
check that the U.S. Government will seek, and this informs their 
investment decision. If the number provided is at a particular level 
that makes the project uneconomic, principally because the calculation 
was not faithful to the statute, and this drives a project sponsor and 
its investors to abandon a project that would otherwise have been 
viable, then not only have the purposes of Title XVII been frustrated, 
but the loss to everyone is irreplaceable.

                        AMENDING THE FINAL RULE

    The Final Rule needs to be amended to address rules that are 
inconsistent with the statute, congressional intent, the Federal Credit 
Reform Act, and OMB Circulars pertaining to Federal credit programs. 
The Final Rule was originally issued in October 2007. Under Secretary 
Chu's leadership, DOE reviewed the Bush Administration's Final Rule and 
issued a Notice of Proposed Rulemaking in August 2009 to correct what 
it viewed as statutory misinterpretations on several narrow issues. 
While it was clear that DOE was correct to pursue the proposed changes, 
there are in fact other areas where the Final Rule is inconsistent with 
the underlying statute and Congressional intent of Title XVII, 
inconsistent with other applicable statutes, inconsistent with OMB 
Circular's pertaining to Federal credit programs and which impede the 
ability of Title XVII to achieve its purposes.
    The specific items include:

          1. Elimination of the partial guarantee in the Final Rule 
        (Sec. 609.10(d)(4)(ii) and (iii) and in the Sec. 609.2 
        definition of ``Guaranteed Obligation''. Partial guarantees are 
        inconsistent with the statutory definition of ``Full Faith and 
        Credit'' provided in Sec. 1702(j) and impede execution of Title 
        XVII.
            In providing for a partial guarantee in the Final Rule, OMB 
        and DOE have usurped the power that the Constitution gave 
        solely to Congress under Article I, Section 8; the power to 
        pledge the credit of the United States.
            Institutionally, both OMB and Treasury have had a 
        preference for partial guarantees and for which OMB provides 
        guidance under OMB Circular A-129 (Appendix A (II) (3) (a)). 
        The principal rationale for this position pertains to the need 
        for the beneficiary of the loan guarantee to have ``skin in the 
        game''. This particular view fails to recognize that Congress 
        ensured that the project sponsor had ``skin in the game'' by 
        limiting the guarantee to 80% of the project cost in 
        Sec. 1702(c). Regardless of an agencies institutional position, 
        it cannot be imposed in a manner that is inconsistent with the 
        Constitution and the statute, which the current Final Rule is.
            Beyond the Constitutional issues, Congress and the 
        Executive should be concerned whenever rules or regulations 
        cast doubt on the meaning of the U.S. Government's pledge of 
        its full faith and credit as it is detrimental to the U.S. 
        Government's interest in the financial markets. It also creates 
        uncertainty with project sponsors, eligible lenders, financial 
        partners and other stakeholders, all of which impede the 
        execution of Federal credit programs and their general 
        purposes, including correcting a private market failure for 
        credit availability.
            While this particular issue originated in the 2007 Final 
        Rule, in October 2009, DOE created the Financial Institution 
        Partnership Program to implement a partial guarantee program 
        under Sec. 1705. For the reasons discussed herein, this is 
        inconsistent with the statutory language of Title XVII and the 
        Executive and Congress should be very concerned about the 
        implications for both Title XVII and future Federal credit 
        programs.
            The inclusion of Sec. 609.10(d)(4)(ii) and (iii) and the 
        Sec. 609.2 definition of ``Guaranteed Obligation'' are of 
        particular concern. As it relates to the definition, the 
        inclusion of the words ``or any part of'' is troubling as these 
        words are used by Congress when they seek to provide the 
        Executive with discretion to provide less than a full faith and 
        credit obligation; however these words were not included in 
        Title XVII and are inconsistent with the underlying statutory 
        meaning and congressional intent of the words ``Full Faith and 
        Credit'' used in Title XVII.

                  Sec. 1702(j) reads: ``FULL FAITH AND CREDIT.--The 
                full faith and credit of the United States is pledged 
                to the payment of all guarantees issued under this 
                section with respect to principal and interest.''

            The concept of full faith and credit is well established in 
        the Constitution, in statute and in U.S. Attorney General 
        Opinions. After a long history of agencies seeking the formal 
        opinion of the Attorney General as to whether the full faith 
        and credit of the United States is pledged to a particular 
        obligation, Attorney General Elliott L. Richardson issued a 
        Memorandum to the Heads of Executive Departments dated October 
        10, 1973 in which he memorializes the Attorney General's 
        opinion on the meaning of ``full faith and credit of the United 
        States''. The third sentence reads, ``More frequently, however, 
        the pledge of full faith and credit is not in doubt and may 
        well be specified in the statute itself.'' This is the fact in 
        the instant case.
            In 6 U.S. Op. Off. Legal Counsel 233, 1982 WL 170692 
        (O.L.C.), the Attorney General opinion on a full faith a credit 
        question recalls an earlier Attorney General opinion in which 
        he says ``. . .If there is statutory authority for the 
        guaranties, absent specific language to the contrary such 
        guaranties would constitute obligations of the United States as 
        fully backed by its faith and credit as would be the case were 
        those terms actually used.''
            In 6 U.S. Op. Off. Legal Counsel 262, 1982 WL 170697 
        (O.L.C.), the Attorney General says ``It has long been the 
        position of the Attorney General that when Congress authorizes 
        a federal agency or officer to incur obligations, those 
        obligations are supported by the full faith and credit of the 
        United States, unless the authorizing statute specifically 
        provides otherwise.''
            An example of where Congress expressly provided discretion 
        to limit the guarantee can be seen in P.L. 107-42 (Air 
        Transportation Safety and System Stabilization Act).

                  Sec. 107 (2) reads ``FEDRAL CREDIT INSTRUMENT--The 
                term ``Federal credit instrument'' means any guarantee 
                or other pledge by the Board issued under section 
                101(a)(1) to pledge the full faith and credit of the 
                United States to pay all or part of any of the 
                principal of and interest on a loan or other debt 
                obligation issued by an obligor and funded by a 
                lender.''

            In establishing the regulations for ATSB, the Board used 
        the discretion that Congress provided under Sec. 107 (2) to 
        limit guarantees to less than 100% of the principal and 
        interest (see 14 CFR Sec. 1300.14).
            There seems to be very little ambiguity in the statutory 
        understanding of ``full faith and credit'' either by Congress 
        or by the Attorney General. To suggest that the specific 
        statutory language of Sec. 1702(j) referencing ``full faith and 
        credit'' with respect to principal and interest can be further 
        limited beyond the specific limiting statutory language of 
        Sec. 1702(c) seems entirely inconsistent with the historical 
        use and understanding of this language. In fact, this would 
        require one to assume that an agency or officer, authorized by 
        Congress to incur an obligation, has the independent authority 
        to determine the quality or quantity of the guarantee different 
        from any specific limiting language. This presumption has been 
        rejected by the Attorney General and was cited in U.S. Op. Off. 
        Legal Counsel 262, 1982 WL 170697 (O.L.C).

          2. Elimination of the unilateral right of the Secretary to 
        terminate a Conditional Commitment as currently provided in the 
        Final Rule definition of ``Conditional Commitment'' 
        (Sec. 609.2). This provision is inconsistent with Sec. 502(4) 
        of the Federal Credit Reform Act, the standards of the private 
        financial markets for debt and equity conditional commitments 
        and impede execution of Title XVII.
            The Final Rule definition of ``Conditional Commitment'' 
        (Sec. 609.2) contains the provision that ``Provided that the 
        Secretary may terminate a Conditional Commitment for any reason 
        at any time prior to the execution of the Loan Guarantee 
        Agreement; and Provided further that the Secretary may not 
        delegate this authority to terminate a Conditional 
        Commitment.''
            In Federal credit programs, and in the private financial 
        markets for debt and equity, fulfillment of agreed upon 
        conditions precedent is the legal standard for removing any 
        conditionality to an agreement. Sec. 502(4) of the Federal 
        Credit Reform Act reads:

                  The term ``loan guarantee commitment'' means a 
                binding agreement by a Federal agency to make a loan 
                guarantee when specified conditions are fulfilled by 
                the borrower, the lender, or any other party to the 
                guarantee agreement.

            While it might be argued that absent language providing the 
        Secretary with the unilateral right to terminate the 
        conditional commitment, the borrower would be required to pay 
        the full amount of the credit subsidy upon the issuance of the 
        conditional commitment, this fails to distinguish between 
        implementing the program under Sec. 1702(b)(1) and 
        Sec. 1702(b)(2) where the guarantee is also conditioned on the 
        borrower paying the full cost of the obligation at closing. 
        Further, the idea that the borrower should pay the credit 
        subsidy at the time of the conditional commitment in order to 
        remove Secretary's unilateral right to terminate conditional 
        commitment exposes the taxpayer to unnecessary risk that they 
        should not face given the time lag between conditional 
        commitment and the satisfaction of the conditions precedent.
            Providing the Secretary with the unconditional right to 
        terminate a commitment after fulfillment of the conditions 
        precedent introduces a very high level of uncertainty that is 
        detrimental to the interests of the U.S. Government. This 
        negatively impacts the perception of Federal guarantees in the 
        financial markets not only for Title XVII, but in other 
        programs as well. It also provides project sponsors with the 
        unhelpful signal that despite fulfilling the conditions 
        precedent, they may never close on the loan guarantee. This 
        type of language discourages project sponsors from advancing 
        eligible projects. The Executive and Congress should each be 
        concerned about setting new standards and precedents that 
        adversely impact their ability to execute statutes and their 
        priorities.

          3. Elimination of the solicitation requirement in Sec. 609.3 
        of the Final Rule. This requirement is inconsistent with a 
        program where the borrower is responsible for paying the full 
        cost of the credit subsidy and administrative fees as they are 
        for Sec. 1703 technologies and the intent of Title XVII to get 
        technologies into general use. Conforming changes are needed in 
        Sec. 602.2 definition of ``Application'' and ``Pre-
        Application'', Sec.  609.3(a) and (b), Sec. 609.4, Sec. 609.5, 
        Sec. 609.6, and Sec. 609.7.
            The solicitation approach creates a greater likelihood of 
        suboptimal applications as applicants/sponsors are forced into 
        submitting an application at the time and choosing of DOE as 
        opposed to when they, their partners and the financial markets 
        are in the best position to do so. A new ``as-ready'' approach 
        for applicants/sponsors to submit applications should replace 
        the current solicitation process. Applications should then be 
        subject to a simple approval or denial consistent with the 
        statute, rules, regulations, and policies.

          4. Elimination of the competitive evaluation requirement in 
        Sec. 609.7 of the Final Rule. The competitive evaluation 
        requirement is inconsistent with a program where the borrower 
        is responsible for paying the full cost of the credit subsidy 
        and administrative fees as they are for Sec. 1703 technologies 
        and the intent of Title XVII to get technologies into general 
        use.
            It is helpful to frame this issue in the context of all 
        other Federal credit programs, where the U.S. Government is 
        directly paying for the appropriation of the credit subsidy 
        with taxpayer funds. Under the traditional approach, there is a 
        finite amount of monies available to support the credit subsidy 
        and administrative expenses of the program and therefore a 
        finite amount of loan guarantee authority. In this traditional 
        approach to Federal credit programs, where the appropriations 
        are made with U.S. Government funds and specifically limited, 
        it is entirely appropriate to establish the solicitation and 
        competitive evaluation process as a way of allocating scarce 
        resources.
            The ``borrower pay'' mechanisms in Sec. 1702(b)(2) and 
        Sec. 1702(h) statutorily provide the appropriations necessary 
        for both the credit subsidy and the administrative expenses 
        required to evaluate and execute the program subject to the 
        time limitation that a technology is considered in ``general 
        use'' and the project sponsor's willingness to pay for the 
        credit subsidy and therefore the competitive evaluation process 
        only serves to impede the statutory objective of Title XVII.

          5. Elimination of the one project, per technology, per 
        sponsor limitation in Sec. 609.3(a) of the Final Rule. This 
        requirement is inconsistent with a program where the borrower 
        is responsible for paying the full cost of the credit subsidy 
        and administrative fees as they are for Sec.  1703 technologies 
        and the intent of Title XVII to get technologies into general 
        use.
            The limitation on a sponsor to one project per technology 
        is also inconsistent with the statutory purposes of Title XVII 
        which are to commercialize clean energy technologies that 
        reduce greenhouse gas emissions. Title XVII recognizes that the 
        private sector will not fund the targeted technologies on its 
        own and therefore it is in the U.S. Government's interest to 
        participate in its funding until the market failure is 
        corrected. Some of the technologies supported by Title XVII 
        require very large capital commitments and involve a limited 
        number of uniquely and highly qualified operators that are 
        subject to a high degree of regulation. The current prohibition 
        is inconsistent with the statutory and congressional intent of 
        Title XVII, impedes a technology from becoming a commercial 
        technology in general use, and may result in the highest 
        quality sponsors limited to one project with a given technology 
        or proposing multiple technologies for their generation fleet 
        that add complexity and costs unnecessarily, and in ways that 
        are reminiscent of acknowledged mistakes from the past.

          6. Remove the ban on Federal entities in the definition of 
        ``Applicants'' included in Sec. 609.2. Federal power agencies 
        that are directed to the private markets for borrowings and 
        that were not statutorily excluded from the Title XVII program 
        should not be excluded by rule. This is inconsistent with the 
        intent Title XVII to get innovative clean energy technologies 
        into general use.
          7. Include in the definition of ``Credit Subsidy Cost'' in 
        Sec. 609.2, the definition of the ``cost of a direct loan'' as 
        provided in Sec. 502(5)(B) of the Federal Credit Reform Act for 
        those instances where the Federal Financing Bank is providing 
        the financing pursuant to the DOE guarantee.
          8. Assuming implementation under the borrower pay provision 
        of Sec. 1702(b)(2), elimination of the requirement under 
        Sec. 609.9(c)(1) for receipt of authority in an appropriation 
        act as the specific authority is provided by Sec. 1702(b)(2).
        eliminating maximum loan guarantee authorization levels
Historical Context
    Prior to the Federal Credit Reform Act of 1990, the costs of 
Federal credit programs were only evaluated, and appropriated for, at 
the time of default. Over the years, this approach was the subject of 
significant criticism from OMB, CBO, Congress and GAO. During these 
pre-credit reform days, GAO strongly encouraged the imposition of 
limits on the total dollar amount of loans or loan guarantees to be 
issued and OMB often agreed.
    Since enactment of the Federal Credit Reform Act of 1990, the 
standard operating procedure for Federal credit programs has been to 
insert maximum volume authorization levels. This is provided in OMB 
Circular A-129 (prior version Appendix A (II)(3)(e), current version on 
OMB website Appendix A (II)(3)(5)) which reads:

                  Maximum amounts of direct loan obligations and loan 
                guarantee commitments should be specifically authorized 
                in advance in annual appropriations acts, except for 
                mandatory programs exempt from the appropriations 
                requirements under Section 504(c) of the Federal Credit 
                Reform Act of 1990.

    As a practical matter, the post-FCRA era establishes maximum 
authorization levels for those programs subject to the FCRA. GAO's 
Principles of Federal Appropriations Law, Volume II, Chapter 11, page 
11-23 notes:

                  As a result of FCRA, guarantee programs are no longer 
                unrestricted. Even if the applicable appropriation act 
                does not explicitly set a maximum program level, the 
                program level that can be supported by the enacted cost 
                appropriation, reinforced by the Antideficiency Act, 
                constitutes an effective ceiling.
Title XVII's Unique Structure--Borrower-Pays In Lieu of an 
        Appropriation
    In providing the ``borrower pay'' option in Sec. 1702(b)(2) as a 
substitute for a taxpayer funded appropriation, and requiring that the 
``cost of the obligation'' be measured by the standards in the Federal 
Credit Reform Act, Congress was structuring a program that would not 
impact the Federal budget, would fully compensate the U.S. Government 
for the risks that it was assuming, and would be of sufficient size to 
get clean energy technologies into general use.
    On April 20, 2007, GAO issued its Opinion B-308715 where it 
concluded that Sec. 1702(b)(2) confers upon DOE independent authority 
to make loan guarantees, notwithstanding the FCRA requirements. GAO 
said:

                  The language of section 1702(b) makes clear that 
                Congress contemplated two possible paths for making 
                loan guarantees under title XVII. DOE, consistent with 
                FCRA (2 U.S.C. Sec.  661c(b)), could issue loan 
                guarantees pursuant to appropriations for that purpose 
                (EPACT, Sec.  1702(b)(1)); or DOE could issue loan 
                guarantees if it receives payments by borrowers of the 
                ``full cost of the obligation'' (EPACT, Sec.  
                1702(b)(2)). To read section 1702(b) as subjecting 
                title XVII loan guarantees to the requirements of FCRA 
                would read subsection (b)(2) out of the law, and we 
                cannot do that; we have to give meaning to all of the 
                enacted language. E.g., 70 Comp. Gen. 351, 354 (1991); 
                29 Comp. Gen. 124, 126 (1949). See also 2A Sutherland, 
                Statutory Construction, Sec.  46:06 at 193--94 (6th ed. 
                2000). Section 1702(b)(2) is clearly inconsistent with 
                FCRA, and it is a later enacted, more specific law. It 
                is well established that a later enacted, specific 
                statute will typically supersede a conflicting 
                previously enacted, general statute to the extent of 
                the inconsistency. E.g., Smith v. Robinson, 468 U.S. 
                992, 1024 (1984); B-255979, Oct. 30, 1995. For these 
                reasons, we conclude that EPACT section 1702(b)(2) 
                allows DOE to issue loan guarantees if the borrowers 
                pay the ``full cost of the obligation.'' The 
                alternative path clearly represents authority to make 
                loan guarantees independent of and notwithstanding the 
                earlier, more general FCRA requirements.
                  Given our answer to the first part of this question, 
                we need not address the second part which asks whether, 
                in the alternative, section 1702(b)(2) constitutes new 
                budget authority for the purposes of FCRA. Suffice it 
                to say that section 1702(b)(2) provides DOE authority 
                to make loan guarantees independent of FCRA.
Future Approach
    The Administration should eliminate the current approach of 
establishing arbitrary dollar limits for loan guarantees on different 
technologies. The current approach is not only inconsistent with the 
``borrower pay'' appropriation model and the statutory intent to get 
commercial technologies into ``general use'', it harms the U.S. 
Government's ability to incent sponsors and third-party providers of 
capital to invest in new technologies when they consider the cost of 
each technology, the number of projects needed for a given technology 
to become a commercial technology as defined, and the amount of loan 
guarantee authority arbitrarily allocated in the current approach.
    The U.S. Government should acknowledge that under the ``borrower 
pay'' mechanism authorized in Title XVII and implemented for the loan 
guarantee program, the total amount of potential loan guarantees will 
be dependent on:

          1. the amount of time before a technology becomes a 
        commercial technology in ``general use'';
          2. the number and quality of applications/applicants and the 
        applicants willingness to pay the required credit subsidy and 
        application fees;
          3. the ability of the applicants to meet the statutory 
        requirements and rules established under Title XVII; and,
          4. the success of the program in achieving the policy 
        objectives of the U.S. Government.

    This is not to say that every project will or should be approved, 
as thoughtful implementation of Title XVII still subjects each 
application to a rigorous process and those projects that are not 
credible should be rejected. However, thoughtful implementation that 
removes improper rule based impediments and arbitrary limits will 
advance a program that is consistent with the underlying statutes and 
Congressional intent. It will also enhance Title XVII's credibility 
with the private sector and should bring highly qualified project 
sponsors and their projects to the U.S. Government for reasonable 
consideration.
    This approach is consistent with the statute and Congressional 
intent of Title XVII as well as GAO's opinion on DOE's authority. It 
also provides applicants, sponsors, investors, contractors, third 
parties that provide other financial or risk support, and other 
stakeholders with clarity that does not exist today. This clarity will 
incent sponsors to commit to spending the substantial dollars necessary 
to bring projects to a financial closing and provide supply chain 
partners with the business visibility that is necessary for them to 
make new U.S. based investment in manufacturing and operations to 
support their partner's projects.
Congress Appropriation Control
    Congressional concerns over control should be considered through 
agreed-upon formal reporting mechanisms that provide transparency and 
confidence that the program is being implemented thoughtfully and that 
the individual loan guarantees are being structured to achieve the 
objectives of Title XVII, including the long-term protection of the 
taxpayer.
    discontinuation of the financial institution partnership program
    Discontinue the Financial Institution Partnership Program 
(``FIPP''). First, the execution of a partial guarantee program is 
inconsistent with the Full Faith and Credit provided under Sec. 1702(j) 
as discussed earlier. Second, the financing execution provided under 
FIPP is inferior to that of the Federal Financing Bank and 
significantly more costly to the U.S. Government and the borrower, all 
of which impedes the program, particularly Sec. 1705 projects. This 
will have significant positive impacts on the implementation and 
execution of Sec. 1705 projects, addressing a major source of 
unnecessary friction with key constituents.
    addressing cbo's credit subsidy concerns and scoring convention
    Establishment of a ``credit subsidy downgrade fee'' as a way to 
address CBO's concerns that the credit subsidy calculation will 
underestimate the long term costs to the taxpayers. CBO's scoring 
convention currently requires a separate 1% credit subsidy 
appropriation for Title XVII loan guarantees (over and above the 
borrower paid credit subsidy fee).
    The ``credit subsidy downgrade fee'' would be a contractual 
provision that addresses CBO concerns that principally result from 
``project downgrade risk''. Operationally, DOE would require every term 
sheet, conditional commitment and final documentation, to include the 
credit downgrade trigger that would require the borrower to pay 25 
basis points in additional interest rate spread for each two notch 
downgrade up to a maximum of 50 basis points (``credit subsidy 
downgrade fee''). This contractual provision would be in lieu of the 
current CBO requirement of a 1% credit subsidy appropriation. The 
credit downgrade trigger would be activated upon the downgrade by one 
or more of the rating agencies and would remain in effect as long as 
the downgrade persists. Subsequent upgrades that return the project 
rating to the original rating will reduce the credit subsidy downgrade 
fee up to the 50 basis points maximum.
    This approach saves the U.S. Government from having to use scarce 
budget dollars for the CBO 1% credit subsidy appropriation, yet 
provides the U.S. taxpayer with the protection from the downgrade risk 
that CBO is seeking. All of this is accomplished through a borrower 
paid contingency fee, maintaining the statutory intent of 
Sec. 1702(b)(2).

                ISSUING AN EXECUTIVE ORDER ON TITLE XVII

    Issuance of an Executive Order pertaining to Title XVII, the Final 
Rule issues to be addressed, the operational execution of maximum loan 
guarantee authority issues and calculation of the Federal credit 
subsidy, appropriation issues as well as Administration policy and 
objectives pertaining to jobs, clean energy infrastructure development, 
domestic energy supply, the environment and domestic manufacturing 
priorities.
    This approach provides the Executive Branch agencies with the 
unambiguous Presidential leadership and direction necessary to 
establish a fully functional Title XVII. It also provides the private 
sector with an equally clear message that Title XVII will be a 
reasonable, predictable and available Federal credit program.

                                SUMMARY

    In summary, Title XVII is a very powerful policy tool that provides 
a means to achieve the priorities and policies of the President and 
Congress pertaining to jobs, the economy, clean and secure domestic 
energy capacity, and the environment. It does so through a clean energy 
infrastructure build that is fully funded by the private sector. This 
build will also be the engine of growth in the investments that develop 
our domestic supply chain manufacturing base in supporting industries 
such as iron and steel. The key to all of this is a fully functional 
Title XVII. The President and his Administration can accomplish these 
critical objectives by exercising their discretion to amend the Final 
Rule and to provide direction to OMB, DOE and Treasury on the 
operational execution of this Federal credit program as well as his 
policies and priorities. I am pleased to answer any questions that you 
may have.

    The Chairman. Thank you very much.
    Mr. Fertel, we're glad to have you here. Go right ahead.

 STATEMENT OF MARVIN S. FERTEL, PRESIDENT AND CHIEF EXECUTIVE 
               OFFICER, NUCLEAR ENERGY INSTITUTE

    Mr. Fertel. Thank you, Mr. Chairman and thank you, members 
of the committee for holding this important hearing today.
    The nuclear industry is encouraged by the award of 
conditional commitments to the Vogtle nuclear power project and 
the Eagle Rock uranium enrichment facility and the fact that 3 
other nuclear power projects and one additional uranium 
enrichment project are well advanced in due diligence process. 
We are also encouraged by the Administration's willingness to 
address challenges associated with implementing this program 
including the President's proposal to authorize an additional 
$36 billion in loan guarantee volume in Fiscal Year 2011 and 
the revision to the final rule governing the program to allow 
sharing of collateral with other lenders.
    However despite this progress the Title XVII Loan Guarantee 
Program faces significant challenges. For the nuclear industry 
one of the most significant challenges involves determining the 
credit subsidy cost of the title XVII loan guarantees. Since 
borrowers receiving loan guarantees for nuclear projects are 
expected to pay the cost associated with those guarantees the 
industry has a legitimate interest in the assumptions and 
methodology used to calculate the credit subsidy cost.
    Credit subsidy cost are calculated using a credit subsidy 
calculator developed by the Office of Management and Budget. Of 
the major inputs to the calculator 2 of them the fall 
probability and recovery rate in the event of the default have 
the greatest impact on the results. It is our understanding 
that the Executive branch employs a recovery rate of 55 percent 
across the board for all energy technologies and projects being 
considered for loan guarantees.
    Using a standardized recovery rate does not satisfy the 
requirements of the Federal Credit Reform Act. In addition a 
recovery rate chosen of 55 percent does not, based on our 
research, have any basis in actual market experience with 
financial structures like those being proposed under title 
XVII. Consistent with FCRA, NEI believes that the most accurate 
and equitable process for calculating credit subsidy cost is a 
detailed, project specific assessment.
    FCRA requires the government to consider all the cashflows 
from the terms of the loan including fees, defaults and 
recoveries. For large customized transactions like those 
authorized for the Energy Policy Act of 2005 accurate estimates 
of a recovery can only be derived from project specific 
analysis. Even if it were acceptable to use standardized ``one 
size fits all'' assumptions the 55 percent recovery rate now 
used is well below the recovery rates observed historically for 
regulated utility debt and project finance debt.
    According to historical data recovery rates for these types 
of debt typically range from approximately 85 percent to 100 
percent. NEI has developed the White Paper* that provides 
historical perspective on these issues. I ask permission to 
have that White Paper be included in the record of this 
hearing.
---------------------------------------------------------------------------
    * Document has been retained in committee files.
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    The Chairman. We'll be glad to have that as part of the 
record.
    Mr. Fertel. Thank you.
    It is vitally important that the credit subsidy cost be 
calculated accurately. If current practices continue the 
Executive branch will continue to produce inflated credit 
subsidy costs. Project sponsors in turn will simply abandon 
otherwise credit worthy, in our case nuclear projects and the 
Nation will forgo the carbon free energy and tens of thousands 
of well paying jobs represented by these facilities.
    The difficulties in implementing the Title XVII Loan 
Guarantee Program cannot be laid entirely at the Department of 
Energy's doorstep. Other Executive branch agencies, as we've 
already heard, including the Office of Management and Budget 
play a very significant role, often governing, in determining 
the rules and protocols up for this program. In our experience 
the Department of Energy staff working on loan guarantees from 
senior leadership to program management, from loan offices to 
legal, financial and market advice as on the due diligence 
teams are experienced, highly trained professionals. They're 
committed to trying to make this program work.
    Mr. Chairman, we have reviewed the 2 pieces of legislation 
you introduced, S. 3746 and S. 3759 which make a number of 
changes to the underlying statute to address some of the 
difficulties that have arisen during the implementation. Many 
of these changes are designed to address issues encountered by 
the renewable energy community and not nuclear energy projects. 
However we fully support them and I would also say I fully 
support what my colleagues have said about extending the time 
line on 1705, even though nuclear has no role in 1705 program.
    NEI believes all these programs must operate efficiently 
and effectively for all clean energy technologies. We have 
identified a few additional statutory changes largely designed 
to address the defects in the current process for developing 
credit subsidy costs. Among these are these:
    Require the Executive branch to use project specific 
analysis in developing recovery rates and other inputs to the 
credit subsidy calculator.
    Allow project sponsors to pay the credit subsidy cost 
annually based on the next years anticipated draw.
    Address the lack of transparency that characterizes the 
current process for determining the credit subsidy fee.
    We would say the final authority in determining credit 
subsidy costs with the Secretary of Energy.
    Mr. Chairman, we would appreciate the opportunity to work 
with the committee staff in developing these proposals further. 
We hope you and other members of the committee would support 
such an initiative.
    One other challenge deserves mention. The success of the 
Clean Energy Loan Guarantee Program has been hampered by a lack 
of certainty over loan volume. Project developers must have 
clear lines of sight that financing will be available if we 
expect them to continue spending millions of dollars or in the 
case of new nuclear projects and fuel supply facilities, 
billions of dollars, necessary to maintain project schedules.
    In this regard, Mr. Chairman, let me commend this committee 
for having recognized long ago that the scale of the energy and 
environmental challenges facing our nation requires an 
effective, long term financing platform to accelerate 
deployment of clean energy technologies. For this reason NEI 
continues to support creation of the Clean Energy Deployment 
Administration as envisioned in S. 1462, the American Clean 
Energy Leadership Act which was approved by the committee in 
June 2009.
    Thank you, Mr. Chairman. I would be pleased to answer any 
questions you and the committee have.
    [The prepared statement of Mr. Fertel follows:]

 Prepared Statement of Marvin S. Fertel, President and Chief Executive 
                   Officer, Nuclear Energy Institute

    Chairman Bingaman and members of the committee, thank you for your 
interest in the loan guarantee program authorized by Title XVII of the 
2005 Energy Policy Act, and your commitment to address the issues and 
challenges that have arisen in the course of implementing this 
important program.
    My name is Marvin Fertel. I am the President and Chief Executive 
Officer of the Nuclear Energy Institute (NEI). NEI is responsible for 
establishing unified nuclear industry policy on regulatory, financial, 
technical and legislative issues affecting the industry. NEI members 
include all companies licensed to operate commercial nuclear power 
plants in the United States, nuclear plant designers, major architect/
engineering firms, fuel fabrication facilities, materials licensees, 
labor organizations, universities and other organizations and 
individuals involved in the nuclear energy industry.
    NEI recognizes the challenges associated with establishing a 
financing program of this magnitude. The nuclear energy industry is 
encouraged by the award of conditional commitments to the Vogtle 
nuclear power project and the Eagle Rock uranium enrichment facility, 
and the fact that three other nuclear power projects and one additional 
uranium enrichment project are well-advanced in the due diligence 
process. These projects, and many more like them, are essential if our 
nation is to meet our goals for clean energy and job creation.
    Since taking office, the Obama Administration has demonstrated a 
willingness to address major challenges associated with implementing 
this program, including the president's proposal to authorize an 
additional $36 billion in loan guarantee volume in fiscal year 2011, 
and the revision to the final rule governing this program to allow 
sharing of collateral with other lenders, without which the program 
simply would not function.
    Despite this progress, however, the Title XVII loan guarantee 
program faces significant challenges that will limit its effectiveness. 
For the nuclear energy industry, one of the most significant challenges 
involves determining the credit subsidy cost of Title XVII loan 
guarantees. Since borrowers receiving loan guarantees for nuclear 
energy projects are expected to pay the cost associated with those 
guarantees, the industry has a legitimate interest in the assumptions 
and methodology used to calculate credit subsidy cost.
    Credit subsidy costs for the Department of Energy's loan guarantee 
program are calculated using a credit subsidy calculator developed by 
the Office of Management and Budget. Of the major inputs to the 
calculator, two of them (default probability and recovery rate in the 
event of default) have the greatest impact on results.
    For the purposes of Title XVII, it is our understanding that the 
Executive Branch employs a recovery rate of 55 percent across the board 
for all energy technologies and projects being considered for Title 
XVII loan guarantees. The 55-percent recovery rate was set during the 
administration of President George W. Bush, prior to the submission 
deadline for detailed Part II loan guarantee applications . The use of 
a standardized recovery rate does not satisfy the requirements of the 
Federal Credit Reform Act (FCRA) of 1990. In addition, the recovery 
rate chosen--55 percent--is an arbitrary number and has no basis in 
actual market experience with financial structures like those supported 
under Title XVII. Nor did the decision to set an arbitrary 55 percent 
recovery rate have the benefit of the project-specific recovery 
information provided in the Part II applications for nuclear power loan 
guarantees.
    We believe the methodology used by the Executive Branch inflates 
the credit subsidy cost well beyond the level required to compensate 
the federal government for the risk taken in providing the loan 
guarantee. At least one nuclear power project was quoted an 
unrealistically high credit subsidy cost, which ignored the project's 
strong credit metrics and the robust lender protections built into the 
transaction, and limited the estimate of recovery rate to 55 percent, 
significantly lower than the recovery estimate in the credit assessment 
of the project by an independent rating agency.
    Consistent with FCRA, NEI believes that the most accurate and 
equitable process for calculating credit subsidy costs is a detailed, 
project-specific assessment. The current approach, which relies on 
standard assumptions applied to all technologies, with limited project-
specific flexibility, cannot produce accurate results, and will not 
serve the loan guarantee program's objectives--to support deployment of 
clean energy technologies in such a manner that the risk to the federal 
government is fully offset by fees paid by the borrower.
    In fact, a project-specific approach is explicitly required by the 
Federal Credit Reform Act (FCRA). FCRA requires the government to 
consider all of the cash flows over the term of the loan, including 
fees, defaults, recoveries and contractual and structural 
protections.\1\ For large, customized transactions like those 
authorized by the Energy Policy Act of 2005, accurate estimates of 
recovery can only be derived from detailed project-specific analysis. 
Recovery values will vary from project to project, depending on the 
technology, nature and structure of the project, the project sponsors, 
contractual issues, and many other factors.
---------------------------------------------------------------------------
    \1\ Section 502(5)(B) of the Federal Credit Reform Act of 1990 
provides:

        ``The cost of a direct loan shall be the net present value, at 
the time when the direct loan is disbursed, of the following estimated 
cash flows:

        (i) loan disbursements;
        (ii) repayments of principal; and
        (iii) payments of interest and other payments by or to the 
Government over the life of the loan after adjusting for estimated 
defaults, prepayments, fees, penalties, and other recoveries; including 
the effects of changes in loan terms resulting from the exercise by the 
borrower of an option included in the loan contract.''
---------------------------------------------------------------------------
    The vast majority of federal credit programs are characterized by 
high volumes and relatively low dollar amounts, concentrated in 
housing, education, rural development and small business. In 
calculating credit subsidy costs for these program, the Executive 
Branch makes a number of simplifying assumptions and, because the 
federal government pays for the credit subsidy costs of these 
transactions, borrowers are generally indifferent to the methodology by 
which credit subsidy costs are calculated. These simplifying 
assumptions should not be used in lieu of project-specific assessments 
in the case of a program involving multi-billion-dollar transactions, 
in which the borrower pays the credit subsidy cost.
    Even if it were acceptable to use standardized, ``one-size-fits-
all'' assumptions, the 55-percent recovery rate now used is well below 
the recovery rates observed historically for regulated utility debt and 
project finance debt. According to historical data from Moody's 
Investors Service and Standard and Poor's, ultimate recovery rates for 
regulated utility debt range from 87 percent to 99 percent. Recovery 
rates for project finance debt are comparable, in the range of 90 
percent to 100 percent, because project finance transactions employ 
structural features designed specifically to maximize recoveries in the 
event of default. NEI has developed a detailed white paper that 
provides historical perspective on these issues, and I ask permission 
to have that white paper included in the record of this hearing.
    It is vitally important that credit subsidy costs be calculated 
accurately. If current practices continue, the Executive Branch will 
continue to produce inflated credit subsidy costs. Project sponsors, in 
turn, will simply abandon otherwise creditworthy nuclear energy 
projects, and the nation will forego the clean energy and thousands of 
well-paying jobs represented by these facilities.
    The difficulties encountered by the nuclear energy industry and the 
renewable energy community in implementing the Title XVII loan 
guarantee program cannot be laid entirely at the Department of Energy's 
doorstep. Other Executive Branch agencies and offices--including the 
Office of Management and Budget--play a significant, often governing, 
role in determining the rules and protocols governing this program. In 
our experience, the Department of Energy staff working on loan 
guarantees--from senior leadership to program management, from loan 
officers to the legal, financial and market advisers on the due 
diligence teams--are experienced, highly trained professionals 
committed to making the program work.
    Mr. Chairman, we have reviewed the two pieces of legislation you 
introduced--S. 3746 and S. 3759--which make a number of changes to the 
underlying statute to address some of the difficulties that have arisen 
during implementation. Although many of these changes are designed to 
address issues encountered by the renewable energy community, we fully 
support them. NEI believes this program must operate efficiently and 
effectively for all clean energy technologies that are eligible, not 
just a few.
    We have identified a few additional statutory changes, largely 
designed to address the defects in the current process for developing 
credit subsidy costs. Among other items, these changes would:

   require the Executive Branch to use project-specific 
        analysis in developing recovery values and other inputs to the 
        credit subsidy calculator;
   allow project sponsors to pay the credit subsidy cost 
        annually, based on the next year's anticipated draw;
   address the lack of transparency that characterizes the 
        current process for determining credit subsidy cost, and
   vest final authority in determining credit subsidy cost with 
        the Secretary of Energy, since it is the Department of Energy 
        that is responsible and accountable for implementing the loan 
        guarantee program, and since DOE is equipped with the corporate 
        and project finance expertise necessary to make those 
        determinations.

    Mr. Chairman, we would appreciate the opportunity to work with 
committee staff in developing these proposals further, and we hope that 
you and other members of the committee would support such an 
initiative.
    One other challenge deserves mention. The success of the clean 
energy loan guarantee program has been hampered by lack of certainty 
over loan volume. Project developers must have clear line of sight that 
financing will be available, if we expect them to continue spending 
millions of dollars--or, in the case of new nuclear power and fuel 
supply facilities, billions of dollars--necessary to maintain project 
schedules. If Congress chooses to impose limitations on loan volume--
and we are not persuaded that such limitations are necessary in a 
program where project sponsors pay the credit subsidy cost--then those 
limitations should be commensurate with the size, number and financing 
needs of the projects. In the case of nuclear power, $18.5 billion is 
not sufficient. NEI continues to support the President's request for an 
additional $36 billion in loan volume.
    Finally, Mr. Chairman, let me commend this committee for having 
recognized long ago that the scale of the energy and environmental 
challenges facing our nation--large-scale deployment of clean energy 
technologies, modernizing the U.S. electric power supply and delivery 
system, and reducing carbon emissions--requires a broader financing 
platform than the program envisioned by Title XVII. An effective, long-
term financing platform is necessary to ensure deployment of clean 
energy technologies in the numbers required, and to accelerate the flow 
of private capital to clean technology deployment. For this reason, NEI 
continues to support creation of a Clean Energy Deployment 
Administration, as envisioned by S. 1462, the American Clean Energy 
Leadership Act, which was approved by this Committee in June 2009.
    Thank you, Mr. Chairman. I would be pleased to answer questions.

    The Chairman. Thank you very much. Thank you all for your 
excellent testimony. We have 3 members who've arrived and have 
not yet had a chance to ask questions. Let me call first on 
Senator Dorgan, then Senator Risch, then Senator Cantwell and 
then Senator Shaheen and I will follow up with questions that 
occur to us.
    Senator Risch. I'm going to pass. Thank you.
    The Chairman. Alright. Senator Dorgan, start.
    Senator Dorgan. Mr. Chairman, thank you very much. Thanks 
to the witnesses. I was at a panel discussion and missed the 
first part of this testimony at the hearing.
    I ask whether Mr. Silver was in any way critical of OMB 
because I notice that some of you have referred to OMB. The 
answer is of course not because I don't think that would be the 
proper role for him to come to this table and be critical of 
OMB. But I think it is the case and it's a fair point some of 
you have made that trying to move things through OMB is a 
little like walking through wet cement. I mean, it's really 
hard to get through it.
    We passed in EPAC in 2007 some legislation that provided 
title XVII loan guarantees. We were really excited about that. 
We also have now written legislation that is not yet enacted 
that has the Clean Energy Development Act, CEDA.
    You know going back, Senator Bingaman and Senator Domenici, 
I think, have provided great leadership to this committee. I, 
as chairman of the Appropriations Subcommittee, have provided, 
as a result of the authorization, $49 billion in loan 
guarantees. So all of us have been very excited about, I think, 
an unparalleled amount of investment capability in clean energy 
that is available through loan guarantees.
    But we also in addition to being excited have been 
enormously frustrated. As the years passed and the months 
passed that the money doesn't seem to get where it's needed to 
go in order to see projects built and completed and people put 
to work and clean energy moving across the wire. So this has 
been both a time to be excited about the ability to offer 
something and then frustrated about the pace of that offering.
    I note that in the Department of Agriculture they have the 
capability to offer loan guarantees in renewable fuels 
projects. They're moving money out. Projects are getting built. 
I'm wondering if it's so different to provide loan guarantees 
for fuel than it is to provide loan guarantees for electricity 
or something to put on the wire out there.
    So I think, having said all that, let me ask the witnesses 
about the Office of Management and Budget. I think some of you 
have referred to it directly, some obliquely. But do you see 
that as the major problem?
    I think Secretary Chu came in and said, look, DOE didn't 
have much experience in this. You've provided a lot of 
capability. It's been slow. We understand that. But Secretary 
Chu came in and said, I'm going to try to change that.
    So tell us the record here.
    Mr. Meyerhoff.
    Mr. Meyerhoff. Ok. I'm happy to start. So I will tell you, 
Senator, that we don't have necessarily direct line of sight as 
an applicant into what the OMB does, right? So our primary 
interface is the DOE and there may be a process then in the 
background, right, that then through the DOE of which results 
are being brought back to us through the DOE.
    I believe that we have been through cycles of learning. I 
understand your disappointment. I think we're getting actually 
now more traction. I mean, I would tell you is that the trend 
is toward goodness.
    Having said that I think there would be a fairly simple set 
of rules I think we could institutionalize that would drive 
accountabilities throughout the process. I don't want to single 
out OMB here.
    Senator Dorgan. No.
    Mr. Meyerhoff. I would apply that actually to all 
participants.
    Senator Dorgan. You say the trend is positive. So if we're 
not galloping along at least do you think, most of you think, 
we're at least trotting along to make some progress here?
    Mr. Meyerhoff. So I would say for our own experience. It's 
hard for me to speak for everybody else, but from our 
experience right now we're moving forward. We're hopeful to see 
funding for a fully shovel ready project hopefully in the first 
quarter of next year.
    Senator Dorgan. Mr. Fertel.
    Mr. Fertel. Senator, I would say we're walking along, I 
think. Mr. Silver, I think explained how they're going through 
growing pains which we appreciate. We think he's doing a very 
good job.
    I would agree with Jens that more transparency. We can't 
see. It's very opaque what happens within the group.
    Also I think clarity on who's responsible for making the 
decisions. Senator Burr asked a number of questions about who 
does make the final decision. I think Mr. Silver did what he 
had to do in answering the question.
    Senator Dorgan. Witnesses have to be circumspect in terms 
of looking out for their own interest at that table. Let me ask 
a question about whether aside from the potential delivery of 
CEDA and the future, I hope, and loan guarantees now?
    Aside from that where are we with respect to our comparison 
with other countries in the ability to produce projects that 
have competitive pricing because of subsidies and so on? Are we 
somewhere in the ballpark of what other countries are doing in 
this area?
    Mr. Meyerhoff. So maybe I take the first shot because First 
Solar operates in these markets very actively. I would say the 
U.S. market with a lot of support coming out of the government 
is now emerging as the fastest growing solar PV market in the 
world. We're very grateful for that.
    A lot of things have been done that has enabled us, we as a 
company have responded with just about a billion dollar 
investment around development assets and manufacturing capacity 
alone for that growth outlook. So if you think about deficiency 
and what we're talking about today on the financing side. 
However I would tell you that a large scale European solar PV 
project will turnkey finance with the full funding commitment 
and financial close and probably about 4 to maximum 5 months 
today for us.
    So if you compare that to where we're at today our 
applications have been in the process anywhere from 9 months to 
an excess of over a year without having funded yet. So I 
believe we need to assign, again very clear, accountability set 
time lines with respect to how much time is spent in each part 
of the process to have more predictability around that part. 
But I would say we're moving in the right direction. I would 
say there are good pieces of evidence and learning that can be 
found just out of what has been done in Europe.
    Senator Dorgan. My time has expired. I actually have to be 
at another hearing as well. But Mr. Chairman, I think the 
testimony, I've read some of it previously. I think it's really 
helpful to have had this hearing to keep pressure and pushing 
and try to understand how do we make this user friendly.
    How can we get it out? How can we have this program 
accomplish what we intended to accomplish? Thank you, Mr. 
Chairman.
    The Chairman. Thank you.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. I too, want to 
add my thanks for having this hearing today. I do recognize the 
important and critical role this loan program plays on large 
scale energy projects. I do believe we should replace the money 
that has been taken from this program.
    Like my colleague who just mentioned the word, the 
discussion of transparency and urgency, I think those need to 
be the 2 mantras for this program. But I would also like to get 
the panel's feedback on, I think my colleague from Colorado may 
have brought this up in the previous panel. But about the 1603 
program and how it fits with this whether you think it fits 
with this or how you view that reauthorization of that program 
in getting projects.
    To me, I look at the numbers and they're quite staggering. 
55,000 jobs created since 2009 in wind and geothermal as a 
result of the program, that is the Treasury Grant Program. 
17,000 solar jobs since 2009 and estimation of 6,500 additional 
jobs in that industry if we could get this program 
reauthorized.
    Then also, another concept in the chairman's renewable 
energy standard legislation that was just introduced is a 
provision on a low interest, clean energy fund. So if I could 
get comments on those 2 concepts as they relate to the 
Treasury--I'm sorry, as they relate to the loan program that 
we're talking about this morning. How you see them fitting 
together and how you see this issue of capital and different 
ways of getting capital infusion into the marketplace.
    So Mr. Newell or Mr. Meyerhoff, if you had any comments 
about that?
    Mr. Newell. The 1603 program has been a very successful 
program and we think is a critical program in order to continue 
to attract investments and to be able to bring renewable energy 
projects, specifically, to financial close to get them built. 
Right now we're seeing a flurry of activity as companies try to 
meet the deadlines under the current 1603 with the expiration 
coming up on that. It is affecting how the loan guarantee 
program works because it is really affecting what applications 
can go in and not go in because for many of these companies if 
they believe they're not going to be able to get the loan 
application through the process in time enough to be able to 
qualify and bring down the 1603 Treasury Grant.
    Then they won't go through the process on the loan 
application. It is difficult at this point in the process to be 
able to look forward. There's just not transparency to be able 
to look forward and know that you're going to be able to get 
through in that amount of time that we have left not knowing 
whether the 1603 will be extended.
    1603 is important now because there is a real lack of tax 
equity available in the marketplace. For better or for worse 
the system that the U.S. uses primarily to incentivize 
renewable energy production is a system of tax credits. In a 
time now when many companies have less appetite because of 
their financial conditions for tax affected investments it has 
really taken a lot of the wind out of that market. You've seen 
a lot of the players leave that market.
    There was a----
    Senator Cantwell. No pun intended. Yes.
    Mr. Newell. Yes.
    There's a recent study by the American Council on Renewable 
Energy that showed that we were about--that the impact of 1603 
being center verses not was really the difference of a risk of 
about 100,000 jobs moving forward. It seems like a pretty 
straight forward calculation to make right now. There is a 
question about how the Loan Guarantee Program is structuring 
some of its loans with respect to the use of tax affected 
structures.
    There are reports of applicants being advised that they 
should not use tax affected structures aggressively because 
those loans may have a harder time being approved through the 
process. I think that's something that needs to be made much 
more transparent. To the extent that the tax credits are the 
mechanism that we use to incentivize construction of renewable 
energy projects and other kinds of energy projects than it's 
important for the companies who are promoting those projects to 
be able to aggressively use those incentives that have been 
provided by Congress to the maximum extent possible.
    One of the areas of inquiry that we suggest for the 
committees to look at how the loan program is operating with 
respect to those tax structures. We'd recommend that. I would 
add, Senator Cantwell, to your list of transparency and 
urgency, I would add consistency to what we need.
    Because in some ways more than we need to have a maximum 
volume of supporting any of these is what we really to be able 
to do the long term financings. To make long term investments 
in these is we really need consistency whether it be on 1603. 
Knowing it's going to be there and moving along or a permanent 
financing structure or an extension of the Loan Guarantee 
Program or refinancing of the Loan Guarantee Program through 
1703 that doesn't have a deadline. Any of those structures can 
work for us.
    But that consistency is really crucial for us.
    Senator Cantwell. I don't know it's up to the chairman. I'd 
love to hear from you, Mr. Meyerhoff. Is that? I know my time 
is expired.
    The Chairman. Go right ahead and respond.
    Mr. Meyerhoff. I will make it just quick. I echo everything 
that has just been said but I want to reemphasize that the 
different programs that are in place are not harmonized. They 
cannibalize each other. So the 1603 grant which is extremely 
important to this industry. There are enough studies that show 
there's not enough tax appetite available to realize all the 
projects out of different renewable resources.
    However the 1603 program has a cashflow through the project 
entity reduces right now through the DOE Loan Guarantee Program 
and reduces the amount of debt available. So we're taking 
liquidity from one part and we're moving it to the other end. 
We're reducing the overall economic potency that the 2 programs 
would have individually on paper. So I think it is important to 
harmonize those.
    There's a third aspect which is also tax driven which is 
the accelerated depreciation. So we have the grant in lieu 
program. We have the DOE loan program, but the accelerated 
depreciation is another key economic driver.
    So now you have cash on cash returns but you still have a 
tax component. We're still, if you really want to optimize the 
structure, you're still requiring tax appetite. I think if you 
look at everything available I think it would be worthwhile to 
analyze how to harmonize these programs to their full 
efficiency.
    Senator Cantwell. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman. I just have 2 
quick questions.
    Mr. Newell, in your list of recommendations of things that 
you thought could be done, one of the things that you mentioned 
was provide increased access to--I forget exactly how you 
phrased it, but I translated it into small companies that may 
not have the capacity to keep up with what's going on in the 
Federal Government. How do you suggest that be done? Do you 
recommendations?
    Mr. Newell. We do have some recommendations. I would like 
to say, Senator, that this is an area which I would 
particularly want to commend Mr. Silver and the program. 
Because we have been working with them over the past 6 months 
to a year on that issue specifically and they have made really 
great strides and have devoted a significant amount of 
resources within the program to easing the way for smaller 
developers. They're to be commended for that.
    There are some significant issues that affect smaller 
developers some of which are--have to do with the requirements 
of the program.
    One is NEPA. While we're very supportive of the NEPA 
process and work through it. I think that for the smaller 
developers, I think there could be focus on streamlining the 
NEPA requirements.
    I think you should consider limiting NEPA's applications 
for project that are smaller than $200 million or to clarify 
the categorizations for projects such as rooftop solar or 
ground mount solar installations where the length of time you 
go through relative to the actual benefit you're getting from 
that process. So there's a miss match between those 2 things.
    Second is I think that you could reasonably eliminate the 
need for credit ratings below--for projects below a certain 
size. The costs of getting those credit ratings. There's a 
floor on the cost of getting a credit rating and that cost 
becomes prohibitive the smaller you go down the scale.
    Again, relative to the amount of risk that the government 
is taking that the being able to eliminate that need is a--
would seem to be a reasonable step forward. That scenario where 
I know it has been proposed in legislation that we would 
strongly support that.
    Reducing the administrative and diligence in loan costs for 
small energy projects could be done without significantly 
impacted the financial burden on the overall program because it 
had to be small programs, small projects, as well as mitigating 
duplicative diligence cost by using things like common council 
and common consultants there. There's just some very straight--
--
    Senator Shaheen. Sure.
    Mr. Newell. Common sense things you could do.
    Senator Shaheen. These are all part of your written 
testimony? I haven't seen your written testimony.
    Mr. Newell. They are. They are in the written testimony.
    I think that in this case you--I would recommend that the 
Department or the committee consider guidance in which some 
amount of the financing is in some way guided toward small 
developers because otherwise it is just the natural course of 
process that when you have a whole series of applications 
sitting at your desk. Five of them are for a billion, a billion 
to a billion 2, a billion 3 each, important as they are. Then 6 
of them are for $37 million for a solar developer in New 
Hampshire or----
    Senator Shaheen. Right.
    Mr. Newell. A biofuels developer, it just tends to be that 
those applications because in some sense that they take the 
same amount of work because you're going to do the others. They 
just end up getting put to the side or the bottom of the pile. 
It really takes keeping an eye on those.
    Because those small developers are a really important part 
of our ecosystem. They allow us to put the energy projects in 
place and the other ones wouldn't go.
    Senator Shaheen. Certainly in New Hampshire, that's the 
case. So, thank you.
    Mr. Fertel, you were talking about the credit subsidy 
analysis. I missed--you had a list of things. I missed the 
second one. I wonder if you could elaborate a little bit on 
that as you were talking about looking at future years?
    Mr. Fertel. Yes, the second one, Senator, was to allow the 
project sponsor to pay the credit subsidy fee cost annually as 
they draw. Right now as soon as you basically are given the 
thing, you get assessed the whole thing. If I'm going to draw 
it out over 2 years, 3 years or 4 years.
    We're saying is just allow them to pay it----
    Senator Shaheen. Ok.
    Mr. Fertel. Proportionately over that period of time.
    Senator Shaheen. Great. Thank you. Thank you.
    The Chairman. Thank you.
    Let me ask, Mr. Meyerhoff. You described what you referred 
to as the higher leverage ratios that are applicable for 
projects in Europe, I believe. That's one of the disadvantages 
that we're operating under now is, as compared to Europe.
    Could you go over that ground again and explain how you 
believe we need to get that fixed?
    Mr. Meyerhoff. So I would say obviously the leverage ratio 
or the debt service coverage ratio is a key component of the 
credit worthiness of a project. What I was alluding to is that 
if we think about credit risk and as we think about subsidy 
cost in Europe you see that even at much higher leverage ratios 
the default rates have been very low. Obviously a higher 
leverage gives better economics to the project which ultimately 
means lower electricity cost to the ratepayer.
    So I think as we're driving through the cycles of loaning 
we should be open minded. But we have seen that in the DOE 
process absence of 80 percent leverage ratios. Let's talk about 
maybe more U.S. market ratios of even 70 percent.
    We've seen a lot of debate around this. It may be in part 
due to the portfolio approach discussed in the earlier panel 
where other decisions or other dimensions seemed to come into 
the credit evaluation and into the debt quantum of the 
projects. So I think we should try to find balance where we're 
saying ok, if the solar PV project or the wind project or 
whatever gets supplied for usually there's a range of debt 
service coverage ratios of x and y.
    As we get more experience and more understanding that the 
credit quality of these projects and their actual behavior 
becomes better and better than obviously we can increase the 
leverage. That is what we've seen in Europe. Europe started 
with a less aggressive leverage ratios too, but increasingly 
has grown more comfortable with the high credit quality of 
these generation assets.
    The Chairman. So you think that we are, to a point, to 
where we should also move to higher credit quality assumptions 
with regard to these types of projects?
    Mr. Meyerhoff. What I would say, I would urge us to take 
the learning out of the European market and apply those 
learnings. I would urge us for consistent application by 
generation asset of certain ranges of debt service coverage 
ratios and not necessarily discriminate the project based on 
other factors. Such as, for example, the corporate strength of 
the corporation building the project because generally a 
company like us was financially fairly strong but will sell 
that asset independently off independent of our corporate 
strength.
    So the project has to be viewed in isolation and receive--
achieve the desired debt service coverage ratio and debt 
quantum based on its own cashflows.
    The Chairman. Ok. Anyone else have a comment on this issue?
    Mr. Fertel.
    Mr. Fertel. From a nuclear standpoint our merchant 
generators look at a much higher debt to equity ratio, 
generally 80/20 or 70/30 than the regulated utilities who would 
probably be in the 50/50 range. From the impact on customers, 
on consumers, or our economy doing that, looking at an 80/20 
versus 50/50 for a nuclear plant roughly decreases the cost of 
electricity from that nuclear plant on the order of 4 cents a 
kilowatt/hour for the reasons you heard because the return on 
debt is lower than the return on equity. The loan guarantees, 
to be honest, provide the ability to get a lot more debt and a 
lot more leverage.
    So it reduces your cost of capital which helps. But its big 
thing is that the return on your debt is so much better than 
the return on your equity that it does have a very measurable 
impact on the cost of the electricity coming into the economy. 
So I would support what was said as something that should 
certainly be looked at as a positive public policy move.
    The Chairman. Alright. Yes.
    Mr. Newell. This is related to the discussion of the 
recovery rates earlier because to the extent that you're using 
recovery rate assumptions that are too conservative than it's 
going to lead you to assume that you have to have lower ratios. 
I think if you really go back and look at what the recovery 
rates really are in the commercial markets for these types of 
projects they are very high. It is very rare to not recover 
fully any debt that you put into these projects.
    That the idea that you need to then keep conservative 
coverage ratios seems at odds with the very long history of 
financings in this market.
    The Chairman. Yes, Mr. Fertel.
    Mr. Fertel. Just to the point that Mr. Newell made. Right 
now in our country if the credit subsidy fee cost goes the way 
they look like they're going now by holding this 55 percent 
recovery rate. You probably will preclude, probably preclude 
merchant nuclear generators and probably any merchant large 
generation source from getting a loan guarantee to help them 
because it just makes it too expensive.
    So it actually has a direct impact on whether projects will 
go forward on whether they can go forward without a loan 
guarantee, I think for merchants, becomes very, very difficult.
    The Chairman. Alright.
    Senator Cantwell, did you have additional questions?
    Senator Cantwell. Yes. Thank you, Mr. Chairman. I want to 
go back to Mr. Meyerhoff's point about cannibalization or the 
distinction between these programs because I think it's 
critically important that we focus on the difference between 
the 1703 program and its, you know, 1705 whatever you want to 
call that. I don't want to say mutation, but, you know, its 
continuation into that program.
    That's about risk. That's about first commercialization and 
scalability as Mr. Fertel was saying that you can't get in the 
market. But then there's another issue which is really about 
proven technology that we believe, particularly from the RES 
perspective of renewable energy that isn't as much about risk. 
But we have a capital market that basically blew up. There's no 
more capital.
    Even though we wanted to get the credit program on at least 
a level playing field with the incentives that were given to 
the fossil fuel industry. So thereby 6, you know, 3. Now we 
know it's been hugely successful.
    But what about the, you know, the idea of low interest 
capital to renewable energy, clean energy projects at very low 
interest with a revenue stream basically as a protector because 
you're having the value of electricity being produced. So now 
we're taking the risk out of the equation. Why that's important 
is because if you're talking to DOE and you're giving DOE a 
program that is all about risk I guarantee you they're going to 
take a long time to make up their minds about things.
    But if you get a streamline turnkey approach that is about 
less risk and it's about getting capital to the market at low 
interest. Then you're going to literally get these projects 
moving. So I'd like some comment or feedback if I'm on the 
right track about that distinction.
    Mr. Meyerhoff. Yes, so I mean I couldn't agree more with 
the statement. I mean we're looking at, as I mentioned, the 
1703 program. That obviously allows innovation that is not 
quite bankable, to be bankable through the program. It's a very 
important incubator, right, to drive further the cycles of 
innovation to keep R and D in this country and to motivate it. 
There's a lot of opportunity, obviously, in our sector to do 
that.
    Under 1705 then, as you mentioned, we're taking 
commercially proven technologies and we're financing them. 
We're financing them through not only because the capital 
markets are still struggling out of a crisis. But also solar, 
in particular solar PV, has never issued an institutional bond.
    We're about through the 1705 program in a controlled way to 
issue the first solar bonds probably within the next 6 to 9 
months. The 1705 program plays a very important role in 
actually opening that market educating classic institutional 
debt investors around the high credit quality of that 
generation asset. We can do so because the institutional 
tranche under the 1705 program is small enough that we can do 
this in a controlled way which then means every time that we do 
this a few times we can open the institutional capital markets 
with an asset class. So these programs actually in our mind, 
have a certain harmony to them and allows that migration path.
    Now the 1603 program obviously as I mentioned before it 
represents the equity side of it. So this stop and go on the 
equity side impairs possibly all the great efforts being put in 
place on the debt financing because if we don't find efficient 
equity to invest into these projects we're back to square one. 
So the 1603 program has been extremely important.
    It has been extremely important also to the smaller 
companies and to the smaller rooftop installations that are 
really, I think, predominately have been executed through that 
program. Now what we've encountered is--and as we're bringing 
now our shovel ready projects into the market for equity 
investors. We've actually seen through the treatment under the 
DOE program that leads us to prefer tax capable equity 
investors over an investor that would go with a grant for the 
simple reason that I'm deleveraging the project in the DOE Loan 
Program by getting the grant through the project.
    So again, this is where they cannibalization. The 
cannibalization is not between 1703 and 1705. It's between 1603 
and the DOE Loan Guarantee Program. That's where I think we can 
harvest some efficiency.
    Senator Cantwell. I think, Mr. Chairman, if we're talking 
about jobs today and clearly we are talking about a lot of jobs 
that were created in 2009, then it's about getting the equity 
into the marketplace through the easiest turnkey process that 
we can establish for capital.
    Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Shaheen, did you have additional 
questions?
    Thank you all very much. It's been very useful testimony. I 
think we can take your suggestions both oral and written and 
try to make progress with them.
    Thank you very much.
    [Whereupon, at 11:35 a.m. the hearing was adjourned.]

                               APPENDIXES

                              ----------                              

                               Appendix I

                   Responses to Additional Questions

                              ----------                              

    Responses of Jonathan Silver to Questions From Senator Bingaman
    Question 1. In previous hearings we've heard testimony about how 
government agencies such as the Overseas Private Investment 
Corporation, Ex-Im Bank, and USDA seem to manage risk, similar to 
private sector investors, on a portfolio rather than transaction-by-
transaction basis--and are assessed by OMB on that basis, rather than 
examining every transaction independently. Do you understand this to be 
the case, and is there some statutory difference that would lead to 
this different treatment? Is there anything in the current laws 
governing the loan guarantee program that would preclude the assessment 
of risks on a portfolio basis rather than a transaction-by-transaction 
basis?
    Answer. As with all other federal credit programs, OMB's 
responsibility for determining the credit subsidy cost associated with 
DOE's loan guarantees is found in Section 503 of the Federal Credit 
Reform Act of 1990, which states that the Director of OMB is 
responsible for credit subsidy cost estimates. Under the oversight 
authority in Section 503, OMB delegates the modeling of credit subsidy 
costs to agencies, and issues implementing guidance to ensure 
consistent and accurate estimates of cost. For new programs or programs 
where actual experience is not available, such as the Title XVII 
program, OMB works closely with agencies to create or revise credit 
subsidy models. DOE has worked with OMB to develop the credit subsidy 
estimation methodology used for the Loan Programs, and OMB approved 
DOE's credit subsidy cost model in 2008. Title XVII loan guarantees 
generally support large and diverse investments with a wide variety of 
underlying projects, risks, and contract terms. These loan guarantees 
are scored on a loan-by-loan basis, as are those of other similar 
federal credit programs.
    Question 2. You mention in your testimony that deals are presented 
to OMB and Treasury for review prior to presentation to the CRB or the 
Secretary ``consistent with statutory requirements.'' Title 17 requires 
consultation with the Treasury Secretary before a loan can be issued, 
which I read as final close of the transaction, and the Federal Credit 
Reform Act charges OMB with ``coordinating'' cost estimates, which also 
seems to implicate final close--is there some additional statutory 
requirement that requires OMB and Treasury involvement so much earlier 
in the process?
    Answer. The authorizing statute governing the Title XVII Loan 
Guarantee Program is silent on exactly when in the review process 
either Treasury or OMB must be involved. The statutory basis for 
Treasury's consultative role is found in Section 1702 (a) of Title XVII 
of the EPAct of 2005, which authorizes the Secretary of Energy ``to 
make guarantees . . . for projects on such terms and conditions as the 
Secretary determines, after consultation with the Secretary of the 
Treasury.'' (Sec. 1702(a)). The Final Rule governing the Section 1703 
of the Title XVII loan guarantee program provides for Treasury 
involvement before a conditional commitment is issued. Specifically, 10 
C.F.R 609.7(a) states that, concurrent with the review process that 
precedes issuance of a conditional commitment, ``DOE will consult with 
the Secretary of the Treasury regarding the terms and conditions of the 
potential loan guarantee.''
    OMB's authority is derived from Section 503 of the Federal Credit 
Reform Act (FCRA), which provides: ``For the Executive Branch, the 
Director [of OMB] shall be responsible for coordinating the estimates 
required by this title. ``Under this authority, the director of OMB 
delegates the authority to agencies to make estimates, while OMB 
reviews and must approve credit subsidy costs for all programs. The 
Title XVII implementing regulations provide that OMB must review and 
approve DOE's calculation of credit subsidy costs, consistent with the 
FCRA. Under the program's Final Rule, OMB must review and approve DOE's 
calculation of the credit subsidy cost prior to issuance of a loan 
guarantee.
    Question 3. At what point in the process does DOE submit an 
estimated subsidy cost for a given project for review by OMB? At what 
point does OMB finalize a subsidy cost estimate? Please answer for both 
subsidized (1705) and ``self-pay'' transactions.
    Answer. For both of the Title 17 loan guarantee programs, DOE 
currently submits each proposed transaction--including a preliminary 
credit subsidy cost estimate--to OMB for review at the end of the 
initial due diligence phase, prior to the issuance of a conditional 
commitment. Following conditional commitment, after all conditions have 
been met by the borrower and 30 days prior to financial closing, DOE 
submits a final credit cost estimate to OMB for its review and 
approval. Consistent with statutory requirements, the credit subsidy 
cost is finalized at closing, and reflects the final contractual terms 
and conditions and all available information.
    Question 4. I understand that DOE requires biofuels projects to 
have an off-take agreement, something that makes a lot more sense for 
an electricity project than a fuels project. The RFS mandate that 
requires consumption of those fuels apparently does not qualify as an 
off-take agreement, and the fact that we have a law requiring the use 
of renewable fuel is not factored into DOE's decision-making process in 
any way. I think you're aware that the RFS waiver for cellulosic 
biofuel basically only requires oil companies to purchase fuels that 
are available in the marketplace. If DOE is saying that it will only 
help those fuels become available in the market place if the oil 
companies sign up to buy it, it seems to me we are giving all the cards 
to the oil companies. Am I missing something here? How do we fix this 
problem?
    Answer. The Department is committed to promoting biofuels and has 
led in this area through investments under the Recovery Act, our work 
on Ely testing, and much more. The loan guarantee program welcome 
biofuels projects as they can help diversify our transportation fuel 
supply. Biomass loan guarantee applications present a number of 
challenges including, but not limited to, significant technology, 
production, and commodity price risk. These risks present challenges in 
structuring projects that comply with the Title XVII requirement that 
the Secretary determine that there is a ``reasonable prospect of 
repayment'' of each loan guaranteed under Title XVII. That being said, 
the DOE does not require offtake agreements for biofuels projects, 
though they are desirable and enhance a project's creditworthiness. Nor 
do we ignore the existence of RFS-2 in our analysis; in fact, it is an 
important part of our credit analysis of each project. Despite the 
challenges presented by biofuels projects, the loan programs currently 
have several biofuels projects in due diligence, and DOE hopes to be 
able to issue a conditional commitment to a biofuels applicant in the 
near future. The Loan Guarantee Program is one of several incentives 
that developers of biofuels can potentially use. As you know, DOE 
invests heavily in energy research and development and demonstration 
programs for biofuels, including numerous cost-shared grants, and there 
are significant tax advantages included in the tax code. Additionally, 
DOE, USDA and EPA have formed a joint working group, which is 
investigating ways to support the industry.
    Question 5. Has DOE submitted new solicitations or proposed 
modifications to existing rules to OMB for approval? How long has OMB 
review been for submitted solicitations? Do you anticipate producing 
any more solicitations under the program?
    Answer. The Department has not submitted any new solicitations or 
proposed modifications to existing rules that are pending approval at 
OMB. Our most recent solicitation--Federal Loan Guarantees for Projects 
that Manufacture Commercial Technology Renewable Energy Systems and 
Components--was published August 10, 2010. In light of the 2011 sunset 
date for Section 1705 authority, and the available Section 1703 
authority, DOE has no current plans to issue new solicitations. New 
solicitations will depend on future programmatic authorities and 
appropriations.
    Question 6. You mention in your testimony the significant 
experience in financial transactions possessed by the members of the 
DOE team. Can you elaborate on that a bit? Is this experience 
particularly unique or are there other areas within the government 
where similar experience can be gained?
    Answer. The Loan Programs Office has assembled a world-class team 
of federal employees and expert contractors with specialized expertise 
in both domestic and international project finance. The federal 
employees on our origination team, alone, have well over 300 years of 
energy-related project finance experience. Our professionals have 
worked at an array of sophisticated public and private sector finance 
entities. We have similar levels of experience and expertise among our 
legal, technical, and other staff members, and the consultants engaged 
to support them in their work.
    Question 7. Most applicants have indicated that, in order for the 
program to be effective, they need a predictable process that can 
result in at least a conditional commitment (or a much more timely 
rejection) within 6 months of application. Assuming an adequate 
application is submitted, does DOE have sufficient resources in place 
to meet this timeline?
    Answer. The Department is committed to ensuring that the Loan 
Programs have the resources needed to process and review applications 
as efficiently and effectively as possible. To that end, the Loan 
Programs have made a number of improvements over the last 18 months, 
including a significant increase in qualified personnel. We are now 
well-positioned to process transactions at a rate that meets the 
business needs of our applicants, while ensuring that taxpayer monies 
are properly safeguarded.
    Question 8. Has DOE reviewed the CEDA legislation contained in S. 
1462? Can you share any views on how we might see that implemented 
differently than the current loan guarantee program?
    Answer. While the Administration has not taken a position on this 
particular piece of legislation, we would work to leverage the lessons 
learned, including through the Loan Programs Office and build on the 
programmatic improvements we have made to date. The Administration also 
believes that the taxpayer protections in the Federal Credit Reform Act 
are necessary for any credit program underwritten by the taxpayers.
    Question 9. How are other benefits conveyed by the federal 
government, such as tax credits or ``1603 grants,'' viewed when 
constructing the terms of a deal? Does the presence of such other 
benefits affect the subsidy cost calculation or the amount of equity 
required of an applicant?
    Answer. In assessing each transaction, the total amount of federal 
subsidy is an important. factor in the review to ensure the most 
efficient use of taxpayer dollars; appropriate risk sharing, including 
sufficient 'skin-in-the-game' for project sponsors; and accurate cost 
estimates that reflect the total cost to government, consistent with 
program regulations and solicitation requirements. Other federal 
government benefits are taken into account in a number of ways. For 
example, the impact of cash received by the sponsor from a 1603 grant 
is analyzed in terms of a sponsor's continuing commitment to the 
transaction.
    Question 10. Have OMB or Treasury submitted questions on, or 
requested the adjustment of, terms of a transaction for such things as 
returns to investors, stock option terms, or other ``operational'' 
aspects of an applicants business? Have negotiations related to such 
questions or terms extended the time to issuance of a conditional 
commitment or led to any
    Answer. The model and methodology used to calculate the credit 
subsidy cost for any given transaction incorporates an array of inputs 
and information about the underlying project and its sponsors--
including many that would be considered ``operational.'' OMB's review 
of a given credit subsidy cost necessarily incorporates these elements, 
and questions often arise about deal terms and structure that affect 
the cash flows to and from the government. Similarly, the Treasury 
consultation relates broadly to the ``terms and conditions'' of a 
proposed loan guarantee, so it also gives rise to such questions. The 
Department works closely with OMB and Treasury to address these issues.

    Responses of Jonathan Silver to Questions From Senator Murkowski

                               BUDGETING

    A total of $3.5 billion has now been taken away from the temporary 
Section 1705 program created by the 2009 stimulus bill. $2 billion was 
taken for Cash for Clunkers, and $1.5 billion was taken for the state 
bailout bill. That leaves just $2.5 billion of the original $6 billion 
for loan guarantees for renewable, transmission, and biofuel projects.
    Question 1a. Does the Department or the Administration intend to 
request a ``refill'' for part or all of the funding that has been taken 
from the Section 1705 program?
    Answer. The Administration strongly supports the DOE loan guarantee 
programs, as evidenced by the President's FY11 budget request for 
additional credit subsidy for Title XVII loans. The Administration is 
monitoring the programs and will continue to seek appropriate funding 
levels to ensure they can achieve their objectives. In the meantime, 
the DOE Loan Programs Office is committed to utilizing the funds it has 
in the 1705 program to fund solid projects to achieve the program's 
statutory objectives. As you know, the Administration has supported an 
array of incentives for the renewable energy industry. In addition to 
the additional credit subsidy appropriations for the Title XVII 
programs, the FY11 budget includes $5 billion in Section 48C renewable 
energy manufacturing tax credits and over $700 million in research 
development and demonstration funding in the Energy Efficiency and 
Renewable Energy Account. Also, the Administration has supported 
extension of the 1603 grant program.
    Question 1b. Given the types of projects involved in the program, 
and the length of time it takes for new applications to be considered, 
do you believe that such appropriations should qualify as ``emergency'' 
funding? Do you believe it would be acceptable to include such funding 
in a supplemental appropriations bill?
    Answer. The Administration believes that honest budgeting is a key 
to fiscal discipline and that the bar for emergency funding 
designations should be a high one. The Administration also believes 
that the projects that have received financing through the Loan 
Programs Office will have an important and positive impact on our clean 
energy economy, in terms of job creation, economic competitiveness, 
energy security, and our environmental legacy, and continues to support 
clean energy through the regular budget process. The Administration is 
monitoring the Loan Guarantee Program and will continue to seek 
appropriate funding levels to ensure the program can achieve its 
objectives. The Administration has a broad array of support for the 
renewable energy industry. The FY2011 budget request included $5 
billion in Section 48C renewable energy manufacturing tax credits, over 
$700 million in research development and demonstration funding in the 
Energy Efficiency and Renewable Energy account, $500 million in credit 
subsidy in the Loan Guarantee program for renewable energy and energy 
efficiency projects, and $36 billion in loan authority for nuclear 
power facilities. In addition, the Administration has supported 
extension of the 1603 grant program.

                              JOB CREATION

    In July, GAO issued a report stating that the Department's 
``performance goals are too few to reflect the full range of policy 
goals for the LGP. For example, there is no measurable performance goal 
for job creation.'' In your testimony, you discussed a number of 
metrics by which performance can be judged, but with regard to job 
creation.
    Question 2a. Can you provide the number of actual, private-sector 
jobs--not a projection of them--that have been created as a result of 
the Loan Guarantee Program as of today? And how does that compare to 
the number of government and contracting jobs created at the Department 
itself to administer the Loan Programs?
    Answer. The sponsors of the projects that have received conditional 
commitments to date under the Title XVII loan programs estimate that 
their projects will create over 4100 permanent jobs and over 14,000 
temporary construction jobs. Construction has already begun on most of 
these projects, and several are either complete or scheduled to be 
completed in 2011. As of November 1, the LPO had approximately 70 full-
time federal staff, supported by approximately 60 full-time contractors 
and 45 part-time contractors.
    Question 2b. Under the 1705 program created by the stimulus bill, 
DOE pays applicants' credit subsidy cost with taxpayer money. If we 
assume those credit subsidy costs to be 10 percent of loan value for 
renewable projects, and divide that share by the number of permanent 
jobs that are supposed to be created, the results are a little 
concerning. For example, a solar project in California works out to 
$1.6 million for each of the 86 permanent jobs that are supposed to be 
created. Is that representative of how much each job costs in the 
Section 1705 Program?
    Answer. The 1705 program has a number of goals, including the 
creation of permanent and temporary jobs (and saving jobs). It is also 
intended to encourage commercial development and adoption of new or 
significantly improved energy technologies, which reduce greenhouse gas 
emissions, contribute to our national energy security and economic 
growth, and improve the environment. Furthermore, the program funds a 
broad portfolio of technologies and projects with different mixes of 
labor and capital intensity that diversify our supply chain, which can 
lower prices through competition and reduce system vulnerability to 
shocks and disruptions. The calculation underlying the question does 
not account for achievements related to any of these other goals; nor 
does it address the many construction jobs that have been created. 
Thus, it fails to reflect the full value of the program.

                    CREDIT SUBSIDY COST TRANSPARENCY

    It appears to be the case that applicants spend a great deal of 
time calculating and negotiating with DOE the credit subsidy costs 
associated with their individual applications. Those figures then go to 
the Office of Management and Budget and are apparently re-worked in 
some way.
    Question 3a. As a general matter, does the estimated credit subsidy 
cost tend to increase after OMB review, decrease, or remain the same?
    Answer. As a general matter, the estimated credit cost at the time 
of conditional commitment does not tend to vary greatly from the 
estimate initially submitted by DOE to OMB. DOE and OMB work closely to 
ensure that the agreed-upon methodology for calculating credit subsidy 
costs is applied appropriately, that cost estimates reflect all project 
characteristics and other factors, and that cost estimates are 
consistent with all applicable statutory and regulatory requirements.
    Question 3b. Do applicants get to participate in the OMB's portion 
of the review process at all, or at least to the same extent they are 
able to interact with DOE earlier in the process?
    Answer. While the Department certainly has extensive interactions 
with applicants during the due diligence and negotiation phases, it 
would be inaccurate to say that applicants are involved in 
``calculating and negotiating with DOE the credit subsidy costs 
associated with their individual applications.'' The Department 
actively negotiates deal terms with applicants, and those terms have an 
impact on the ultimate credit subsidy cost; but the cost itself is not 
negotiated or calculated with applicants. Consistent with statutory 
requirements and good stewardship of taxpayer resources, the cost is 
calculated by the Department, and reviewed and ultimately approved by 
OMB, using an agreed-upon methodology and model. The Department is 
responsible for selecting projects and negotiating deal terms. OMB is 
responsible for approving the credit subsidy cost, and, OMB personnel 
do not have direct negotiations with applicants.
    Question 3c. Are the OMB models and methodologies for analysis and 
calculation of credit subsidy cost publicly available?
    Answer. The Department is responsible for, and maintains the 
methodologies and models for calculating credit subsidy costs. OMB 
reviews and approves the model and cost estimates for each Title XVII 
loan guarantee, as it does for other, similar federal credit programs. 
The exact models and methodologies are not publicly available, since 
they contain proprietary and business confidential information. The 
Department calculates the estimated credit subsidy cost based on the 
agreed upon term sheet between the applicant and DOE, using a 
methodology approved by OMB. As part of this analysis, the Loan 
Programs Office credit staff reviews and scores every aspect of the 
transaction, including, but not limited to: pledged collateral, market 
risk, technology risk, regulatory risk, contractual foundation, 
operational risk, and recovery profile. The result is a credit subsidy 
range that incorporates all available information regarding the project 
and financing at the time. The approach to determining the credit 
subsidy is based on transaction risk analysis which is similar to that 
conducted by private sector lenders.
    Question 3d. Why is the DOE review of credit subsidy cost conducted 
separate and apart from OMB's? Is there a way to integrate the two 
processes so that applicants have a more definitive answer once they've 
incurred the expenses and expended the effort necessary to get through 
the process?
    Answer. Fundamentally, it is the Department's obligation to conduct 
due diligence on a project, negotiate the terms of a transaction and to 
calculate the credit subsidy cost based on those terms. The role of OMB 
is to review and approve DOE's calculation. The Department and OMB are 
committed to ensuring that the interagency processes associated with 
the Loan Programs Office are conducted as efficiently and effectively 
as possible, and in a manner that is consistent with our mandate to 
safeguard the taxpayers' money.

                     ACCOUNTABILITY FOR PERFORMANCE

    As Executive Director of the Loan Programs Office, presumably you 
report to Secretary Chu. In terms of White House involvement though, 
there seems to be some level of confusion about who is monitoring not 
only the Department's activities, but also the involvement of the 
Office of Management and Budget. Just as the Environmental Protection 
Agency interacts with the President's Council on Environmental Quality 
and Carol Browner, I assume a similar construct exists for the Loan 
Programs Office.
    Question 4. What individual or entity at the White House, and more 
directly engaged with the President, is responsible for oversight of 
the Loan Programs Office?
    Answer. As you stated, as Executive Director of the Loan Programs 
Office, I report directly to Secretary Chu, who is responsible for 
carrying out Administration policies within the Department of Energy, 
and has statutory authority to administer the Loan Programs. In 
carrying out these activities for the Loan Programs, the Department 
coordinates with appropriate offices throughout the Administration, to 
ensure the programs are executed in a manner consistent with the 
governing statutes, regulations, and Administration policies.

                               GAO REPORT

    The July 2010 GAO report found that the Department has ``treated 
applicants inconsistently ... in at least five of the ten cases in 
which DOE made conditional commitments, it did so before obtaining all 
of the final reports from external reviewers, allowing these applicants 
to receive conditional commitments before incurring expenses that other 
applicants were required to pay.''
    Question 5a. Please provide the Department's perspective on the 
statement above.
    Answer. The Department takes very seriously the analysis and 
recommendations put forth by GAO. We disagree, however, with GAO's 
assessment that we treat applicants unfairly. The Loan Programs are 
solicitation-based--meaning that we accept applications only in 
response to specific solicitations that we issue, each of which is 
tailored to a specific category or categories of technologies or 
project types.
    Each solicitation clearly lays out the criteria that are used to 
analyze applications submitted in response to that solicitation--and 
DOE is committed to applying them on a consistent basis within each 
category.
    Question 5b. Why were some conditional commitments made before DOE 
received the final reports from external reviewers?
    Answer. The issue of whether DOE will require external reviews is 
based on DOE's review of the application and the specific 
characteristics of a project. Where DOE has required an external report 
to be prepared in connection with a project, DOE requires a final 
report prior to closing of the loan guarantee. The Department believes 
that LGP staff can prudently draw conclusions and make recommendations 
based on near final draft reports. Receipt of a final report is often a 
condition precedent to closing but is not needed to make a conditional 
commitment. This is a standard business practice in the project finance 
industry. The federal government is not legally obligated until the 
closing of the loan guarantee, and any necessary actions can be taken 
to address material changes identified in the final report prior to 
closing of the loan guarantee.
    Question 5c. Pages 12 and 13 of the GAO report contain four 
recommended actions for the Secretary of Energy. Has the Department 
taken, or intend to take, action on any of those items?
    Answer. We take all recommendations seriously and are either 
actively taking steps to make these improvements or have completed 
them, or disagree with the recommendations and believe that we already 
have the necessary actions in place. In reference to the four 
recommended actions on pages 12 and 13, the Department takes the 
following positions:

          1. The Department agrees that it is important for the Loan 
        Guarantee Program to accurately track its progress and the 
        impacts that the projects it supports are having. It has long 
        tracked important metrics for our projects--including 
        greenhouse gas emissions avoided, power generated, and 
        individual loan performance. We believe that these are 
        important measures of the effectiveness of our program. In 
        addition, we continue to work to improve our methods for 
        tracking and measuring success in the context of the loan 
        programs.
          2. We disagree with GAO's assessment that we treat applicants 
        unfairly. The Loan Programs are solicitation-based--meaning 
        that we accept applications only in response to specific 
        solicitations that we issue, each of which is tailored to a 
        specific category or categories of technologies or project 
        types. Each solicitation clearly lays out the criteria that 
        will be used to analyze applications submitted in response to 
        that solicitation--and DOE is vigilant in applying them on a 
        consistent basis within each category.
          3. The Department believes that current process for rejected 
        applicants is working. Each application receives a full and 
        fair review by the Program, comparable to the lending process 
        in the private sector. These reviews consist of highly 
        sophisticated technical and financial analyses conducted by our 
        experienced professional staff.
            The Department agrees that more transparency was needed and 
        LGP has worked hard to improve this. To that end, we have 
        implemented a more proactive communications policy with 
        applicants. Our intake staff is empowered to reach out to 
        applicants to ask questions of, seek information from, and work 
        with applicants to ensure that each application is complete, 
        and fully and fairly reviewed.
          4. The Department agrees with the overall goal to 
        systematically obtain and address feedback from applicants. The 
        Loan Guarantee Program talks regularly with stakeholders to 
        receive feedback. In addition, we recently implemented a 
        feedback page on our new website that allows stakeholders, 
        including applicants, to provide feedback anonymously.

    Question 6a. Section 1705 Deadline Extension: On August 5, the 
Department extended the application deadline for the renewable energy 
loan guarantee solicitation by six weeks, to October 5. Secretary Chu 
stated that this would allow the Department to ``support additional 
projects...''
    Has the Department had difficulty attracting applications for this 
program?
    Answer. No. The loan programs have received over 230 applications 
from projects seeking Section 1705 funds. Over 100 of these 
applications remain active or have already resulted in a conditional 
commitment. Of course, not all of the original applications were 
eligible for the program, and not all of the active applications will 
result in a loan guarantee.
    The Loan Programs Office extended the application deadline not 
because of a lack of demand, but because our process improvements 
permitted us to give applicants additional time to submit their 
applications and to have the best applications possible.
    Question 6b. Please share any information you have about the number 
of applications that have been submitted so far, the total amount of 
funding they request, and the status of those applications.
    Answer. The information you have requested is continually changing, 
as projects move through the review process. As of January 5, 2011, the 
status of loan guarantee requests for projects eligible for the 1705 
program, is as follows:

------------------------------------------------------------------------
                                           Total 1705      Loan Request
          Application Status              Applications    (in billions)
------------------------------------------------------------------------
Received (see Note 1)                              239              $90
------------------------------------------------------------------------
Rejected/Withdrawn/Inactive                        132             $35+
------------------------------------------------------------------------
Active, but Part H Application Not Yet              12               $2
 Submitted (See Note 2)
------------------------------------------------------------------------
Projects in Part II Intake Review (See              41              $19
 Note 3)
------------------------------------------------------------------------
Due Diligence; Pre-Term Sheet Issuance              19              $11
------------------------------------------------------------------------
Due Diligence; Draft Term Sheet Issued              23              $11
 to Applicant
------------------------------------------------------------------------
Conditional Commitment                               4             $1.8
------------------------------------------------------------------------
Closed                                               8             $3.9
------------------------------------------------------------------------
 Note 1: There is a difference between the total loan amount requested
  by all submitted applications and the cumulative loan request amounts
  listed in the various subsets on this chart. This is because, as a
  project progresses through the review process, the size of the
  proposed guarantee may change from the amount originally requested.
 Note 2: The Loan Programs have a two-part application process. Twelve
  active projects have not yet submitted their Part II application; they
  may do so until the relevant, upcoming deadline. For FIPP projects,
  the deadline is January 6, 2011. Under the Manufacturing solicitation,
  the deadline is January 31, 2011. Projects that submit their Part II
  applications by the appropriate deadline will be put into Part II
  Intake review and considered for further due diligence.
 Note 3: The majority of these applications were recently submitted on
  or immediately prior to the December 31, 2010 final Part II deadline
  under the 2009 Energy Efficiency, Renewable Energy and Advanced
  Transmission and Distribution Technologies solicitation. They are
  currently being reviewed and considered for further due diligence.

                              ATVM PROGRAM

    Question 7a. In June 2009--roughly 15 months ago--Secretary Chu 
announced $8 billion in conditional loans to three auto companies. He 
stated at the time that, ``Over the next several months, additional 
loans will be awarded to large and small auto manufacturers and parts 
suppliers up and down the production chain.'' Only one new loan has 
been announced since then, however, and it remains conditional almost a 
year later. When can we expect to see movement in this program again?
    Answer. DOE recently announced another conditional commitment under 
the ATVM program. This brings to six the number of conditional 
commitments that have been made under the program. Four of these 
transactions have already reached financial close, while one recipient 
decided not to proceed to financial close. DOE anticipates offering 
several more conditional commitments over the next several months.
    Question 7b. The administrative budget for the ATVM program was $20 
million in FY2010, and the Department has requested another $10 million 
for FY2011. With very little public activity taking place in the ATVM 
program over the past year, can you explain what these administrative 
funds are being used for? How many government personnel and private 
consultants are working for the ATVM program?
    Answer. The funds cover all of the program's administrative costs 
to manage its existing portfolio, in addition to expenses incurred in 
reviewing applications and negotiating loan terms. In FY 2010, this 
included administrative funding used to close three loans that were 
committed in that year, in addition to the costs of 10 full-time 
federal employees and one private contractor working for the program. 
Additional funding was needed to pay for financial and market 
consultants and outside legal advisors who were assisting in the 
analysis of projects in the pipeline.
    Question 7c. At your briefing with congressional staff on September 
21, you noted that a very large loan is in the works and you expect it 
to be completed next spring. Can you provide additional details about 
who the loan would be for, or, at the very least, whether it is for a 
large manufacturer, an OEM, or another part other industry?
    Answer. The Department is working on a variety of proposals with 
large and small projects but, because of the confidential nature of 
these discussions, we cannot release any other details at this time.
    Question 7d. The Energy Committee recently reported a substitute 
amendment to S. 2843 that would remove the ATVM program's existing loan 
cap and expand eligibility to additional classes of vehicles. Does the 
Department have a position on these provisions? Please explain DOE's 
views on both the loan cap and expanded eligibility.
    Answer. DOE is committed to executing the ATVM program consistent 
with its statutory requirements and does not have a position on either 
of these amendments.

                                BIOFUELS

    A number of biofuels companies have met with Senators to express 
their significant dissatisfaction with the Department's loan guarantee 
programs. Several have also written letters to Secretary Chu, pleading 
for clarification about what, exactly, is required for them to secure a 
loan guarantee for their projects.
    Question 8a. DOE has not selected any biofuels project to receive 
loan guarantees. Please indicate whether the Department believes that 
corn starch ethanol, cellulosic, algae, and/or any types of other 
biofuel projects qualify for consideration under either the 1703 
program or the temporary 1705 program.
    Answer. As a general matter, biofuels projects are eligible for 
consideration under both programs. However, eligibility decisions are 
made on a project-by-project basis, and are dependent on the specific 
attributes of a given project.
    Question 8b. Are any specific factors preventing DOE from awarding 
loan guarantees to the cellulosic biofuel industry?
    Answer. The Department is committed to promoting biofuels and has 
led in this area through investments under the Recovery Act, our work 
on E15 testing, and much more. The Program welcomes biofuels projects 
as they can help diversify our transportation fuel supply. However, 
biomass applications present a number of challenges including, but not 
limited to, significant technology, production, and commodity price 
risk. These risks present challenges in structuring projects that 
comply with the Title XVII requirement that the Secretary determine 
that there is a ``reasonable prospect of repayment'' of each loan 
guaranteed under Title XVII. However, we do currently have several 
biofuels projects in due diligence, and DOE hopes to be able to issue a 
conditional commitment to a biofuels applicant in the near future.
    The Loan Guarantee Program is one of several incentives that 
developers of biofuels can potentially use. As you know, DOE invests 
heavily in energy research and development and demonstration programs 
for biofuels, including numerous cost-shared grants, and there are 
significant tax advantages included in the tax code. Additionally, DOE, 
USDA and EPA have formed a joint working group, which is investigating 
ways to support the industry.

                          CELLULOSIC BIOFUELS

    In February 2010, a number of cellulosic biofuel companies wrote to 
Secretary Chu to highlight the ``method by which credit evaluation for 
next-generation biofuels projects is conducted'' by DOE. According to 
the letter, the LGP office is interpreting a provision in the Energy 
Policy Act of 2005 as ``requiring long-term, fixed-price offtake 
agreements [and] the absence of such agreements as constraining its 
ability to make loans to the biofuels sector.'' The cellulosic industry 
contends that ``the liquid fuels market does not operating within such 
a framework; long-term, fixed-price forward contracting mechanisms, 
offering assurance of predictable future revenue streams, simply do not 
exist in our target markets.''
    Question 9a. Could you please provide DOE's perspective on and 
approach towards loan guarantees for the cellulosic biofuel industry?
    Answer. The Department is committed to promoting biofuels and has 
led in this area through investments under the Recovery Act, our work 
on E15 testing, and much more. The Program welcomes biofuels projects 
as they can help diversify our transportation fuel supply. However, 
biomass applications present a number of challenges including, but not 
limited to, significant technology, production, and commodity price 
risk. These risks present challenges in structuring projects that 
comply with the Title XVII requirement that the Secretary determine 
that there is a ``reasonable prospect of repayment'' of each loan 
guaranteed under Title XVII. However, we do currently have several 
biofuels projects in due diligence, and DOE hopes to be able to issue a 
conditional commitment to a biofuels applicant in the near future.
    The Loan Guarantee Program is one of several incentives that 
developers of biofuels can potentially use. As you know, DOE invests 
heavily in energy research and development and demonstration programs 
for biofuels, including numerous cost-shared grants, and there are 
significant tax advantages included in the tax code. Additionally, DOE, 
USDA and EPA have formed a joint working group, which is investigating 
ways to support the industry.
    Question 9b. Approximately how many loan guarantee applications has 
DOE received from companies within the cellulosic biofuel industry?
    Answer. As of January 5, 2011, DOE had received a total of 19 Part 
II applications for cellulosic biofuels projects.
    Question 9c. Have any specific factors prevented DOE from awarding 
loan guarantees to cellulosic biofuel projects?
    Answer. The most significant impediments to biofuels projects 
receiving loan guarantees from the Program include significant 
technology, production and commodity price risks.
    Question 9d. Are cellulosic biofuel projects eligible for loan 
guarantees under the temporary Section 1705 program?
    Answer. Yes, leading edge biofuels projects are eligible under 1705 
a(3)which states: ``Leading edge biofuel projects that will use 
technologies performing at the pilot or demonstration scale that the 
Secretary determines are likely to become commercial technologies and 
will produce transportation fuels that substantially reduce life-cycle 
greenhouse gas emissions compared to other transportation fuels.''
    DOE has issued two solicitations under which these projects could 
apply: the FY09 Energy Efficiency, Renewable Energy and Advanced 
Transmission and Distribution Technologies; and the Financial 
Institution Partnership Program--Commercial Technology Renewable Energy 
Generation Projects Solicitations. As with all other eligible 
technologies, these projects must also meet all of the other 
requirements of the Section 1705 program.
     Responses of Jonathan Silver to Questions From Senator Dorgan
    In the Omnibus Appropriations Act of 2009 (P.L. 111-8) and the 
Supplemental Appropriations Act of 2009 (P.L. 111-32) as well as S. 
3635, the Fiscal Year 2011 Energy and Water Appropriations bill, 
language has been carried at the request of the Congressional Budget 
Office (CBO) that prohibits DOE from making loan guarantees to project 
applicants if they have already received federal grants and cooperative 
agreements. As chairman of the Senate Energy and Water Subcommittee, we 
carried these provisions in order to address scoring implications 
required by the CBO. This is commonly being referred to as the double 
dipping provision.
    At the same time, there are concerns that have been raised by some 
project applicants that the Department of Energy's (DOE) loan guarantee 
program has placed too many conditions on the loan program and made the 
process too difficult even for strong projects to get through the 
process to close on a loan guarantee commitment. One example of this 
problem is that certain projects that have already received a grant 
from the federal government, for instance for CCS programs funded by 
the DOE, are disqualified from receiving a loan guarantee through your 
office. On the one hand, the Energy Committee has authorized such grant 
programs to demonstration and commercialization of CCS, and the DOE has 
committed serious funds in support of those projects through the ARRA 
and appropriations bills through my Energy and Water Development 
Appropriations Subcommittee. On the other hand, these same projects are 
disqualified from receiving a DOE loan guarantee, a loan that may be 
essential to commercialization of the overall project because of the 
lack of financing that is available in the capital financial markets.
    Furthermore, the Interagency CCS Task Force Report, which the DOE 
co-chairs with the Environmental Protection Agency, released its report 
on August 12, 2010, and recognized the need to overcome the barriers to 
CCS deployment within 10 years with a goal of 5-10 commercial-scale 
demonstration projects by 2016. With this goal in mind, many of the 
projects in the pipeline today are likely going to need a variety of 
incentives to achieve that end.
    Question 1. Is the DOE willing to work with Congressional Budget 
Office and Office of Management and Budget to find a workable solution 
or interpret the provisions in a manner that would recognize the 
importance of strong projects and work with some grant recipients 
depending upon the difference of loan and grant assistance?
    Answer. The Department recognizes the importance of advanced fossil 
projects, and we look forward to working with CBO and OMB to address 
the issue you have raised.
    Question 2a. I understand that DOE requires biofuels projects that 
are seeking a loan guarantee to have a dedicated buyer, or ``off-take 
agreement.'' For liquid fuels, we can assume that a dedicated buyer 
would be a major oil company. While this kind of requirement may make 
sense for an electricity project, it does not make as much sense for a 
fuels project, because off-take agreements do not generally exist in 
the liquid fuels industry. The Renewable Fuels Standard (RFS) mandate 
that requires consumption of biofuels apparently does not qualify as an 
off-take agreement, in fact the national requirement of the use of 
renewable fuel does not seem to be factored into DOE's decision-making 
process in any way. The RFS waiver for cellulosic biofuels basically 
only requires oil companies to purchase fuels that are available in the 
marketplace. It seems that the purpose of a DOE loan guarantee is to 
help new market entrants, however DOE is effectively only agreeing to 
issue loan guarantees to companies producing fuels that are already in 
the market. Due to the ability of the oil companies to not use fuels 
not already in the market place, it seems that we are giving all the 
cards to the oil companies. This situation suggests two questions:
    Is the market for fuel fundamentally different from the market for 
electricity? Should there be different guidelines for fuels projects?
    Answer. There is no question that the market for fuel is 
fundamentally different than the market for electricity. The loan 
programs welcome biofuels projects as they can help diversify our 
transportation fuel supply. Biomass loan guarantee applications present 
a number of challenges including, but not limited to, significant 
technology, production, and commodity price risk. These risks present 
challenges in structuring projects that comply with the Title XVII 
statutory requirement that the Secretary determine that there is a 
``reasonable prospect of repayment'' of each loan guaranteed under 
Title XVII, Despite the challenges presented by biofuels projects, the 
loan programs currently have several biofuels projects in due 
diligence, and DOE hopes to be able to issue a conditional commitment 
to a biofuels applicant in the near future.
    As you know, the Loan Guarantee Program is one of several 
incentives that developers of biofuels can potentially use. DOE invests 
heavily in energy research and development and demonstration programs 
for biofuels, including numerous cost-shared grants where repayment is 
not required, and there are significant tax advantages for biofuels 
included in the tax code.
    Question 2b. Does DOE have the authority to establish different 
guidelines for fuels?
    Answer. DOE reviews each loan guarantee application on its own 
merits against a common set of criteria outlined in each solicitation. 
All projects must meet the basic eligibility criteria, at a minimum, 
including the statutory requirement of a ``reasonable prospect of 
repayment.''
    Responses of Jonathan Silver to Questions From Senator Barrasso
    Mr. Silver, thank you for your testimony. According to the 
Department of Energy's ``The Loan Programs: An Overview'' briefing 
paper (page #12) from September 21, 2010, the Loan Guarantee Approval 
process goes from the ``Solicitation'' stage all the way to the ``Deal 
Monitoring'' stage.
    Question 1. At what point on this chart does the Office of 
Management Budget (OMB) become involved?
    Answer. OMB is currently involved during the Approval Process, 
where it reviews the deal prior to the issuance of a conditional 
commitment, and again during the Closing Process, where it approves the 
final credit subsidy cost.
    Question 2. Is the technology evaluation solely up to the 
Department of Energy (DOE)?
    Answer. Yes, the Department oversees the technology analysis of 
applications.
    Question 3. Has the White House engaged in the review process for 
any specific applications?
    Answer. The Secretary of Energy has ultimate responsibility for 
approving the issuance of a loan guarantee. The Department, in 
reviewing each transaction, coordinates with appropriate offices 
throughout the Administration to ensure the loan programs are executed 
in a manner consistent with relevant statutes, regulations, and 
Administration policies.
    Question 4. After the Department sends out a solicitation, does the 
Department change criteria for selecting and evaluating technology?
    Answer. No. Projects are evaluated and selected according to the 
criteria laid out in the solicitation to which they are responsive and 
the requirements of Title XVII.
    Question 5. What is involved in the Due Diligence part of the 
approval process?
    Answer. ``Due Diligence'' is a broad term; the Department engages 
in ``due diligence'' throughout the review process, all the way to 
financial close. The initial due diligence phase, which occurs before 
conditional commitment, includes, among other things, a close 
examination of the technology, and an analysis of the financial model 
and plan for the project. The projects also undergo detailed legal, 
market, and environmental reviews, including an evaluation to determine 
if they are and will be in compliance with the National Environmental 
Policy Act (NEPA), the Endangered Species Act (ESA), Davis-Bacon labor 
requirements, and other state and local laws and regulations. It is 
during this work that the Loan Programs Office (LPO) deal team engages 
outside consultants and advisors with specialized expertise relevant to 
the project to assist with the transaction.
    After due diligence has proceeded to a point where discussion of 
substantive business issues makes sense, LPO begins an often lengthy 
negotiation with the applicant on the terms and conditions of the 
potential loan guarantee. In some instances, the proposed project must 
be significantly restructured to ensure that it is creditworthy and 
meets the statutory requirement of a reasonable prospect of repayment.
    During the initial due diligence phase, the LPO credit staff 
undertakes a comprehensive credit analysis of the proposed transaction. 
The credit team calculates an estimated credit subsidy cost based on 
the agreed upon term sheet between the applicant and the Department. 
This credit subsidy cost is calculated using a methodology approved by 
OMB. As part of this analysis, LPO credit staff reviews and scores 
every aspect of the transaction, including, but not limited to: pledged 
collateral, market risk, technology risk, regulatory risk, contractual 
foundation, operational risk, and recovery profile. The result is a 
credit subsidy range that incorporates all available information 
regarding the project and financing at the time.
    Due diligence continues after a conditional commitment is made, all 
the way up to financial close. Conditional commitments are 
``conditional'' because they are contingent on the applicant meeting a 
number of conditions precedent to financial close, and which are laid 
out in the commitment. During the post conditional commitment period, 
DOE staff completes any remaining due diligence, with a primary focus 
on ensuring that all conditions precedent (of which there generally are 
many) are met. The parties simultaneously negotiate and draft final 
loan documentation during this period. Once all outstanding issues have 
been addressed, DOE staff conducts a final credit analysis to calculate 
the final credit subsidy cost. The credit subsidy cost is then reviewed 
and approved by OMB. Once the credit subsidy cost is finalized, the 
project immediately moves to financial closing, at which point any fees 
due from the borrower, including those for the credit subsidy cost, 
must be deposited into Treasury, and budgetary resources supporting the 
loan guarantee are obligated.
    Question 6. If an applicant promptly provides all the information 
requested by DOE, how long will the due diligence part take?
    Answer. In order to ensure that taxpayer monies are properly 
safeguarded, the Department uses best practices, similar to those 
private sector lenders would use in reviewing such deals. It is 
important to keep in mind that these transactions are large and complex 
and that no two deals are alike. In the private sector, the due 
diligence associated with such transactions is measured in months, not 
weeks. And, because of considerations that are unique to federal 
financing (e.g., environmental and labor regulations), the Department's 
process is even more robust in some regards. Given the complexities 
associated with these deals, it is very difficult to apply timeframes 
to any one part of the process with any specificity.
    Responses of Jonathan Silver to Questions From Senator Cantwell
    Mr. Silver, in 2008, GAO found significant shortcomings with the 
current DOE loan guarantee program, many of which still remain 
unaddressed.
    This past summer GAO issued another critical review of the program. 
They found that DOE had not developed the tools necessary to assess 
progress within the program, noting the program lacked adequate 
performance goals to help operationalize its policy goals.
    GAO acknowledged that DOE has established some performance goals 
and measures. However, GAO found that the measures were too few to 
reflect the full range of policy goals for the Loan Guarantee Program. 
As an example, GAO noted that there is no measurable performance goal 
for job creation.
    Moreover, they found that the performance goals for the program do 
not reflect the full scope of the program's authorized activities; for 
example, they say nothing about promoting energy efficiency. Without 
sufficient performance goals, DOE cannot know whether the Loan 
Guarantee Program is achieving the desired results.
    Question 1a. What are DOE's plans to remedy these concerns raised 
by the GAO?
    Answer. The Department takes very seriously the analysis and 
recommendations put forth by GAO. The Department agrees that it is 
important for the Loan Guarantee Program to accurately track its 
progress and the impact that the projects it supports are having. It 
has long tracked important metrics for our projects such as greenhouse 
gas emissions avoided, power generated, and individual loan 
performance. We believe that these are important measures of the 
effectiveness of our program. In addition, we continue to work to 
improve our methods for tracking and measuring success in the context 
of the loan programs.
    Question 1b. Does DOE have plans to revisit its performance 
measures and goals? If so, what is the status of that effort?
    Answer. The Department continuously looks for the best ways to 
measure the Loan Programs' projects performance and goals.
    Question 1c. Does DOE plan to do a post-hoc analysis of the 
projects that have received loan guarantees to determine the success of 
the program?
    Answer. The Department's involvement with projects does not end at 
financial close. The Loan Programs Office has a portfolio management 
team that will be involved in actively monitoring and managing the 
investments in the portfolio throughout their term. Separate and apart 
from this monitoring function, the Department is continually reviewing 
the progress of the loan programs, and the impact they have had, as 
part of the Department's strategic and budget planning.
    Question 2a. Mr. Silver, in its report issued in July, GAO found 
that DOE ``is implementing the program in a way that treats applicants 
inconsistently, lacks systematic mechanisms for applicants to appeal 
its decisions or for applicants to provide feedback to DOE, and risks 
excluding some potential applicants unnecessarily.''
    GAO found that DOE's implementation of the program has favored some 
applicants and disadvantaged others in a number of ways, including 
providing preferential treatment to applicants proposing nuclear 
projects.
    Further, GAO found that DOE lacks systematic mechanisms for 
applicants to appeal its decisions or provide feedback to DOE on the 
department's administration of the program.
    What is DOE doing to address these issues identified by the GAO 
investigation?
    Answer. We take all recommendations seriously. In cases where we 
agree that improvements are needed, we are either actively taking steps 
to make these improvements or have completed them. On some of the 
recommendations, we believe that we already have the necessary 
procedures in place. Regarding the four recommended actions on pages 12 
and 13 of the GAO report, the Department takes the following positions:

          1. The Department agrees that it is important for the Loan 
        Guarantee Program to accurately track its progress and the 
        impacts that the projects it supports are having. It has long 
        tracked important metrics for our projects--including 
        greenhouse gases avoided, power generated, and individual loan 
        performance. We believe that these are important measures of 
        the effectiveness of our program. In addition, we continue to 
        work to improve our methods for tracking and measuring success 
        in the context of the loan programs.
          2. We disagree with GAO's assessment that we treat applicants 
        unfairly. The Loan Programs are solicitation-based--meaning 
        that we accept applications only in response to specific 
        solicitations that we issue, each of which is tailored to a 
        specific category or categories of technologies or project 
        types. Each solicitation clearly lays out the criteria that 
        will be used to analyze applications submitted in response to 
        that solicitation--and DOE is vigilant in applying them on a 
        consistent basis within each category.
          3. The Department believes that current process for rejected 
        applicants is working. Each application receives a full and 
        fair review by the Program, comparable to the lending process 
        in the private sector. These reviews consist of highly 
        sophisticated technical and financial analyses conducted by our 
        experienced professional staff.
            The Department agrees that more transparency was needed and 
        LGP has worked hard to improve this. To that end, we have 
        implemented a more proactive communications policy with 
        applicants. Our intake staff is empowered to reach out to 
        applicants to ask questions of, seek information from, and work 
        with applicants to ensure that each application is fully and 
        fairly reviewed.
          4. The Department agrees with the overall goal to 
        systematically obtain and address feedback from applicants. The 
        Loan Guarantee Program talks regularly with stakeholders to 
        receive feedback. In addition, we recently implemented a 
        feedback page on our new website that allows stakeholders, 
        including applicants, to provide feedback anonymously.

    Question 2b. In general, has DOE and OMB determined that nuclear 
energy projects are more or less risky than other projects funded under 
this program?
    Answer. Each transaction is evaluated on the specifics of that 
transaction. Some nuclear transactions may be less risky than some 
innovative technology transactions; for example, sponsors may have 
greater resources, management depth and expertise which they bring to 
the projects.
    Question 3a. Mr, Silver, as I'm sure you can tell, there is a great 
deal of frustration amongst many of us in Congress about the speed and 
transparency of the Loan Guarantee Program. While there has been real 
progress from past years in both areas, further improvement is 
necessary, and quickly.
    In my view, the greatest frustration stems from what seems to be a 
lack of urgency. The policy imperatives that motivated the creation of 
this program in the first place are no less pressing today than they 
were five years ago: job creation, energy security, environmental 
protection.
    I believe all of these issues are more pressing than they were five 
years ago. They are all critical issues of national concern and they 
are good reasons to deploy more renewable energy. In addition, for both 
financial and statutory reasons, applicants for loan guarantees are 
often under tremendous pressure to move quickly. Yet DOE and OMB 
sometimes seem to operate as though there were no cause for urgency.
    I would like to hear your assessment of whether that is an accurate 
perception. Are DOE and OMB personnel processing these applications 
with a sense of urgency?
    Answer. The Department and OMB are processing applications with a 
sense of urgency. The Department takes its responsibility to both 
applicants and the U.S. taxpayer seriously. It is not uncommon for 
applicants to submit applications for projects that are not ready for 
deployment, and therefore, review may be delayed until necessary 
information is re-submitted. The due diligence process includes a 
thorough review of all financial, technical, legal, environmental and 
other relevant data. These reviews often demonstrate the need for 
material changes to the terms and structure proposed in the 
application, which in turn may lead to lengthy negotiations with the 
applicant. While deals have taken a long time to close in the past, the 
Department has made significant improvements that have increased the 
efficiency of the process. For example, it has hired more staff; 
launched an online application portal; streamlined the NEPA process; 
redesigned and launched a more user-friendly website; and initiated 
more proactive communication with applicants. Nonetheless, the unique 
and highly complex nature of each project, and the importance of 
ensuring that each project is structured and documented in a manner 
that minimizes the risk to the taxpayer, means that these are time-
consuming and resource intensive projects to bring to closing. There is 
simply no generic ``one-size-fits-all'' method of reviewing the 
applications; and many of the time-sensitive issues--like issuance of 
regulatory approvals and conclusion of negotiations with off-takers, 
construction contractors, equipment suppliers and the like--are not 
within the Department's control.
    Question 3b. Do you have any recommendation on legislation Congress 
could pass that would improve the DOE loan guarantee process more 
transparent and responsive?
    Answer. The Administration has made a limited number of requested 
changes which we believe are either necessary or helpful, including 
allowing project credit subsidy costs for modifications to Title XVII 
loan guarantees, to be paid from a combination of borrower payments and 
appropriated funds; expanding the Section 1705 program to include 
efficient end use energy technology projects; reaffirming that the Loan 
Guarantee Program can provide guarantees to projects at multiple sites; 
and clarifying when project sponsors may be eligible for multiple loan 
guarantees for eligible projects under the Section 1705 program. In 
addition, we believe that the programmatic improvements we have made 
will go a long way toward meeting the goals set for our programs. We 
also have previously submitted technical drafting assistance at the 
recommendation of this committee to improve the program. We 
continuously look for ways to improve the program and will work with 
OMB and the Congress if there are specific changes we believe could 
improve the program.
    Question 4a. Mr. Silver, in the 1970's and 1980's, the Department 
of Energy wasted billions of taxpayer dollars on defaulted loans to 
subsidize synthetic fuels through the synfuels corporation. According 
to GAO, 10 of the 14 projects funded through that program resulted in 
defaults.
    In spite of that history, DOE is now considering a loan guarantee 
application from a coal-to-liquids project in Wyoming.
    According to analysis by the Natural Resources Defense Council, 
even if 90% of the CO2 from liquid coal plants is captured, 
then well-to-wheels CO2 emissions would be still be higher 
than emissions from today's crude oil system.
    Why is DOE considering making new investments in synthetic fuels?
    Answer. The Secretary of Energy has made the commercialization of 
technologies that enable carbon capture and sequestration (CCS) 
technologies a policy priority. Title XVII of the Energy Policy Act of 
2005 (EPACT 2005), under which the DOE Loan Programs Office was 
established, expressly provides for loan guarantees for gasification 
projects incorporating carbon capture and sequestration, including 
integrated gasification combined cycle projects, industrial 
gasification projects, petroleum coke gasification projects, and 
liquefaction projects. Accordingly, the Loan Programs Office is 
considering several prospective projects deploying advanced 
gasification technology with CCS. The DOE invited these projects to 
enter due diligence after a competitive solicitation process and 
thorough preliminary review.
    In addition to power, these projects may produce substitute natural 
gas, chemical feedstocks or transportation fuels. The program does not 
have a bias for or against any particular product of gasification 
technology. Instead, we focus on projects that have strong development 
teams capable of implementing complex technological projects. In 
addition, we evaluate prospective projects based on the degree to which 
each advances energy policy objectives, which includes the reduction or 
avoidance of greenhouse gas emissions compared with existing technology 
and competing technology investments.
    Question 4b. What data do you have to suggest that such an 
investment is either economically or environmentally sound?
    Answer. The Department's National Energy Technology Laboratory 
(NETL) has published extensive research over several years on the 
economics and lifecycle greenhouse gas emissions of coal-to-liquids 
(CTL) technology. NETL has examined, for example, coal-to-liquids 
technology using a methanol-to-gasoline production process and 
incorporating carbon capture and sequestration (CCS.)
    These studies have found that the lifecycle greenhouse gas 
emissions of this process with 88 percent CCS are approximately five 
percent below the EPA Renewable Fuel Standards 2 (RFS2) petroleum 
baseline emission standards established under Section 526 of the 2007 
Energy Independence and Security Act (EISA) of 2007. In addition, the 
studies found that the lifecycle emissions of CTL with CCS are 
substantially below many sources of imported crude oil, which currently 
account for a large portion of the oil refined in the U.S.
    All of the advanced fossil technology projects currently in Loan 
Program due diligence were found to be economic upon preliminary 
review. The Program invited the projects into due diligence based on 
their economic viability. It is possible that the due diligence process 
will discover that economics of certain projects have changed. All 
projects to which the Department extends loan guarantees must, 
according to Section 1702 of EPACT 2005, have ``a reasonable prospect 
of repayment of the principal and interest on the obligation by the 
borrower.''
    Question 4c. How do coal-to-liquids projects meet the statutory 
language of the Loan Guarantee Program requiring projects to ``avoid, 
reduce, or sequester emissions of air pollutants or man-made greenhouse 
gases''?
    Answer. The NETL studies cited above found that the lifecycle 
greenhouse gas emissions of a coal-to-liquids process with 88 percent 
CCS are approximately five percent below the EPA Renewable Fuel 
Standards 2 (RFS2) petroleum baseline emission standards established 
under Section 526 of the 2007 Energy Independence and Security Act 
(EISA) of 2007. In addition, the studies found that the lifecycle 
emissions of CTL with CCS are substantially below many sources of 
imported crude oil, which currently account for a large portion of the 
oil refined in the U.S.
    The Loan Programs Office will verify the lifecycle greenhouse gas 
emissions for each project under review during the due diligence 
process. The Department will not extend a loan guarantee offer to any 
project that does not meet the statutory requirement in Section 1703 of 
EPACT 2005 to ``avoid, reduce, or sequester air pollutants or 
anthropogenic emissions of greenhouse gases.''
    Question 5a. Mr. Silver, in your response to a letter sent by Rhone 
Resch, President & CEO of the Solar Energy Industries Association 
(SETA), to President Obama regarding the $1.5 billion rescinded from 
the Loan Guarantee Program last month, you stated that ``In the short 
term, we have the resources to support a broad portfolio of clean 
energy technologies and anticipate that those resources will allow DOE 
to support credit worthy projects across all open solicitations.''
    Does this mean that the estimated 81 projects requesting more than 
30 billion dollars in loans will not get funded unless Congress 
restores at least $1.5 billion?
    Answer. The Loan Programs Office is committed to utilizing the 
funds we currently have in the 1705 program to fund solid projects to 
achieve our statutory objectives. As discussed above, DOE is currently 
engaged in pre-conditional commitment due diligence on over forty 1705-
eligible projects (in addition to the twelve 1705-eligible projects 
that have already received conditional commitments to date, and 
projects eligible under 1703 and ATVM). Twenty-three of these projects 
are sufficiently far along in the process that DOE has already provided 
a working draft term sheet and begun active negotiations with the 
applicant. DOE estimates that these twenty-three projects, 
cumulatively, would utilize most, if not all, of the uncommitted 
appropriated 1705 funds. Of course, as in the private sector, it is 
possible that not all projects that have received draft term sheets 
will ultimately reach the conditional commitment and/or closing stage. 
Accordingly, DOE will continue to move forward with due diligence on 
the other projects in its pipeline and will actively review the new 
Part II project applications that it expects to receive by the upcoming 
application submission deadlines.
    Many projects that are eligible under 1705, but which do not 
receive loan guarantees under that program, will be eligible to receive 
loan guarantees under the 1703 program, which currently is a self-pay 
credit subsidy program.
    In addition, the 2011 President's Budget includes $500 million in 
credit subsidy to support energy efficiency and renewable energy 
projects under 1703. The Administration is monitoring the Loan 
Guarantee Program and will continue to seek appropriate funding levels 
to ensure the program can achieve its objectives.
    Question 5b. I interpret your statement to mean that now DOE plans 
to spread the available funds across all technologies and all 
solicitations; commercial renewable, innovative renewable, transmission 
and the new solicitation for commercial renewable manufacturing, is 
that correct? If so, is that decision based on any Congressional 
guidance?
    Answer. DOE is committed to funding as many well-designed, well-
structured, and creditworthy projects as possible. Projects from all of 
the open solicitations remain eligible for loan guarantees.
    Question 5c. Would you agree that project sponsors believe that 
when they file an application pay all of the fees and costs--which 
could amount to millions of dollars in some cases--that if they meet 
all of the solicitation's criteria of a credit-worthy project there 
will be sufficient funds to cover the subsidy costs?
    Answer. Each solicitation issued under the 1705 program makes clear 
that the Department's ability to pay the credit subsidy cost associated 
with loan guarantees is ``subject to the availability of funds.''
    Question 5d. What are you telling applicants now with respect to 
the chance that projects may well not be funded due to lack of funds? 
How will DOE treat the fees of credit-worthy applicants in the event 
you are not able to offer a loan guarantee due solely to lack of funds 
to cover the subsidy cost? Are fees refundable?
    Answer. Applicants to the Loan Programs Office are made aware that 
the Department's ability to pay the credit subsidy cost under the 1705 
program is ``subject to the availability of funds.'' Many projects that 
are eligible under 1705, but which do not receive loan guarantees by 
the September 30, 2011 sunset date, will be eligible to receive loan 
guarantees under the 1703 program, which currently is a self-pay credit 
subsidy program--though the 2011 President's Budget includes $500 
million in credit subsidy to support energy efficiency and renewable 
energy projects under 1703. Administrative fees associated with 
applying for a loan guarantee are used to cover the expenses that the 
Department incurs in reviewing the applications, as required by Title 
XVII. They are not refundable.
    Question 5e. Isn't there a possibility that the Section 1705 
program could run out of funding early next year? Given this fact why 
would new applicants apply for loans under the open solicitations?
    Answer. The Loan Programs Office is committed to financing well-
structured, well-designed, and creditworthy projects that will be able 
to reach financial close by September 30, 2011, regardless of when 
their applications are received. As discussed above, as in the private 
sector, it is possible that not all of the twenty-three projects that 
are in the process of term sheet negotiations will ultimately reach the 
conditional commitment and/or closing stage. Accordingly, DOE will 
continue to move forward with due diligence on the other projects in 
its pipeline and will actively review the new Part II project 
applications that it expects to receive by the upcoming application 
submission deadlines.
    Question 6a. Mr. Silver, Master Limited Partnerships (also known as 
MLPs) have been used to help finance mining, as well as oil and gas 
drilling, supporting the development of critical domestic fuel sources.
    Given the need for additional investment capital to support U.S 
domestic energy supply, do you think that this type of structure should 
be extended to include qualified renewable energy projects?
    Answer. The Loan Programs Office has not formed a view on Master 
Limited Partnerships.
    Question 6b. Do you agree that allowing MLPs to be used for 
renewable energy on a basis comparable to that afforded to fossil fuels 
could both expand the supply of domestic renewable energy as well as 
expand the base of investors eligible to invest in America's renewable 
energy resources?
    Answer. The Loan Programs Office has not formed a view on Master 
Limited Partnerships.
     Responses of Jonathan Silver to Questions From Senator Bennett
    Scoring conventions of the Congressional Budget Office (CBO) 
require the Appropriations Committee to include a proviso in the Energy 
and Water Appropriations bill to prohibit projects that have previously 
received certain federal funding, such as grants, from receiving a 
Title 17 loan guarantee. CBO argues that using federal funds to support 
a project that receives a federally-guaranteed loan shifts risk from 
the developer to the federal government. As the loan guarantee program 
matures, the number of projects that would be disqualified because of 
their past funding history grows, particularly in the fossil energy 
category because of DOE's Clean Coal Power Initiative (CCPI). Although 
fossil is particularly affected, the problem also cuts across 
categories, and probably includes projects in the nuclear and renewable 
categories.
    Question 1a. Does DOE agree with CBO's assessment that if a project 
has received a federal grant in the past that additional risk is 
assigned to the federal government?
    Answer. The Department has not undertaken an analysis of this 
issue. The Department executes the loan programs consistent with its 
statutory requirements. More broadly, DOE seeks to ensure the most 
efficient use of taxpayer dollars and that sponsors have sufficient 
``skin-in-the-game''.n all projects supported by the program.
    Question 1b. Given that funding appropriated for loan guarantees in 
FY07 does not have the same prohibition on receiving federal grants, 
would the loans issued from FY07 loan authority therefore be inherently 
more risky to the federal government than those issued from FY09 and 
later, all things being equal?
    Answer. Again, the Department has not undertaken an analysis of 
this issue. However, no project is funded, under FY07 or FY09 authority 
or otherwise, unless the Department has undertaken an extensive and 
rigorous review of the risks associated with the project, the Secretary 
has determined that there is a reasonable prospect of repayment, and 
OMB has approved the credit subsidy computation. It should also be 
noted that, although the FY07 appropriation does not contain this 
requirement, not all projects that may be funded under that authority 
will necessarily have received other federal support.
    Question 1c. What protections does DOE have in place to ensure 
strong protections against default?
    Answer. To protect against default, before issuing a loan 
guarantee, our team of highly qualified professionals thoroughly 
evaluates the technology, the structure and financial plan, the 
construction agreements and other project documentation, and costs and 
timeline to complete the project. From this review, we develop a 
detailed understanding of the sources of cash available for repayment 
of the loan. Our loan guarantee documentation includes the full range 
of customary lender protections--representations and warranties, 
detailed conditions precedent to each loan disbursement, covenants and 
events of default; we generally have a lien on all project assets; 
depending on the specific risks of the project, we include risk 
mitigants, such as debt service reserve accounts, cash sweeps, sponsor 
support agreements and mandatory prepayment provisions, among others; 
and we receive detailed financial and operating reports throughout the 
life of the loan, supplemented by independent engineering reports 
during the construction period and otherwise as appropriate.
    Question 2a. There are at least three distinct exceptions to the 
ineligibility proviso discussed above: (1) the FY09 Supplemental 
Appropriations bill allows a project to receive both a loan guarantee 
and a federal grant or cooperative agreement as long as the grant or 
agreement was recorded on or before May 1, 2009; (2) the loan guarantee 
must be offered from the $4 billion authority from FY07, which is not 
subject to the prohibition; and (3) DOE may use a CCPI grant award to 
pay the cost of a loan guarantee for a specific project referenced in 
section 1703(c)(I)(C) of EPACT05.
    Is DOE aware of any other exceptions to the ineligibility proviso?
    Answer. The text of the prohibition contains a number of additional 
exceptions, including an exception for ``otherwise allowable Federal 
income tax benefits.''
    In addition, the prohibition currently applies only to the 2009 
appropriations authority for loan guarantees issued under Section 1703.
    Question 2b. Is it DOE's position that if a project has received a 
federal grant (i.e. a CCPI grant) to support the project, and none of 
the above exceptions apply, the project would be ineligible to receive 
a loan guarantee?
    Answer. If the grant proceeds are ``expected to be used (directly 
or indirectly)'' to support the project, the project would be 
ineligible to receive a loan guarantee under Section 1703 using FY09 
budget authority. It is also worth noting that the FY09 Supplemental 
Appropriations bill provides that OMB must certify compliance with the 
restriction before a loan guarantee may be issued using the FY09 
authority. In addition to the restrictions contained in the FY09 budget 
authority, there may be other reasons why a project that has received a 
grant may not qualify for a DOE loan guarantee. For instance, grants 
are often used to support technologies prior to their commercial 
readiness.
    Question 2c. Has DOE examined the current list of applicants (or at 
least those in the short-term pipeline) and determined whether they are 
eligible for a loan guarantee in light of this proviso? At what time in 
the application process is this determination made?
    Answer. Yes. Only one project currently in due diligence could be 
ineligible to receive a loan guarantee under the 2009 Supplemental 
Appropriations Bill because it has also received a Federal grant. DOE 
may proceed with this project using available authority from FY07. 
Although this statutory prohibition does not apply under the FY 2007 
authority, DOE's analysis of the credit subsidy cost takes into account 
other forms of federal assistance. There is at least one other project 
that has been put on hold because the Tennessee Valley Authority was 
proposed to be the project off-taker, which would not be permissible 
under the terms of the FY09 restriction. Although we do not have 
complete data, we believe there are other projects (or potential 
projects) that may be inhibited from entering into off-take 
arrangements with TVA, or similar entities, as a result of the 
restriction. The eligibility determination is made during due 
diligence, before a term sheet for the project is final (although 
compliance must ultimately be certified by OMB prior to closing). We 
would not offer a conditional commitment to a project before ensuring 
all eligibility requirements can be met.
    Question 2d. If the proviso is interpreted strictly, could the loan 
guarantee program potentially lose most if not all applicants?
    Answer. The Department interprets the proviso strictly. As stated 
above, two of the current projects in due diligence would be ineligible 
to receive a loan guarantee using FY09 authority because of the 
proviso, but at least one of those projects may be funded from FY07 
authority, to the extent funding remains available. Other projects that 
might be precluded by the prohibition may also be eligible under 
Section 1705, which does not include this prohibition. As stated above, 
even though the prohibition does not apply, the credit subsidy cost 
would take into account other forms of federal assistance.
    Question 3a. According to your testimony, ``[f]ollowing the 
Secretary's approval, LPO offers a conditional commitment for a loan 
guarantee.... This commitment is `conditional' because it is contingent 
upon the applicant meeting certain conditions precedent to financial 
close.'' With regard to these ``conditions precedent''.
    What specific measures are being taken by DOE to ensure the timely 
acquisition by the applicant of all the relevant federal, state, local, 
and tribal permits necessary to implement each loan guarantee project?
    Answer. Beyond the clear incentives for a project sponsor to 
complete the project quickly, there are several means by which the 
Department ensures the timely acquisition of all relevant permits by 
loan guarantee applicants. First, the loan guarantee application 
instructions in program solicitations at Attachment 1, Section B. 10, 
instruct the applicant to ``provide a list of all federal, state and 
local licenses, permits and approvals required to site, construct, 
implement and operate the project, including environmental 
authorizations or reviews necessary to commence construction and 
operation. For approvals already received, provide the filing and 
approval dates and parties involved; for those not yet received, 
provide the filing date, steps to be taken to obtain them, and expected 
date(s) they will be obtained.''
    Further, Section IV. B. 1. a. vii. of the solicitation states that 
an evaluation criteria for Part II application review is: ``the extent 
to which all necessary land rights and state and local permits, as well 
as the environmental clearances necessary to proceed, have been 
obtained or approved.''
    These requirements would be verified and part of the due diligence 
process; and, absent extraordinary circumstances, no guaranteed loan 
proceeds would be disbursed until all such permits and approvals have 
been issued.
    In addition, the National Environmental Policy Act (NEPA) review 
process documentation (an environmental assessment or environmental 
impact statement) prepared for each project will include a description 
of the environmental permits required for implementing the proposed 
action. The analysis included in the NEPA documentation will address 
``whether the action threatens a violation of Federal, State, or local 
law or requirements imposed for the protection of the environment'' (40 
DFR 1508.27(10)). In the case of any necessary wetland permitting for 
the loan guarantee project by the U.S. Army Corps of Engineers, the 
Loan Programs Office's (LPO's) NEPA review process will involve the 
Corps as a cooperating agency, which enables the Corps to satisfy the 
requirements of Section 404 of the Clean Water Act using LPO's NEPA 
process. This avoids duplicative NEPA review processes and expedites 
permitting.
    Question 3b. What specific measures are being taken by DOE to 
streamline the NEPA review process where applicable and to mitigate the 
associated time delays for applicants?
    Answer. The Department is expediting the NEPA review process in 
numerous ways:

          1) We have developed Memorandums of Understanding with the 
        California and Nevada U.S. Bureau of Land Management (BLM) 
        offices to serve as cooperating agencies on the NEPA review of 
        any project that involves a DOE loan guarantee and a grant or 
        permit from BLM. This avoids duplicative NEPA review processes 
        and allows the Department to take advantage of the BLM ``Fast 
        Track'' NEPA review process;
          2) The Department adopts the NEPA review documentation 
        prepared by other Federal agencies instead of performing 
        separate reviews to ensure no duplicative processes. The 
        Department has worked with BLM, the Army Corps, and the U. S. 
        Department of Housing and Urban Development's NEPA 
        documentation;
          3) The Department worked with the Council on Environmental 
        Quality (CEQ) to adapt existing categories of actions that do 
        not require preparation of a NEPA environmental assessment or 
        environmental impact statement (i.e., categorical exclusions). 
        Exchange of letters between Secretary Chu and CEQ Chairman 
        Sutley confirmed the appropriateness of applying the 
        categorical exclusions to projects that retool and reequip 
        existing facilities;
          4) LPO environmental compliance staff conducted webinars for 
        potential applicants to educate them on the NEPA review process 
        associated with Loan Programs Office and DOE NEPA requirements;
          5) The Loan Programs Office website was enhanced to include 
        detailed information concerning the NEPA review process and 
        examples of NEPA compliant documents prepared for loan program 
        applications that can be used by applicants as templates for 
        their project;
          6) LPO environmental compliance staff meet with applicants 
        prior to their submission of Part II applications to ensure the 
        information provided expedites the NEPA review process. This 
        includes encouraging applicants to submit their required 
        environmental report in a format and content that closely 
        resembles the final DOE NEPA document;
          7) Loan Programs Office staff work closely with the DOE 
        Assistant General Counsel for Environment's legal staff to 
        reduce the time required for internal review and approval of 
        LPO's NEPA documents. This involves providing project pre-
        briefings to legal staff before they receive a document for 
        review. Loan Programs Office also established a single point of 
        contact on the legal staff to coordinate the review and 
        approval process; and
          8) The Loan Programs Office Environmental Compliance Division 
        increased the NEPA staff from a single contractor in August 
        2008 to a staff of eight Federal FTEs and numerous support 
        contractors by September 2009, which increased the throughput 
        of NEPA reviews by the office.

    Question 3c. What specific measures are being taken by DOE to 
facilitate the acquisition of federal land permits by the applicants?
    Answer. In addition to the measures described above to help 
facilitate applicant's acquisition of federal land permits for loan 
guarantee projects, the Department has also served as the lead federal 
agency to coordinate among federal regulatory and land management 
agencies responsible for administering federal lands. Specifically, the 
Department has stepped up to serve as the federal nexus for the 
Endangered Species Act Section 7 consultation with the U.S. Fish and 
Wildlife Service (FWS) that results in FWS issuing a Biological Opinion 
and Incidental Take Permit, which must be obtained before the applicant 
can obtain various federal land permits and close a loan guarantee 
agreement with DOE. The Department also negotiated agreements between 
BLM and other federal regulators (namely FWS) to expedite BLM right-of-
way approval of transmission line corridors necessary to service 
renewable energy development projects. In addition, DOE works closely 
with loan guarantee applicants to ensure that they are fully apprised 
of land management agency requirements for permits and approvals early 
in the due diligence process. This eliminates surprises that could 
adversely affect the loan guarantee closing process.
    Responses of Jonathan Silver to Questions From Senator Stabenow
    In 2007, I worked with House and Senate colleagues to ensure that 
Section 136 was in place to help auto companies manufacture new fuel 
efficient vehicles in the United States. To date the loans granted have 
been successful in producing new jobs and new domestic manufacturing. 
However, over 100 applications have been filed with the DOE and the 
vast majority of those applications are from suppliers. Furthermore, of 
the five companies that have received a conditional loan agreement from 
DOE under this program, only one was a supplier. That company, Tenneco, 
decided not to pursue finalization of the loan.
    Participation of suppliers is critical to the deployment of 
advanced technology vehicles. Parts manufacturers contribute almost 30% 
of the $16.6 billion in automotive R&D and provide much of the 
intellectual capital required for the design, testing, and engineering 
of new parts and systems and play a major role in the deployment of 
established and emerging technologies. Recently, this Committee 
reported an amendment to section 136, in part to make it clearer that 
suppliers can qualify.
    Question 1a. Are statutory changes necessary for DOE to administer 
the ATVM program in a way which more suppliers can take advantage of 
the program?
    Answer. DOE is committed to working with all applicants who qualify 
under the ATVM loan program. Many suppliers have had difficulty 
qualifying, as there needs to be a nexus between the supplier and a 
specific ATVM car model. Section 136 of the Energy Independence and 
Security Act of 2007 states that the term ``qualifying components'' 
means that components must be:

          (A) designed for advanced technology vehicles; and
          (B) installed for the purpose of meeting the performance 
        requirements of advanced technology vehicles.

    Many of our applicants do not meet these requirements, or if they 
do, their production volumes for ATVM vehicles are too small as to make 
a loan feasible.
    Question 1b. Are there other obstacles from your perspective?
    Answer. Supplier contracts often have the OEM acquiring the 
components receiving the rights to intellectual property which DOE must 
receive from the component maker as collateral under the Act. In 
addition, payment terms with OEMs are often in arrears; such terms 
expose an ATVM component loan to additional risk.
    Question 2a. Regarding loan guarantees under section 1705 and 
section 1703: Can you please provide specific information on how DOE 
analyzes applications to categorize, prioritize and evaluate financial 
health?
    Answer. The Department's credit staff conduct a rigorous project 
finance underwriting and credit analysis similar to that conducted by 
commercial financial institutions. For project finance transactions, 
the critical element of the review is an evaluation of cash available 
for debt service after consideration of all costs and revenues and 
evaluation of all risks that could affect costs or revenues.
    Question 2b. Please explain how DOE analyzes the debt of mature 
publicly traded companies with conventional debt?
    Answer. Since most Department transactions do not involve recourse 
to publicly traded sponsors, DOE does not focus on the debt of such 
companies except to the extent DOE is analyzing the ability of such 
companies to fulfill their obligations such as to provide transaction 
equity or to backstop contractual obligations. In analyzing mature, 
publically traded companies, the Department utilizes conventional 
credit analysis.
    Question 2c. Is there an acceptable debt-to-equity ratio or other 
measure of leverage for an application to be successful in securing a 
guarantee?
    Answer. The acceptable debt-to-equity ratio varies with the risk 
associated with each project; there is no uniform standard.
    Question 2d. In the private sector, investment bankers view 
applicants as partners and they communicate continuously as deals are 
being structured. Michigan companies tell us that there is zero or 
little interaction with applicants about timeline, company business 
models, or creditworthiness, that the process is a black box, that DOE 
simply takes written information and later renders a verdict. How much 
communication do you have with applicants about the above issues?
    Answer. The Department has implemented a more proactive 
communications policy with applicants. Our intake staff is authorized 
to reach out to applicants to ask questions of, seek information from, 
and work with applicants to ensure that DOE's evaluation is fully 
informed. We seek to ensure that all projects are given a full and fair 
evaluation under the terms of the applicable solicitation and our 
governing documents. Once a project is in the due diligence/negotiation 
stage, our investment officers and attorneys are in regular and 
continual contact with applicants and their advisors.
    Question 2e. When applicants have follow up questions about their 
loan guarantee, how are those handled? It seems logical that each 
applicant would get a ``client manager'' or ``caseworker'' to 
communicate with regarding their application.
    Answer. The Department reorganized its staff into technology domain 
groups to create efficiencies and capitalize on the expertise of our 
staff. The Department also implemented a more proactive communications 
policy with applicants. The intake staff is authorized to reach out to 
applicants to ask questions of, seek information from, and work with 
applicants to ensure that DOE's evaluation is fully informed. We seek 
to ensure that all projects are given a full and fair evaluation under 
the terms of the applicable solicitation and our governing documents. 
Once an application is accepted into the due diligence/negotiation 
process it is assigned an investment officer who serves as the point of 
contact for incoming and outgoing questions between the Department and 
the applicant.
    Question 2f. Has DOE been given any guidelines by OMB related to 
the process, communication or financial requirements for applicants?
    Answer. DOE is responsible for carrying out the Title XVII program, 
and coordinates closely with Treasury and OMB consistent with statutory 
requirements. The programs' initial regulations, which provide public 
guidance on how the program operates, were developed through standard 
rulemaking procedures, which involve OMB by statute.
    In addition, OMB has provided guidance to all agencies on various 
matters relating to the Recovery Act, including communications 
regarding applications for Recovery Act funding. Since Section 1705 
funds came under the Recovery Act, some of that guidance applies. With 
respect to financial requirements, OMB Circular A-129 outlines policies 
for all Federal credit programs, to ensure efficient and effective use 
of budgetary resources.
    Question 3. What is the nature of the working relationship between 
DOE and the Office of Management and Budget on loan guarantee 
applications and section 136 applications?
    Answer. DOE is responsible for implementing the programs, including 
reviewing applications and making award determinations. Pursuant to 
OMB's oversight authority provided by the Federal Credit Reform Act, 
OMB and DOE coordinate closely to ensure accurate cost estimates for 
each of the awards.
     Responses of Jonathan Silver to Questions From Senator Sanders
    Question 1. Is it true that DOE is considering providing a clean 
energy loan guarantee to a coal-to-liquids project despite the fact 
that using coal to produce liquid fuel produces double the greenhouse 
gas emission impact of using conventional oil? If so what steps is DOE 
planning to take to mitigate the greenhouse gas emissions impacts of 
this project, and what criteria is DOE using to ensure that all loan 
guarantee projects result in the deployment of projects that are truly 
clean, meaning they result in a reduction of greenhouse gas emissions 
and other pollution and environmental degradation relative to 
conventional technologies?
    Answer. It is the Department's policy not to comment on specific 
applications. However, DOE believes that coal-to-liquids (CTL) projects 
incorporating carbon capture and sequestration (CCS) may be eligible 
under Title XVII of the Energy Policy Act of 2005, provided that they 
meet the other requirements of the program such as economic viability 
and reduced greenhouse gas emissions. The DOE's National Energy 
Technology Laboratory (NETL) has published extensive research over 
several years on the economics and lifecycle greenhouse gas emissions 
of CTL technology incorporating CCS. These studies have found that the 
lifecycle greenhouse gas emissions of this process with 88 percent CCS 
are approximately five percent below those produced by the EPA 
Renewable Fuel Standards 2 (RFS2) petroleum baseline established under 
Section 526 of the 2007 Energy Independence and Security Act (EISA) of 
2007. In addition, the studies found that the lifecycle emissions of 
CTL with CCS are substantially below many sources of imported crude 
oil, which currently account for a large portion of oil refined in the 
U.S.
    The Loan Program verifies the lifecycle greenhouse gas emissions 
for each project in our portfolio. The DOE will not extend a loan 
guarantee offer to any project that does not meet the statutory 
requirement in Section 1703 of EPACT 2005 to ``avoid, reduce, or 
sequester air pollutants or anthropogenic emissions of greenhouse 
gases.''
    Question 2. Do you agree with C130 that the risk of default for a 
new nuclear power plant could be as high as 50 percent, and how will 
you protect taxpayers when the federal government is backing billions 
in nuclear loan guarantees?
    Answer. As CBO noted earlier this year, the 50 percent default 
estimate was developed several years ago, prior to enactment of the 
Title XVII statute and regulations. CBO has since revised this 
estimate, reflecting the current market and additional information 
available at this time. DOE evaluates nuclear projects with a broad 
range of characteristics. For instance, some proposed loans are to 
corporate borrowers, while others are to project finance borrowers. 
Some plants have regulated rate bases, while others sell power on a 
merchant basis. The default risk depends on the type of borrower and 
project, among other things, and we ascribe the probability of default 
accordingly.
    We seek to protect the taxpayer through a number of risk mitigants, 
including i) debt service reserves to cover operating costs during 
extended shutdowns or subpar performance, ii) cash sweeps, iii) 
mandatory prepayment provisions, iv) provisions for liquidated damages 
from the Engineering, Procurement, and Construction contractor, v) 
contingent equity commitments and vi) and a perfected security interest 
in the project.
    Question 3. Regarding nuclear loan guarantees, what criteria, if 
any, are in place to ensure that entities receiving loan guarantees are 
meeting their obligations for adequacy of decommissioning funds for 
existing plants?
    Answer. As a condition precedent to financial close, the project 
must receive a Combined Operating License (COL) from the NRC which 
requires the licensee to comply with NRC's regulations pertaining to 
adequate funding arrangements (among other matters)to ensure timely 
plant decommissioning. The Independent Engineer, on behalf of the DOE, 
reviews and validates the project's decommissioning plan, including the 
estimated decommissioning costs. The estimated decommissioning costs 
are included in the project's financial pro forma which is reviewed and 
validated to ensure that the forecasted annual plant operating revenues 
are adequate to cover all financial obligations, including the funding 
for plant decommissioning.
    Responses of Jonathan Silver to Questions From Senator Landrieu
    Question 1. I am encouraged to hear that the V-Vehicle Company, 
whose original application was denied, is making significant progress 
with DOE on their second application under the Advance Technology 
Vehicle Manufacturing (ATVM) program. As you know, V-Vehicle's 
automobile is a low-cost, fuel-efficient vehicle that will meet 
aggressive emissions standards and the highest safety rating. In 
addition, the company wants to locate the facility in Monroe, LA, 
bringing jobs to a rural region of my state that so desperately needs 
good jobs. Can you comment to the V-Vehicle application and where it 
currently stands? When do you expect to award the next round of ATVM 
projects? Do you expect to announce multiple projects over the next 
several months? How many ATVM projects does DOE have in the pipeline 
for the rest of 2010?
    Answer. It is the Department's policy not to comment on specific 
applications. DOE recently announced another conditional commitment 
under the ATVM program. This brings to six the number of conditional 
commitments that have been made under the program. DOE anticipates 
offering several more conditional commitments over the next several 
months.
    Question 2. It has come to my attention that DOE has taken the 
position that its loan guarantee for wind energy does not have to apply 
to the U.S. government's maritime cargo preference statutes. Under that 
law, any U.S. financed project that ships cargo must use at least 50 
percent of U.S. flagged vessels for transport of that cargo. This issue 
was most recently addressed in Section 3511 of the Defense 
Authorization Act of 2009 (PL 110-417), which strengthened any 
ambiguity that existed to which agency has the authority to determine 
the applicability of U.S. cargo preference laws and conferred that 
responsibility to the U.S. Maritime Administration.
    In addition, an underlying objective of the DOE loan guarantee 
programs is to create domestic investment and jobs, as funded through 
the President's Economic Stimulus Initiative. DOE's current position on 
the Cargo Preference Act runs counter to this objective, since domestic 
shipping jobs will be usurped by foreign flagged vessels. Having U.S. 
flagged vessels bring over wind mill blades from China and other 
foreign nations helps supply domestic jobs, since the manufacturing of 
these parts will not occur in the U.S. As such, I do not understand why 
DOE believes that projects financed by their loan guarantee programs 
need not abide by current law regarding cargo preference. Further, I 
understand that DOE has indicated to abide by terms governing the 
issuance of U.S. guaranteed credit, and, under the terms of the 1954 
Cargo Preference Act, that all U.S. credit programs are subject to the 
terms of that Act.
    I'd like to understand DOE's position on its ability to make 
determinations on U.S. Cargo Preference laws given the provisions of PL 
110-417. I would also like to understand why DOE would take the 
position that stimulus funds should be used for the purchase of foreign 
exports and not be shipped by U.S. shipping companies. Can you tell me 
why DOE has taken the position that they need not abide by the Cargo 
Preferences Act?
    If this is an oversight on DOE's behalf, can I get your commitment 
to reverse it immediately?
    Answer. DOE is currently pursuing a consultative process on this 
matter with the Department of Transportation under 46 U.S.C. 55305(d) 
of the Act.
    Question 3. I am concerned that the Loan Guarantee Program has 
placed too many conditions on the loan program and made the process too 
difficult even for strong projects to get through the process. For 
instance, I understand that projects that have received a grant or 
earmark from the federal goverment are disqualified from receiving a 
loan guarantee. This seems to make no sense. If the project has 
received the stamp of approval from another rigorous Federal approval 
process, why should they be automatically precluded from DOE programs?
    My question is whether DOE is precluding applicants that have 
already received another source of Federal funding from participating 
in their loan guarantee programs?
    If yes, do you support this practice and believe it should be 
continued?
    Answer. DOE executes the loan programs in accordance with all 
relevant laws and regulations. The 2009 Supplemental Appropriations 
bill contains language that precludes DOE from offering loan guarantees 
using FY 2009 budget authority to projects that have received, or 
expect to receive, certain forms of federal government support, 
including grants. In addition, different government programs serve 
different purposes: a finding of suitability for a research grant based 
on promise or potential is not necessarily an indication that a 
technology or project is ready or able to enter the commercial market 
with a loan.
                                 ______
                                 
     Responses of Jens Meyerhoff to Questions From Senator Bingaman

    Question 1. The rapid growth and apparent success of First Solar in 
several markets appears to have given you access to capital that many 
others in the solar sector have been unable to find. Some may say this 
indicates you don't need the program, as the private sector should be 
available to you. Once could even go a step further and say financing 
for solar is moreikely to help your competitors than your company. What 
are your thoughts on these points?
    Answer. Financing for solar projects at the project entity level is 
in its infancy in the United States. Banks carefully evaluate this 
emerging business opportunity and are in a steep learning curve. Solar 
generating systems are long lived (20+years) assets and the private 
sector today neither provides enough liquidity (debt capacity) nor 
adequate term/duration commensurate with the asset's longevity. 
Typically, bank loans will have a tenure of seven years, introducing 
refinancing risk or impairing the project economies.
    Today's mid-sized solar projects of up to 50MW are generally 
financed through the corporate balance sheet of larger utility 
companies or financial investors with tax capacity. Smaller projects 
are mostly equity financed, making them most expensive.
    The PV industry is in the process of opening and enabling private 
sector lending. This has been successfully accomplished in Europe with 
the support of the Germaneconstruction Bank. Over the past years, 
European banks have developed enough experience and comfort with solar 
PV, where the reliance on such programs has declined significantly.
    Our competitors are equally active in accessing new sources of 
liquidity as evidenced by SunPower's recent announcement of rated solar 
bonds in Italy.
    The focus of these financings is at the project level and not at 
the corporate level. So while First Solar can support construction and 
warranty/O&M viability with its balance sheet, the actual debt 
financings of the project is a matter of project viability, technology 
risk and asset maturity. In that aspect all industry participants face 
similar challenges.
    Given First Solar's emphasis on very large scale solar 
installations, one could argue that these projects require more support 
to open large institutional financing capability than most others, as 
liquidity requirements are in excess of $1 billion, in most cases too 
large to be balance sheet financed by our utility customers.
    To reiterate, the DOE 1703/1705 programs provide the following 
benefits in that aspect:

   Significant increase in debt liquidity.
   Important financing bridge, until the U.S. financing markets 
        fully develop for utility-scale solar projects.
   Encourages development of innovative renewable technologies, 
        including those which help utilities to integrate solar power 
        projects into their grids.
   Reduces the cost of capital, which indirectly reduces the 
        cost of renewable power.

    Question 2. There are those that would argue that the United States 
doesn't need this type of program. Companies such as yours could take 
advantage of support offered overseas and prove the technologies there 
and then deploy them later in the US when they are sufficiently 
demonstrated that banks and utilities are more comfortable with them. 
Do you agree with this? What implications do you see for the United 
States in such a policy?
    Answer. There are a few flaws to this logic:

          a) The market dynamics between European FIT systems, which 
        provide cash on cash returns compared to a much more complex 
        tax incentive structure in the U.S. do not necessarily make the 
        project financing structures transferrable. U.S. projects and 
        their cash flows are USD denominated and span over 20-25 years. 
        This adds significant currency risk and allows only large 
        international banks to possibly participate.
          b) US projects are larger in size and require institutional 
        financing through bond issuance. These offerings access 
        different capital sources that even in Europe are just 
        emerging.
          c) Grid integration of large scale solar is ``local'' and not 
        easily transferred from Europe. The process of technology 
        adoption by the utilities requires deployment of renewable 
        sources in their infrastructure. These learning cycles are 
        specific to each region and differ significantly even within 
        the U.S. Given the U.S. market structure, it is the first large 
        scale transition market and has the opportunity to lead large 
        scale renewable integration, innovation and establish clear 
        leadership for our industry. The size of power plants being 
        realized in the southwestern United States will dwarf anything 
        in Europe and allow cycles of learning and product innovation 
        not previously achieved. A follower approach will allow others 
        to capture this competitive advantage and the obvious economic 
        benefits.

    Question 3. Have you had the opportunity to review the CEDA 
legislation contained in S. 1462? Do you have any opinions you could 
share?
    Answer. The Clean Energy Deployment Administration (CEDA), or Green 
Bank, is an important part of the American Clean Energy Leadership Act.
    By providing loans and loan guarantees at federal treasury interest 
rates, the Green Bank would lower the cost of financing debt to 
renewable power projects by 2-4 percentage points. This would directly 
address the biggest obstacle to expanded deployment of renewable 
generation: the cost to utilities. The Green Bank would provide loans 
and loan guarantees at minimal risk to the taxpayer. The Green Bank 
would lend overwhelmingly to projects with a proven history of 
effective deployment. The default rates on such projects are extremely 
low and, even under the most cautious assumptions; the prospective 
default rate would be roughly 10%. The Green Bank would see the loans 
and loan guarantees repaid in the vast majority of the projects, which 
means the taxpayer will be exposed to minimal levels of risk.
    The Green Bank is modeled after federal corporations with proven 
track records, such as the Export-Import Bank and the Overseas Private 
Investment Corporation. It would be a wholesale, non-profit corporation 
wholly owned by the government and accountable to Congress. It is a 
very low-cost way to generate the financing for large volumes of 
renewable power without materially affecting utility rates and 
disrupting the economy. Establishment of a Green Bank would be a 
significant commitment to moving our energy supply--and our economy--
toward clean, domestically produced sources of energy.
     Responses of Jens Meyerhoff to Questions From Senator Cantwell
    Question 1. Over the past couple of years this committee has held 
several hearings on mechanisms to provide low-cost project financing to 
facilitate domestic deployment of renewable energy projects and 
manufacturing facilities.
    Do you support such an idea? Do you believe it would be more 
straightforward than the current Loan Guarantee Program
    Answer. Facilitating domestic deployment begins with demand 
creation. Finance support policies then enable providers to meet demand 
and help scale the industry, lower costs and advance product adoption. 
Generally, we support the idea of a national Renewable Energy Standard 
(RES) as a proven policy for creating market demand. We very much agree 
that a RES or Clean Energy Standard should not create additional 
significant cost to the consumers.
    There are a few things to consider around a national RES:

          a) Renewable energy resources generally have lower capacity 
        utilization of transmission resources due to their 
        intermittency. In order to protect the rate payer, the total 
        cost of ownership of renewable energy needs to be understood. 
        Generally, renewable energy has to be deployed in a portfolio 
        approach. For example, wind generation happens mostly at night, 
        providing base load, while idling transmission capacity during 
        the day. In addition, wind generation is not very predictable 
        and therefore provides little to no capacity value to a 
        utility. However, when combing wind and solar, the two 
        technologies become synergistic as solar is a peaking resource 
        utilizing transmission capacity when wind does not. Adding 
        biomass or natural gas generation to the mix provides further 
        firming of the generation capacity. A national RES should 
        consider carve outs for different technologies in order to 
        motivate and drive true integration of renewable energy sources 
        into the existing infrastructure. It should further comprehend 
        hybrid solutions of natural gas and solar in order to 
        incentivize technology integration of different generation 
        assets without risking reliability in the electricity delivery 
        mechanism. Natural gas and solar have interesting synergies 
        which can be further optimized. Natural gas has fast response 
        times to offset the intermittency of solar, but natural gas 
        generation has high fuel cost component that over 20 years 
        expose generators and rate payers to commodity risk. Solar on 
        the other hand has no fuel cost and highly predictable long 
        term generation cost and therefore offers a natural hedge to 
        the natural gas generation asset.
          b) Rate payer burden could be further reduced by 
        restructuring commercial terms in the underlying power purchase 
        agreements. Given our industry's outlook towards significant 
        further cost reductions through technology advances and the 
        fact that cost will scale with volume, one could consider 
        escalation based PPA's that allow for lower rate payer burden 
        in the near term until scale and cost reduction on a volume 
        weighted average basis further scale electricity cost. In order 
        to truly enable this while providing maximum debt quantum for 
        project finance, a government backed loan program should 
        consider more custom tailored DSCR structures and ratios in 
        support of these commercial solutions.

    With respect to project financing:

          a) Predictability remains the single most important aspect of 
        any program. If a program is not predictable, it becomes 
        opportunistic and will likely not provide benefits to the rate 
        payer. Any program must be aligned to the industry's 
        development cycles in tenure and sunset dates must be 
        application based and completion based.
          b) Subsidy programs must be integrated and should be seen 
        holistically. A program like the section 1603 treasury grant is 
        equally important as the DOE loan programs. One covers equity 
        the other debt. Both need to be liquid and affordable in a 
        successful project finance structure.
          c) The cost of solar PV financing to the tax payer are 
        significantly overestimated. The current blended recovery rate 
        does not discriminateetween generation assets and manufacturing 
        assets. Europe has financed over =50 billion in solar PV assets 
        with a very low default rate (virtually 0% for tier one 
        suppliers). The current recovery rate of 55% either assumes 
        defaults of investment grade utilities under rate based PPA's 
        or fundamental flaws with the existing technologies.
    Question 2. In your opinion, could such a direct loan program be 
established and get up and running more quickly than the loan guarantee 
program has?
    Answer. The timing for such a program and how it would replace the 
existing 1703/5 programs would be the biggest concern. We would need a 
phased approach and keep the current programs in place while shifting 
over. The main concern as with the existing resources is that the 
government is not a bank and neither has the ability to easily make 
credit decisions nor does it have the ability to attract and retain the 
human capital to run such a program effectively. In Europe, most of 
these programs are facilitated by commercial banks that use their 
project finance resources for diligence matters. This allows thousands 
of transactions to be processed annually with cycle time of less than 3 
month even for large scale projects.
    Question 3. How do you think your company or the companies you 
represent could benefit from such a program?
    Answer. A program as described in the prior paragraph would benefit 
all industry participants greatly. Germany's KFW program has allowed 
companies of all sizes including installers to scale and create a 
predictable business model. In order to avoid abuse or a taxing of the 
rate payer when combined with a national RES, one might think about a 
scaling function that correlates market size, generation cost to 
lending terms.
    The direct loan program as defined is highly attractive and would 
provide significant renewable electricity cost reductions. It is a 
viable answer to the over $30 billion provided by the central bank of 
China to Chinese Solar Panel suppliers.
    Question 4. Do you think that the low interest rates and long 
repayment schedules available under this program would positively 
impact the financings of clean energy projects and that any resulting 
savings would translate to lower costs for ratepayers?
    Answer. They key constraint for solar PV financing in the US is 
liquidity, term (loan length) and cost of capital (interest rates). 
Renewable energy generation assets typically have limited operating 
expense and little to no fuel cost. This means that in large part their 
cost are all capital based. Loan tenure and interest cost have a 
significant impact on the electricity price. For example in the US 
desert southwest environment a reduction in the cost of capital of 
100bps has the same effect on the power plant's levelized cost of 
energy (LCOE) as a reduction in the installed cost of $0.30/watt (DC). 
In order to reach the ratepayer, a few things would need to be assured:

          a. The program has to be predictable, so its benefits can be 
        priced into the electricity price without any risk.
          b. A scale should be applied in terms of leverage ratio that 
        is tied to electricity cost and solar resource. For example, if 
        a generator offers $0.15/kwh at 1,800 hrs of irradiance, the 
        leverage ratio should be less than a generator offering $0.13/
        kwh. In reverse the leverage ratio should also be higher if 
        $0.15/kwh were offered at only 1,500 hrs of irradiance. The 
        data for this is readily available and the algorithm is simple. 
        This would motivate companies to drive electricity cost down 
        and help scale the industry. It would maximize volumes and job 
        creation.
                                 ______
                                 
    Responses of Michael D. Scott to Questions From Senator Bingaman

    Question 1. In your testimony you talk about what you view as an 
incorrect reading of the Federal Credit Reform Act as it applies to the 
loan guarantee program that leads to over-estimation of costs and 
excessive aversion to risk. Is this interpretation of OMB with regard 
to the program different than the way the statute was interpreted with 
regard to other credit programs you are aware of? Are you aware of what 
might cause such a different interpretation?
    Answer. To answer the first part of the question, it is important 
to understand that Title XVII of the Energy Policy Act of 2005, created 
a unique Federal credit program that is substantially different from 
any other Federal credit program. It is also necessary to understand 
that the ``excessive aversion to risk'' is also addressed through 
requirements in the Final Rule that are not consistent with the 
underlying statute, Congressional intent, other statutory requirements, 
or published Federal credit policies.
    With respect to the narrow issue of the calculation required under 
the Federal Credit Reform Act (``FCRA''), the first difference is that 
with implementation of Title XVII through Sec. 1702(b)(2), the borrower 
is responsible for the full cost of the obligation (``credit subsidy 
costs'') as well as the administrative costs (Sec. 1702(h)) of the loan 
(evaluation, negotiation, and servicing). Under every other Federal 
credit program, the U.S. Government pays for the credit subsidy and 
administrative costs of the program through taxpayer funded 
appropriations. This means that the borrower generally has very little 
interest in the mechanics of the calculations required under the FCRA. 
The second difference, which is also relevant in assessing OMB's 
approach, is that Title XVII will generate a relatively small number of 
loans with highly unique characteristics, each for relatively high 
dollar amounts. This contrasts with pre-crisis Federal credit programs 
that are characterized by a large number (often in the hundreds of 
thousands or millions) of homogenous loans, each for relatively small 
dollar amounts.
    In general, OMB is doing many of the same things in executing the 
FCRA for Title XVII that it does in all other Federal credit programs. 
This approach fails to recognize the significant differences between 
Title XVII and all other Federal credit programs. The FCRA shortcuts 
that OMB takes in all other Federal credit programs are not appropriate 
for Title XVII.
    In calculating the credit subsidy costs, OMB has significant 
control over critical inputs into the Credit Subsidy Calculator and for 
which the FCRA provides general or specific direction. For instance, 
the FCRA provides specific direction regarding the discount rates to be 
used in discounting the cash flows, general direction about measuring 
cash flows to and from the U.S. Government, and general direction on 
adjusting the cash flows for defaults (which requires the development 
of a cumulative probability of default curve).

                             DISCOUNT RATES

    As it relates to the discount rates used to discount the cash 
flows, the historical practice of OMB is to use the discount rates 
(Treasury rates for a given maturity) included in the President's 
budget assumptions. While this approach is not strictly consistent with 
the statutory requirements of the FCRA (see Sec. 502(5)(E)), it is 
administratively simple for OMB and generally does not matter in the 
context of a program where the U.S. government is paying the credit 
subsidy costs. However, in Title XVII where the borrower is responsible 
for paying the credit subsidy costs and is in fact borrowing from the 
Federal Financing Bank (``FFB'') at the same rate indicated in 
Sec. 502(5)(E), the mismatch between the two rates (an assumed rate 
versus an actual rate) results in an inaccurate calculation. OMB and 
Treasury have historically opposed the use of the discount rates 
required by Sec. 502(5)(E) because they do not believe that a corporate 
borrower reflects the same credit risk as the U.S. Government and 
therefore its cash flows should not be discounted at rates that reflect 
the U.S. Government's borrowing costs. While I certainly understand 
this view (and dealt with it in the context of the Air Transportation 
Stabilization Board as well as the expansion of the Rural Economic 
Development Loan and Grant Program from the 2002 Farm Bill) and further 
understand that OMB and Treasury have historically opposed this 
particular statutory direction, the way to deviate from it is to 
legislatively amend the provision in the FCRA, not to seek backdoor 
solutions to disagreements with the existing statute. Until the FCRA is 
so amended, it is OMB's duty to comply with the statute as written.

                   CASH FLOWS TO THE U.S. GOVERNMENT

    With respect to the issue of what constitutes a cash flow to the 
U.S. Government, one explanation of OMB's approach might be that the 
Sec. 1701(2) reference to the term ``cost of a loan guarantee'' points 
to the definition included in the FCRA under Sec. 502(5)(C). In a 
``loan guarantee'' program that does not use the FFB, this would be the 
appropriate reference. However, in establishing the Final Rule, OMB 
provided that where DOE guarantees 100% of the Guaranteed Obligation, 
the loan shall be funded by the FFB (Sec. 609.10(d)(4)(i)). The FFB is 
an instrumentality of the U.S. Government under the general supervision 
of the Secretary of the Treasury. Under the FCRA, use of the FFB 
results in a credit subsidy calculation done in accordance with the 
FCRA requirements under Sec. 502(5)(B) (cost of a direct loan). The 
main difference between the cash flows considered in the context of a 
loan guarantee and those of a direct loan are that the interest 
payments made to the U.S. Government, or by the U.S. Government (in the 
case of FFB payments back to Treasury for its own borrowings), are 
evaluated. The most substantial impact is that the spread above 
Treasuries (Treasuries represent the FFB's cost of funds) charged by 
the FFB to the borrower are considered a cash inflow to the U.S. 
Government. A historical example of this is the FFB's financing of the 
USDA's Rural Utilities Service (``RUS'') electric program loans. The 
12.5 basis points spread above Treasuries that the FFB charges on these 
loans caused a positive credit subsidy program (meaning that it cost 
the U.S. Government money) to turn into a negative credit subsidy 
program (meaning that it ``makes'' money for the U.S. Government). 
Prior to, and during much of my tenure at Treasury, OMB often opposed 
the use of the FFB because they viewed it as expanding the subsidy 
provided to the borrower or the program. In the instant case of Title 
XVII, the spreads are wider than the 12.5 basis points charged in the 
RUS program and can generate significant net present value offsets even 
after factoring in the net post-default curve cash flows.
    Another cash flow to the U.S. Government that is not currently 
included in the credit subsidy calculation is the ``Facility Fee'' 
payment required of the applicant at the signing of the conditional 
commitment. DOE charges an upfront ``Facility Fee'' based on the amount 
guaranteed that ranges from a low of 50 basis points to a high of 100 
basis points. In the July 2010 GAO report (GAO-10-627), GAO observes in 
footnote ``a'' on page 22 that, ``According to agency documentation, 
this fee is intended to cover the LGP's cost of loan setup and 
associated legal and finance fees.'' Using the Southern Company loan 
guarantee commitment as an example, Southern will be required to pay a 
Facility Fee of $41.6 million. The cost to set up the loan and the 
related legal fees are likely to be in the low to mid hundred thousand 
dollar range and should be paid ``as-incurred'' as a Sec. 1702(h) fee. 
The concept of charging a ``Facility Fee'' is common in the private 
sector where banks have reserve and capital requirements, and therefore 
legitimate costs associated with committing capital. However, the FFB 
does not incur finance fees to issue debt or incur charges for reserves 
or capital, so there is no legitimate expense here. Excluding the 
``Facility Fee'' as a cash inflow to the U.S. Government increases the 
cost of the program on borrowers in a manner that is not consistent 
with the FCRA. The net of this particular issue is that fees that are 
charged to the borrower that are not cost based should be treated as a 
cash inflow to the U.S. Government for purposes of the Federal credit 
subsidy calculation. To the extent that a portion of the fee represents 
an actual expense of the U.S. Government, then that specific portion 
would not be included as a cash inflow to the U.S. Government. This 
approach is consistent with treatment of administrative expenses under 
Sec. 502(5)(A) and Sec. 504(g) of the FCRA as well as the Sec. 1702(h) 
requirements of Title XVII that ``The Secretary shall charge and 
collect for guarantees in amounts the Secretary determines are 
sufficient to cover applicable administrative expenses.'' This approach 
is also consistent with SFFAS 2, ``Accounting for Fees'', paragraph 93 
(at page 308 and 309).
    Recoveries are a specified cash inflow to the U.S. Government under 
the FCRA definitions of the ``cost of a loan guarantee'' and the ``cost 
of a direct loan''. It has been therefore disappointing that OMB has 
not insisted that all sources of recoveries be fully analyzed, valued 
and treated as a cash inflow to the U.S. Government. This represents a 
significant issue because as outlined in the DOE/OMB Report to the 
Committees on Appropriations entitled ``Credit Subsidy Methodology'', 
OMB established a ``base recovery rate'' that could be notched up or 
down according to a ``number of factors''. In practice however, OMB has 
applied a base recovery rate of 55% for all projects, regardless of 
individual project-specific factors. While we understand that OMB may 
have done some minor notching in at least one instance, they have not 
required DOE to actually hire professionals (paid for by the borrower 
as a Sec. 1702(h) administrative expense) to provide expert valuations 
on the multiple sources of project specific recoveries available to the 
U.S. Government. This approach is implicit under the FCRA and is 
important because recovery values will vary on a project-by-project 
basis. This is due to the technology, nature and structure of the 
project, the project sponsors, contractual differences, loan 
amortization characteristics, as well as other factors. Examples of 
different sources of recovery include:

          1. From the sale of the underlying asset serving as the 
        collateral;
          2. From sponsor contractual commitments to inject new equity;
          3. From commitments from the project's technology and/or EPC 
        contractors to cover certain obligations, such as cost overruns 
        or other contingencies;
          4. From other collateral provided to the U.S. Government, 
        such as cash collateral accounts; and,
          5. From other contractual or structural protections agreed to 
        by the project sponsor.

    One concrete example of multiple sources of recovery occurred 
during the execution of the loan guarantee program by the Air 
Transportation Stabilization Board. The ATSB hired a variety of 
valuation experts to provide opinions on a range of collateral that the 
ATSB ultimately became contractually entitled to. These experts opined 
on items that would generate recovery cash flows to the U.S. Government 
such as the sale of aircraft, real estate, simulators, equipment, 
gates, routes, slots, warrants and other contractual provisions. The 
retention of these experts and use of their valuations provided the 
ATSB with a sound and supportable basis to make recovery valuation 
estimates and incorporate the data into the credit subsidy calculation.

                           DEFAULT CURVE USED

    In the FCRA definitions of the ``cost of a loan guarantee'' and the 
``cost of a direct loan'', OMB is directed to adjust the cash flows for 
defaults. Beginning with the Emergency Steel Oil and Gas Loan Guarantee 
Board, the ATSB, and other Federal credit programs since, OMB and 
Treasury have preferred to have the rating agencies rate proposed 
transactions. This is because these loan structures are well within the 
wheelhouse of the rating agencies core evaluation competencies and the 
ratings can be directly linked to the vast statistical rating and 
default data available for periods reaching back 90 years and is 
consistent with OMB Circular A-11 direction to use statistical evidence 
where possible for credit subsidy calculator inputs. This approach is 
certainly preferred as compared with potentially more biased 
alternatives.
    The default curve used by OMB is a critical component in 
determining the value of the cash flows. However, there is more than 
one default curve that could be selected and therefore default curve 
selection can be used to drive preordained outcomes. For example, there 
are at least three default curves available from the various rating 
agencies including:

          a. All Issuer
          b. All Non-Financial Issuer (excludes financials)
          c. Utility

    The ``All Issuer'' has the highest cumulative probability of 
default for a given rating, followed by the ``All Non-Financial 
Issuer'' and then the ``Utility'' default curve. There are reasons to 
exclude the ``Utility'' default curve (i.e., not exactly the same 
transaction structure seen in the historical data represented). 
Likewise the use of a default curve that includes financials is not 
representative of the transactions seen in Title XVII, so the most 
statistically valid default curve to use is the ``All Non-Financial 
Issuer''. While we are not certain as to which default curve OMB is 
using in the Credit Subsidy Calculator, this is a critical input that 
significantly impacts the credit subsidy calculation and should be well 
understood by the Administration to ensure that the most statistically 
relevant data is used.

  OMB DIRECTIVES TO DOE REGARDING ESTIMATED AND FINAL CREDIT SUBSIDY 
                                AMOUNTS

    OMB has provided guidance and direction to DOE (and indirectly to 
applicants) that is inconsistent with the underlying statutes and 
rules. Specifically, the Final Rule and the relevant solicitations 
provide for a non-binding estimate of the Federal credit subsidy costs 
of a proposed project but recognize that the final Federal credit 
subsidy amount can only be determined near the date of financial 
closing and disbursement.
    Common language in the solicitations says ``The final Credit 
Subsidy Cost determination must be made at or prior to the closing on 
the Loan Guarantee Agreement and may differ from the preliminary 
estimate of the Credit Subsidy Cost, depending on project-specific and 
other relevant factors including final structure, the terms and 
conditions of the debt supported by the Title XVII guarantee and risk 
characteristics of the project.'' This is consistent with the 
requirements of the Federal Credit Reform Act of 1990, Title XVII, the 
Final Rule and the relevant solicitations.
    However, OMB has suggested that the non-binding estimate of the 
Federal credit subsidy is actually an amount that the final credit 
subsidy required will not be below. This is problematic for four 
reasons:

          a. It is not consistent with the FCRA requirement that the 
        credit subsidy cost be determined at the ``date of 
        disbursement'';
          b. It suggests that changes in the final business plan, 
        project rating or transaction structure (whether positive, 
        negative or neutral) are not relevant to the final credit 
        subsidy cost calculation;
          c. The existing assumptions and inputs used to calculate the 
        Federal credit subsidy estimates have not been faithful to the 
        FCRA and this approach will further compound the errors; and,
          d. It is important for project sponsors and other 
        stakeholders to know that there is a statutory and fact-based 
        framework that will be followed with respect to the calculation 
        of the credit subsidy payment required and that positive or 
        negative factors that arise after the term sheet but before 
        financial closing will be fully considered in accordance with 
        the law.

    The faithful implementation of the FCRA is a time sensitive and 
critical issue, particularly for those project sponsors in the due 
diligence queue at DOE. The reason is that the non-binding Federal 
credit subsidy cost estimates that OMB and DOE provide project 
sponsors, gives the sponsor its first look at the expected check that 
the U.S. Government will seek, and this informs their investment 
decision. If the credit subsidy number provided is at a particular 
level that makes the project uneconomic, principally because the 
calculation was not faithful to the statute, and this drives a project 
sponsor and its investors to abandon a project that would otherwise 
have been viable, then not only have the purposes of Title XVII been 
frustrated, but the loss to all interested parties, including the 
Administration and Congress, is irreplaceable. This is a new issue in 
Federal credit programs as it is principally only relevant in a 
``borrower pay'' program.
    Question 2. You advocate for the removal of the limitation on total 
guarantee levels under the self-pay provisions of the loan guarantee 
program, as you would argue the FCRA provisions were overridden by the 
subsequent enactment of section 1702(b)(2). Critics have argued that 
this would result in increased risk to the taxpayers, as there would 
not be any inherent check on the volume of lending under the program. 
Do you agree with this assessment?
    Answer. I do not agree with that assessment for the following 
reasons:

          1. There are statutory, Final Rule, and solicitation based 
        requirements that must be met by any applicant and these are 
        challenging and limiting;
          2. The self-pay requirement will limit interest and capacity 
        and generally result in much higher quality project sponsors 
        and underlying projects;
          3. Project sponsors had requested almost $175 billion in 
        guarantees over the prior four years (according to a GAO July 
        2010 report) and yet only $695 million has closed (and all 
        under Sec. 1705 of the ARRA) which suggests that the program is 
        unlikely to be unrestrained;
          4. As a practical matter, many of the projects and the 
        technologies have long lead times between application, 
        submission, conditional commitment and satisfaction of the 
        conditions precedent required for closing. During this time 
        frame, sponsors and their investors will see many changes to 
        their business plan, the market and the business environment 
        that will impact the final investment decision and potentially 
        lead to project cancellations before closing;
          5. The five year history of the program does not inspire 
        confidence with project sponsors, leading many sponsors to 
        delay or abandon projects that they would otherwise have 
        advanced because of the large upfront costs involved in 
        developing projects;
          6. The Administration and Congress have many levers to 
        influence DOE to ensure that the program is executed 
        responsibly; and,
          7. There are opportunities to ensure oversight through 
        required reporting mechanisms and perhaps non-volume limiting 
        legislation that could provide Congress with confidence in the 
        appropriateness of the utilization of the program.

    Question 3. Have you had an opportunity to review the CEDA 
legislation contained in S. 1462? Do you have any opinions you could 
share?
    Answer. Yes, I reviewed the CEDA legislation some time ago and have 
several comments. First, as we have seen with Title XVII and other 
Federal credit programs, executing Federal credit programs can be very 
difficult. They require the cooperation and coordination with the White 
House, OMB, Treasury, as well as the program agency. If there is 
internal opposition from any of these groups, the rules, regulations, 
ability to use the FFB, FCRA requirements can all be used to delay or 
derail the execution of the program. Allowing the recognized and known 
problems of Title XVII to remain unresolved creates precedent problems 
for the execution of future Federal credit programs, whether CEDA or an 
infrastructure bank.
    Second, as a general matter, it is important to recognize the 
concerns that OMB, Treasury and others may have in the creation of the 
CEDA. For instance, if a portion of the targeted technologies are too 
new to be able to establish a ``reasonable probability of repayment'' 
(a fairly standard term included in rules/regulations, if not in the 
underlying statute, for Federal credit programs) it may be better to 
consider grants or equity investments, with appropriate upside for the 
taxpayer, for those technologies that cannot meet the ``reasonable 
probability of repayment'' standard needed for loan guarantees or 
direct loans.
    Third, whenever the ``full faith and credit'' is pledged (as is the 
case in the version that I read) and not otherwise limited by statute, 
the U.S. Government is providing a full, 100% guarantee. As such, it 
can be better for the program and participants to allow or direct the 
use of the FFB to provide the financing. This is because it will lower 
the U.S. Government's net credit exposure, lower the credit subsidy 
amounts required and provide certainty of financing execution as 
compared with allowing or requiring private sector financial 
institutions to finance 100% U.S. Government guarantees. OMB has often 
supported private sector involvement in Federal credit programs under 
the belief that they will bring their credit analysis capabilities to a 
program. My experience from Treasury demonstrated that the private 
sector does not apply the same credit standards for 100% guarantees or 
partial guarantees and therefore the value they add to a Federal credit 
program is questionable. While the private sector certainly likes to do 
this business because it represents a source of relatively risk free 
profits, they do not reduce the credit exposure of the U.S. Government, 
and in fact make it more expensive for the U.S. Government and the 
borrower. Further, as we saw in the most recent financial crisis, 
private sector financing of loan guarantees present real market 
execution issues which can significantly impede the objectives of the 
Federal credit program and potentially create market perception 
concerns for Treasury issuances.
    Question 4. You have several concrete steps that you believe the 
President could take now to correct deficiencies in the loan guarantee 
process. Presumably, the deficiencies result from previous OMB 
interpretations of FCRA and Title XVII that you believe were incorrect. 
Assuming that OMB is disinclined to reverse those interpretations, are 
there specific changes that could be enacted to the guiding statutes 
that would clarify these issues for OMB and DOE?
    Answer. I do not believe that it is possible to legislate program 
execution for Title XVII. OMB and Treasury have too many tools 
available to them to delay or derail any Federal credit program. 
Successful execution of Title XVII, or any Federal credit program, 
relies on a willing and knowledgeable Executive, particularly when 
multiple misinterpretations have been made.
    One example of the problem with legislating a solution can be seen 
in the concept that the Secretary could independently assign a credit 
rating as opposed to having a credit rating agency do so. While the 
Secretary may take a more optimistic view of a particular sponsor and 
transaction than a rating agency, this approach would probably result 
in OMB developing its own default curve for those ratings assigned by 
the Secretary to be used in OMB's Credit Subsidy Calculator. OMB could 
reasonably justify developing its own default curve as the Secretary 
would not be able to demonstrate a multi-decade track record for his/
her ratings. Further, even if this was not the case, there are a number 
of other inputs to the Credit Subsidy Calculator that OMB has control 
over and can influence in the event that one tool is removed via 
legislation. It is also important to recognize that OMB has significant 
control over an agency's budget and can influence the Secretary in ways 
that are less transparent.
                                 ______
                                 
    Responses of Marvin S. Fertel to Questions From Senator Bingaman

    Question 1. Critics of the loan guarantee program argue that 
nuclear energy is a developed technology and that it is therefore 
unnecessary to provide loan guarantees since the private sector should 
be able to correctly price financing. How do you respond to this 
criticism?
    Answer. New nuclear power plants deserve financing support for 
several reasons.
    First, the new nuclear power plants now under development in 
several regions of the United States are the first nuclear energy 
facilities built in several decades. They are being built under a new 
Nuclear Regulatory Commission (NRC) licensing process that, although 
conceptually much improved from the process in place when the first 
plants were built in the 1970s and 1980s, is still untested. In the 
eyes of the financial community, the licensing process represents some 
level of risk and, until the companies and the NRC have demonstrated 
that the licensing process works as intended, the financial community 
is unable to quantify the degree of risk. In addition, although the 
nuclear reactor designs being developed in the United States are 
evolutionary advances on the 104 light water reactors in commercial 
operation, they do incorporate innovative technology enhancements and 
features that have never been used before. For this reason, they 
qualify as an ``innovative'' technologies eligible for loan guarantees 
under Title XVII of the 2005 Energy Policy Act.
    In addition, loan guarantees for new nuclear power plants address a 
structural challenge facing companies interested in building new 
nuclear generating capacity. Unlike the many consolidated government-
owned foreign utilities and the large oil and gas companies, U.S. 
electric power sector consists of many relatively small companies, 
which do not have the size, financing capability or financial strength 
to finance power projects of this scale on their own, in the numbers 
required. This challenge can be managed, with appropriate rate 
treatment from state regulators or credit support from the federal 
government's loan guarantee program, or a combination of both. Loan 
guarantees, in particular, offset the disparity in scale between 
project size and company size. Loan guarantees allow the companies to 
use project-finance-type structures and to employ higher leverage in 
the project's capital structure. These benefits flow to the economy by 
allowing more rapid deployment of clean generating technologies at a 
lower cost to consumers. By reducing the cost of capital, loan 
guarantees reduce the cost of electricity and moderate the impact on 
the economy as the United States transitions to a lower carbon 
footprint.
    Loan guarantees are a powerful tool and an efficient way to 
mobilize private capital. The federal government manages a loan 
guarantee portfolio of approximately $1.1 trillion to ensure necessary 
investment in critical national needs, including shipbuilding, 
transportation infrastructure, exports of U.S. goods and services, 
affordable housing, and many other purposes. Supporting investment in 
new nuclear power plants and other critical energy infrastructure--
which will, in turn, create jobs and investment in the manufacturing 
supply chain--is a national imperative.
    Question 2. You advocate for vesting final authority to determine 
credit subsidy costs in the Department of Energy, rather than OMB. In 
your view, would this entail a change in the Federal Credit Reform Act, 
or is there a way in which this would be consistent with that statute?
    Answer. NEI does not believe it is necessary to amend the Federal 
Credit Reform Act in order to vest final decision-making authority over 
credit subsidy costs for the Title XVII loan guarantee program with the 
Secretary of Energy. We believe the uniqueness of this program 
justifies placing that authority with the Secretary of Energy. First, 
the Title XVII loan guarantee program is fundamentally different from 
other federal loan guarantee programs in that nuclear project sponsors 
are expected to pay the credit subsidy cost associated with loan 
guarantees. Second, unlike other federal credit programs, which consist 
of large portfolios of relatively small loans, the DOE loan guarantee 
program consist of a relatively small portfolio of large loans, at 
least with respect to nuclear projects. Third, the transactions under 
Title XVII are complex, highly structured financings--an area in which 
the Office of Management and Budget has limited experience and 
expertise. By contrast, the Department of Energy has acquired 
considerable expertise in this area and, through the due diligence 
teams working on its behalf to review and structure the projects to 
protect the taxpayer interest, is best-positioned to conduct the 
analyses and assessments necessary to derive reasonable and equitable 
credit subsidy costs. NEI believes that OMB can and should continue to 
play an advisory and oversight role, but we do not believe it is 
appropriate to vest final decision-making authority in an agency that 
does not have the experience or expertise to discharge that authority. 
In this instance, the Department of Energy, as the expert agency, 
should be accorded more deference than it currently enjoys.
    Question 3. Have you had the opportunity to review the CEDA 
legislation contained in S. 1462? Do you have any opinions you could 
share?
    Answer. NEI has reviewed the CEDA legislation in S. 1462 and 
supports CEDA enthusiastically. We appreciated the opportunity, during 
the early part of 2009, to work on a bipartisan basis with committee 
staff to structure the CEDA proposal. Given that more than a year has 
elapsed since the Senate Energy and Natural Resources Committee 
approved the CEDA legislation, it may be appropriate to review the CEDA 
legislation to address any lessons learned during implementation of the 
Title XVII loan guarantee program.
    The U.S. electric industry faces a formidable investment challenge. 
Consensus estimates show that the electric sector must invest between 
$1.5 trillion and $2 trillion in new power plants, transmission and 
distribution systems, and environmental controls to meet expected 
increases in electricity demand by 2030. To put these numbers in 
perspective: the book value of America's entire electric power supply 
and delivery system today is only $750 billion, which reflects 
investments made over the last 60 years.
    Addressing the financing challenge will require innovative 
approaches. Meeting these investment needs will require a partnership 
between the private sector and the public sector, combining all the 
financing capabilities and tools available to the private sector, the 
federal government and state governments--particularly if we hope to 
reduce the electric sector's carbon footprint, which will require 
replacement of a significant portion of our existing generating 
capacity with carbon-free capacity like nuclear energy and renewables.
    The clean energy loan guarantee program authorized by the 2005 
Energy Policy Act was an important step in the right direction, but 
only a small step. That program was designed to jump start construction 
of just a few clean energy projects with high technical risk. That goal 
remains as valid now as it was in 2005, but today we face an additional 
challenge--financing large-scale deployment of clean energy 
technologies. The $18.5 billion in loan guarantees currently authorized 
for new nuclear power projects might support three projects, at best. 
It does not come close to supporting the new nuclear power projects 
that will be ready to start construction over the next several years.
    America needs 21st century institutions to manage 21st century 
challenges. The times demand a new federal financing corporation--a 
Clean Energy Development Bank--modeled on the U.S. Export-Import Bank, 
with sufficient financing capability to ensure that capital flows to 
clean technology deployment--renewables, advanced coal-based systems, 
nuclear and other clean fuels--in the electric sector. If it is sound 
public policy to support export of U.S. goods and services through the 
Export-Import Bank, which has $100 billion in financing capability at 
its disposal, surely it is also good public policy to support 
deployment of clean energy infrastructure and creation of green jobs in 
the United States.
    Response of Marvin S. Fertel to Question From Senator Murkowski
    Question 1. The Government of Japan has changed their laws to allow 
the Government of Japan (NEXI & JBIC) to financially support nuclear 
projects located in the U.S. that involve Japanese companies and/or 
technology (e.g., USEC; South Texas Project; SCANA; Comanche Peak). 
(Previously, the GOJ financial support was only for projects in 
developing countries.) But the GOJ assistance is conditioned on the USG 
providing similar support through nuclear loan guarantees. This GOJ 
support reduces the financial burden and risk to the USG from a loan 
guarantee. Given the delays in DOE acting on the various pending 
nuclear loan guarantees, some in Japan may be wondering about the 
degree of USG commitment to nuclear power. Are you aware of this 
financial support by the GOJ?
    Answer. NEI is aware that the government of Japan altered its 
regulations governing financing by its export credit agencies (JBIC and 
NEXI) to allow those entities to support the financing of new nuclear 
power plants in the United States. We are also aware that the Japanese 
export credit agencies and COFACE, the French export credit agency, are 
prepared to invest approximately $6 billion in two new nuclear projects 
in the United States. This financing, of course, would reduce the 
amount of guaranteed debt that would be required from the Department of 
Energy and is conditional on the U.S. government providing guaranteed 
debt side-by-side with the French and Japanese debt (although Japan and 
France are not providing the same amount of debt as the United States). 
It is fortunate that the French and Japanese government are willing to 
be partners in new nuclear plant development in America, but it is 
necessary for the United States to provide financing support now and in 
the future if these partnerships are to succeed. This situation would 
be significantly strengthened with the existence of a permanent 
financing platform like CEDA.
    Responses of Marvin S. Fertel to Questions From Senator Landrieu
    Question 1. Your testimony seems to argue for a much more 
transparent process at DOE and OMB in regards to the administration of 
the DOE loan guarantee program. Would you give us an example of the 
type of transparency you seek? How would a more transparent process 
assist in addressing the ``defects'' you identify in the development of 
the credit subsidy costs for clean energy projects?
    Answer. Since borrowers receiving loan guarantees for nuclear 
energy projects are expected to pay the credit subsidy cost associated 
with those guarantees, the industry has a legitimate interest in the 
assumptions and methodology used to calculate credit subsidy cost.
    The nuclear energy industry has two major concerns in this area. 
First, we are frustrated over the lack of transparency associated with 
the process of developing the credit subsidy cost. Second, from what we 
can deduce, we do not believe there is a defensible factual basis for 
the key assumptions and inputs--particularly regarding probability of 
default and recovery rate--used in the Credit Subsidy Calculator to 
estimate credit subsidy costs.
    NEI recommends a number of steps to improve the transparency and 
accuracy of the process by which credit subsidy costs are calculated. 
Specifically:

          1. For nuclear power projects, the most reasonable process 
        for calculating credit subsidy costs is a detailed, project-
        specific assessment and credit analysis. We do not believe the 
        current approach, which relies too heavily on standard 
        assumptions applied to all technologies, with limited project-
        specific flexibility, can produce accurate results. The current 
        methodology uses (1) composite data on default probabilities 
        for corporate debt, and (2) a 55% recovery rate, applied 
        without regard to when default might occur. Although admittedly 
        simple, this formula-driven approach will not produce accurate 
        or appropriate results, and will not serve the loan guarantee 
        program's objectives--to support deployment of clean energy 
        technologies in such a manner that the risk to the federal 
        government is fully offset by fees paid by the borrower.
          2. Loan guarantees for nuclear power projects--in which the 
        borrower pays the cost of the guarantee--resemble a commercial 
        banking transaction more than a typical federal loan guarantee 
        program, and should, therefore, be managed like a commercial 
        transaction, and aligned with standard commercial practices as 
        nearly as possible. Among other benefits, such alignment will 
        facilitate the transition to private sector lending for nuclear 
        energy projects, once the first projects, financed with DOE 
        loan guarantees, have demonstrated a successful track record. 
        Like all other terms and conditions negotiated between the 
        Department of Energy and a project sponsor, and incorporated 
        into a term sheet, conditional commitment and final agreement, 
        the credit subsidy cost must also be the product of a 
        transparent and interactive process between the federal 
        government and the applicant. Such transparency is lacking in 
        the DOE loan guarantee program's calculation of credit subsidy 
        cost.
          3. The staff at the Department of Energy (DOE) and the Office 
        of Management and Budget (OMB) responsible for developing 
        estimates of credit subsidy costs should hold technical 
        consultations with project sponsors for any loan guarantee 
        request in excess of $1 billion. We believe that the magnitude 
        and complexity of these transactions merits face-to-face 
        interaction with the applicants. The purpose of these 
        conferences would be to review the assumptions and estimates 
        generated by DOE and OMB, and allow the sponsor to provide 
        additional analysis as appropriate to DOE and OMB in specific 
        issue areas. This could include project-specific default 
        probabilities and recovery plans that would estimate recovery 
        values under various default scenarios at various stages of the 
        project. The recovery plans could then be subject to review by 
        the DOE independent engineer. This process would produce a set 
        of project-specific default probabilities and recovery 
        estimates that could be used in the credit subsidy model. Since 
        we are dealing with a limited number of large transactions, 
        this additional step in the direction of greater transparency 
        should not represent a significant burden.

    Question 2. Your testimony states that the use of a standardized 
recovery rate by OMB in its credit subsidy calculator does not satisfy 
the requirements of the Federal Credit Reform Act (FCRA) of 1990, and 
that the 55% recovery rate used is an arbitrary number with ``no basis 
in actual market experience with financial structures like those 
supported under Title XVII.'' Is it your belief that the standardized 
recovery rate fails to account for the uniqueness of the financing 
structures involved in large-scale clean energy projects? How do we 
know what recovery rate to use that will provide adequate protections 
for the taxpayer?
    Answer. As noted above, the vast majority of federal credit 
programs are characterized by high volumes and relatively low dollar 
amounts, concentrated in housing, education, rural development and 
small business. In calculating credit subsidy costs for these program, 
the Executive Branch makes a number of simplifying assumptions and, 
because the federal government pays for the credit subsidy costs of 
these transactions, borrowers are generally indifferent to the 
methodology by which credit subsidy costs are calculated. These 
simplifying assumptions should not be used in lieu of project-specific 
assessments in the case of a program involving multi-billion-dollar 
transactions, in which the borrower pays the credit subsidy cost.
    Recognizing the uniqueness of each project, the recovery rates for 
each transaction should be derived from detailed project-specific 
analysis, in the same way that detailed analysis produces a a credit 
rating (which includes a probability of default) for each project. The 
case-by-case process would protect taxpayers in the same manner that 
this process is routinely used to protect investors in commercial 
financing decision-making. Furthermore, the recovery rates derived from 
such analysis can then be benchmarked against historical experience. 
According to historical data from Moody's Investors Service and 
Standard and Poor's, ultimate recovery rates for regulated utility debt 
range from 87 percent to 99 percent. Recovery rates for project finance 
debt are comparable, in the range of 90 percent to 100 percent, because 
project finance transactions employ structural features designed 
specifically to maximize recoveries in the event of default.
    Question 3. Do you think we have complete policy alignment within 
the Executive Branch with respect to the value, merits, and need for 
the DOE loan guarantee program?
    Answer. NEI does not believe there is, or ever has been, the 
necessary policy alignment within the Executive Branch--and 
specifically between DOE and OMB--on the value and need for the clean 
energy loan guarantee program. Absent such alignment, it is difficult 
to imagine how the Title XVII program can be successful implemented 
over the long-term.
                                 ______
                                 
  Responses of the Office of Management and Budget* to Questions From 
                            Senator Bingaman
---------------------------------------------------------------------------
    * Answers provided by Jeffrey D. Zients, Acting Director, Office of 
Management and Budget.
---------------------------------------------------------------------------
    Question 1. In previous hearings we've heard testimony about how 
government agencies such as the Overseas Private Investment 
Corporation, Ex-Im Bank, and USDA seem to manage risk, similar to 
private sector investors, on a portfolio rather than transaction-by-
transaction basis--and are assessed by OMB on that basis, rather than 
examining every transaction independently. Do you understand this to be 
the case, and is there some statutory difference that would lead to 
this different treatment? Is there anything in the current laws 
governing the loan guarantee program that would preclude the assessment 
of risks on a portfolio basis rather than a transaction-by-transaction 
basis?
    Answer. OMB's role for the Title XVII program is consistent with 
that for other Federal credit programs under the Federal Credit Reform 
Act of 1990 (FCRA). Under the oversight authority in Section 503 of the 
FCRA (2 U.S.C. 661b), 011/113 delegates the modeling of credit subsidy 
costs to agencies, and issues implementing guidance to ensure 
consistent and accurate estimates of cost. OMB reviews and approves 
modeling methods, assumptions and credit subsidy cost estimates for 
each direct loan and loan guarantee program. For new programs or 
programs where actual experience is not available, OMB works closely 
with agencies to create or revise credit subsidy models. OMB also 
reviews any programmatic or legislative change that impacts the subsidy 
cost of new or existing credit programs.
    For those credit programs that issue many loans or guarantees with 
relatively homogeneous or a standardized set of characteristics, 
contract terms and risks (e.g., student loans), the credit subsidy cost 
estimates are calculated on a portfolio basis, using an average subsidy 
cost per loan.
    In contrast, reliance on a portfolio calculation for the credit 
subsidy cost is not appropriate in the ease of project finance or other 
programs (like DOE loan guarantees) that provide relatively large loans 
or guarantees, and for which the characteristics, terms, and risk vary 
greatly from project to project (and thus are not relatively 
homogeneous or standardized). In these credit situations, it is 
necessary to develop cost estimates on a loan-by-loan basis in order to 
accurately capture estimated costs.
    Title XVII loan guarantees generally support large infrastructure 
investments, by nature, reflect a wide variety of underlying projects, 
risks, and terms. As a result, the subsidy cost will vary from project 
to project and therefore, an estimated subsidy cost must be developed 
for each award.
    This is the same approach we use for loans or loan guarantees of 
other similar programs that involve larger deals or new structures. For 
example, in the case of those loans or loan guarantees made by OPIC, 
Ex-Im, and USDA that involve larger deals, new structures, or other 
special cases, the subsidy cost estimate is developed on a loan-by-loan 
basis. Each of these agencies also makes loans or loan guarantees that 
are smaller in size and that have standard characteristics and terms. 
For example, for OPIC and Ex-Im, OMB reviews and approves the general 
subsidy rate models for both agencies, which are then applied to 
calculate individual subsidy costs. Because both of these agencies can 
provide hundreds of loans/guarantees each year to small and medium 
enterprises, the credit risks for these loans/guarantees are 
diversified in a manner more resembling a portfolio program. For 
example, USDA's Rural Utility Service provides loan guarantees that 
finance traditional technologies and have standard characteristics and 
terms, and therefore the cost estimates are developed on a portfolio 
basis. In addition, these programs have existed for a number of years, 
which allows them to draw on historical (portfolio-based) experience in 
developing the subsidy cost estimates.
    Question 2. What experience do program officers at OMB have in the 
evaluation of terms and conditions in transactions such as those 
produced by the loan guarantee program? Is such experience necessary at 
OMB for the production of accurate subsidy cost estimates?
    Answer. OMB has been carrying out the responsibilities of the 
Federal Credit Reform Act (FCRA) for twenty years, since its enactment 
in 1990. As indicated in the prior answer, Section 503 of the FCRA 
gives OMB the responsibility for credit subsidy cost estimates for all 
Federal credit programs. Under FCRA, OMB reviews and must approve 
subsidy cost estimates for all loan and loan guarantee programs, 
including the credit subsidy cost estimates generated by the Department 
of Energy for the Title XVII program. This OMB review ensures that 
risks to the taxpayer are appropriately reflected and understood, and 
that the budgetary costs of Federal credit programs are accounted for 
appropriately and consistently across the various Federal agencies and 
credit programs. As such, a core group of highly specialized 
professionals with experience in loan and other credit terms has been 
in place for many years and has increased over the past year to ensure 
timely review of DOE's submissions.
    Question 3. Is there differentiation between different technologies 
in the subsidy cost model (and the incorporated estimated repayment 
rate baseline) that OMB uses to arrive at subsidy cost estimates? Has 
this model been compared to the model used by OPIC, Ex-Im, and 
equivalent private-sector lenders?
    Answer. The subsidy cost model used by DOE to develop estimates of 
the credit payments to and from the Government for a Title XVII project 
was developed by the Department of Energy, and approved by OMB in 2008. 
For each loan, the methodology employed by the model considers project-
specific characteristics including technology, project location, 
financial structure, risks and mitigants, and all other factors that 
would affect cashflows to and from the Government.
    OMB must ensure consistency in subsidy cost estimates for all loan 
and loan guarantee programs, including the credit subsidy cost 
estimates generated by DOE for the Title XVII program, across various 
Federal programs, as stated in question 1.
    Question 4. Has OMB reviewed the CEDA legislation contained in S. 
1462? Can you share any views on how we might see that implemented 
differently than the current loan guarantee program?
    Answer. To date, the Administration has not commented upon either 
the Senate bill or the House companion bill in detail; as this complex 
proposal moves through the legislative process, the Administration 
feels strongly that, among other things, legislation must meet the 
President's objectives of creating a clean energy economy through an 
efficient, cost-effective, and comprehensive approach. The 
Administration believes that the Federal Credit Reform Act (FCRA) is 
critical to accurately inform policy makers of the cost to taxpayers of 
credit programs, and for ensuring that the budgetary costs of Federal 
credit programs are accounted for appropriately and consistently across 
the various Federal agencies and credit programs.
    Question 5. Past Appropriations bills have contained an ``anti-
double dipping'' proviso that forbids the provision of a loan guarantee 
``for commitments to guarantee loans for any projects where funds, 
personnel, or property (tangible or intangible) of any Federal agency, 
instrumentality, personnel or affiliated entity are expected to be used 
(directly or indirectly) through acquisitions, contracts, 
demonstrations, exchanges, grants, incentives, leases, procurements, 
sales, other transaction authority, or other arrangements, to support 
the project or to obtain goods or services from the project''. Although 
there are some exceptions provided for in subsequent language, this 
would appear to preclude any loan guarantee where some of the funding 
comes from a federal grant or where a federal instrumentality is the 
end user of the product (such as through a PPA or fuel contract). The 
Congressional Budget Office seems to argue that without this proviso 
there would be increased ``costs'' associated with loan guarantees. Do 
you agree with this view? Can you explain, for example, what effect 
having the federal government as a customer would have on the subsidy 
cost estimate for a given project?
    Answer. The credit subsidy cost estimated by DOE and approved by 
OMB, whether paid by the borrower or through appropriations, reflects 
the estimated cost given all project-specific factors that affect the 
cashflows to and from the Government. To the extent that a project is 
dependent on future Federal appropriations, or where a Federal 
instrumentality is the end purchaser, this would be reflected in the 
credit subsidy cost.
    Question 6. Most applicants have indicated that, in order for the 
program to be effective, they need a predictable process that can 
result in at least a conditional commitment (or a much more timely 
rejection) within 6 months of application. Assuming an adequate 
application is submitted, can the current OMB/Treasury/DOE review 
process accommodate this timeline?
    Answer. OMB carries out its responsibilities as expeditiously as 
possible, and OMB has increased its allocation of staff resources to 
this program over the past year to ensure timely review of DOE's 
submissions. OMB will continue to allocate the resources needed for 
this program, including providing the resources needed to meet the 
Department of Energy's target of completing four to five projects a 
month.
    Before this Administration took office, no projects were approved 
under this program. Since then, OMB has completed its review of 17 
projects that DOE submitted to OMB for loan closing or a conditional 
commitment. To date, OMB has reviewed most of the Title XVII loan 
guarantee projects within 30 days, and in several cases considerably 
more quickly.
    Each project is a complex financial transaction, often involving 
billions of dollars and oneof-a-kind structures. It is difficult to 
predict how long negotiations and due diligence for these projects will 
take, given the size and complexity of these types of deals. As in the 
private sector, the due diligence and negotiations surrounding such 
transactions often takes many months, and involve many parties with 
varied interests. Flexibility in the DOE / Treasury / OMB review 
timeline is needed to ensure that DOE can complete the necessary due 
diligence, and coordinate with Treasury and OMB to complete the review 
needed to ensure that Federal taxpayers' interests are protected in 
these transactions.

  Responses of the Office of Management and Budget to Questions From 
                            Senator Sanders

    Question 1. How long does it currently take OMB to process a 
renewable energy loan guarantee application?
    Answer. OMB carries out its responsibilities as expeditiously as 
possible. To date, OMB has reviewed most of the Title XVII loan 
guarantee projects within 30 days, and in several cases considerably 
more quickly.
    Question 2. Does OMB support. a 30 day time requirement to process 
these applications?
    Answer. Each project that OMB reviews is a complex financial 
transaction, often involving billions of dollars and first-of-a-kind 
structures. Flexibility in the OMB review timeline is needed in unusual 
circumstances to ensure that OMB is able to complete the review 
necessary to ensure that Federal taxpayers' interests are protected in 
these transactions.
    Question 3. Does OMB support fully restoring funding to the 
Recovery Act loan guarantee program, making it whole following the 
decision to rescind funding?
    Answer. The $1.5 billion rescission this summer was proposed by the 
Congress, not the Administration, to offset the cost of a bill that is 
supporting essential State and local needs. In the 2011 Budget, the 
Administration voiced its support for restoring the funds diverted in 
the summer of 2009. The 2011 Budget also includes $500 million in 
credit subsidy for energy efficiency and renewable energy projects 
applying to the loan guarantee program and an additional $5 billion in 
tax credits for renewable energy component manufacturing projects.
    Question 4. Does OMB support an extension of the Treasury 
Department Renewable Energy Grant Program to continue to provide 
upfront incentives to promote renewable energy, given the continued 
difficulty in obtaining financing for renewable energy?
    Answer. The Administration is considering all the tools at its 
disposal to arrive at the correct level of support for clean energy 
technology. Clean, renewable energy is a top Administration priority, 
critical to reducing our reliance on fossil fuels and our economic 
security. At the same time, we also are mindful of the significant 
challenges our country faces as we make the tough choices necessary to 
restore fiscal discipline and build a foundation for economic growth.
    Question 5. Does OMB concur with a previous CBO estimate that the 
risk of default for nuclear loan guarantees could be as high as 50 
percent?
    Answer. Projects applying for Title XVII loan guarantees vary 
significantly. Project and sponsor characteristics, loan terms and 
conditions, and the various project risks vary greatly from project to 
project. As a result, credit subsidy cost estimates must be done on a 
project-specific, loan-by-loan basis, and do not depend solely on the 
type of technology. The Title XVII loan guarantee model takes into 
account all relevant project factors and available information in 
determining the risk of default, and potential recoveries on default.
    Question 6. What will OMB do, in terms of calculating an upfront 
risk subsidy fee to project developers, to ensure taxpayers are 
protected as the federal government provides loan guarantees for 
nuclear power projects?
    Answer. Under the oversight authority in Section 503 of the Federal 
Credit Reform Act of 1990 (2 U.S.C. 661b), OMB reviews and must approve 
subsidy cost estimates for all loan and loan guarantee programs. OMB 
delegates the modeling of credit subsidy costs to agencies, and issues 
implementing guidance to ensure consistent and accurate estimates of 
cost.
    The process of estimating credit subsidy costs for Title XVII loan 
guarantees is complex and rigorous. The methods used by DOE and 
approved by OMB are used for a range of different clean energy 
technologies. Over the past year, the program has issued conditional 
commitments for multiple projects across a wide range of technologies 
including solar, nuclear, wind, and geothermal. Each of these projects 
involves large investments, varied technological, market, and financial 
risks (and risk mitigants), and complex contract terms. Accordingly, 
credit subsidy estimates for Title XVII loan guarantees reflect these 
various project-specific risks and mitigants, which vary not only by 
industry and technology but also by sponsor financial strength, equity 
contribution, protections and collateral secured for taxpayers, and 
other factors. Two loan guarantees supporting projects using the same 
technology may have very different credit subsidies.
    Title XVII credit subsidy estimates are determined on a loan-by-
loan basis, not on the basis of the industry or technology used in the 
project. The Title XVII methodology takes into account each project's 
specific technology risk, and each loan's contract terms as well as 
other project specific factors. For nuclear power plant projects, the 
methodology specifically considers the risk of cost overruns, 
construction delays and the development of new technology. In 
conducting its underwriting and due diligence to inform these 
estimates, DOE also obtains input from third-party engineering, legal, 
financial and marketing advisors, as well as credit ratings provided by 
nationally recognized credit rating agencies. DOE's calculation of the 
credit subsidy cost is reviewed and approved by OMB.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time the hearing went to press:]

           Questions for Timothy Newell From Senator Bingaman

    Question 1. Your previous government and private sector experience 
seems to have given you exposure to a number of public and private 
sector financing mechanisms, such as OPIC and Ex-Im. Are you able to 
contrast how they interact with both applicants and OMB with what you 
understand of DOE's interactions?
    Question 2. Based on your experience in the US and abroad with your 
portfolio companies, is there any real alternative to governmental 
involvement in the early deployments of these technologies?
    Question 3. Is the market for fuel so fundamentally different from 
the market for electricity that there should be different guidelines 
for fuels projects? Does DOE have the authority to establish different 
guidelines for fuels?
    Question 4. Have you had the opportunity to review the CEDA 
legislation contained in S. 1462? Do you have any opinions you could 
share?
    Question 5. According to OMB, their involvement in these 
transactions is largely related to calculation of subsidy cost 
estimates and they have not substantially been involved in an 
operational way. What has been your experience with either OMB or 
Treasury participation in the processing of individual transactions?

           Question for Timothy Newell From Senator Murkowski

                         REVIEW OF INSTRUMENTS

    Question 1. According to a recent report from Harvard Kennedy 
School's Belfer Center, ``Loan guarantees are one of several policy 
tools that can be used to support deployment of clean energy 
technologies. Which policy tool is most appropriate depends on the 
particular state of different technologies, and the principal market 
barriers they face.'' The report goes on to suggest that, ``Given the 
wide range of tools available, and their potentially differing roles in 
promoting different technologies, Congress should consider asking for 
an independent review of the relative value of loan guarantees and 
other policies to support deployment of clean energy technologies.''

          a. Do you believe an independent review would be a useful 
        undertaking?
          b. Are there any policies outside of loan guarantees that you 
        believe could be more beneficial to advancing clean energy 
        technologies?

           Question for Timothy Newell From Senator Cantwell

    Over the past couple of years this committee has held several 
hearings on mechanisms to provide low-cost project financing to 
facilitate domestic deployment of renewable energy projects and 
manufacturing facilities.
    On more than one occasion, the Committee has received testimony on 
the DOE Loan Guarantee Program, as well as the development of a more 
comprehensive program, a ``Clean Energy Deployment Administration'', 
which was included in S.1462, the bill reported out of this committee 
well over a year ago.
    In all of these hearings, one theme that has been articulated 
repeatedly is that there is a need for government support to overcome 
market failures and facilitate significant deployment of clean energy 
technologies. Unfortunately, as the testimony here today has 
illustrated, we still have work to do to provide such support in a 
consistently effective way.
    I have proposed what I believe could be a partial solution, in the 
context of the recently-introduced Renewable Electricity Standard. This 
bill would require that all major U.S. utilities get 15% of their power 
from renewable sources by 2021.
    I contributed a provision (section k -- Loans for Projects to 
Comply with Federal Renewable Electricity Standard ) that would 
authorize the Secretary to issue low-cost loans for renewable energy 
projects to meet the standard. The purpose of the loan program is to 
greatly reduce costs utilities might incur in complying with RES 
mandates, and thus to minimize the impact on the RES on consumer 
electricity rates.
    I believe with such low interest rates and long repayment 
schedules, most renewable energy projects will become significantly 
more cost-effective at little or no cost to taxpayers. Energy 
efficiency projects in particular are likely to achieve rapid cost 
savings that exceed the value of monthly loan repayment requirements.
    Moreover, the nature of RES compliance projects, such as 
construction of a wind farm or cost savings from an energy efficiency 
investment, provides for an almost certain revenue stream throughout 
the life of the loan, meaning there is very little risk of a loan 
recipient being unable ability to repay the U.S. Treasury.
    Question 1a. Do you support such an idea? Do you believe it would 
be more straightforward than the current Loan Guarantee Program?
    Question 1b. In your opinion, could such a direct loan program be 
established and get up and running more quickly than the loan guarantee 
program has?
    Question 1c. How do you think your company or the companies you 
represent could benefit from such a program?
    Question 1d. Do you think that the low interest rates and long 
repayment schedules available under this program would positively 
impact the financing of clean energy projects and that any resulting 
savings would translate to lower costs for ratepayers?

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                 Executive Office of the President,
                           Office of Management and Budget,
                                  Washington, DC, October 19, 2010.
Hon. Jeff Bingaman,
U.S. Senate, Washington, DC.
    Dear Senator Bingaman: Thank you for your letter of September 20, 
2010, to Director-designate Jacob Lew regarding the Department of 
Energy's (DOE) Title XVII loan guarantee program. Because many of the 
specific questions in your letter require detailed knowledge of 
implementation of this program, Mr. Lew has asked that I respond to 
ensure that you get full and complete answers to your questions.
    The Office of Management and Budget's (OMB) role in reviewing DOE 
loan guarantee transactions derives from OMB's statutory oversight 
responsibility under the Federal Credit Reform Act of 1990 (FCRA). 
Section 503 of FCRA gives the Director of OMB the responsibility for 
the credit subsidy cost estimates for all Federal credit programs. 
Under this authority, OMB reviews and must approve subsidy cost 
estimates for all loan and loan guarantee programs, including the 
credit subsidy cost estimates generated by DOE for the Title XVII 
program, to ensure that costs are accounted for appropriately, as 
required by FCRA. Under the oversight authority in Section 503, OMB 
delegates the modeling of credit subsidy costs to agencies, and issues 
implementing guidance to ensure consistent and accurate estimates of 
cost. For new programs or programs where actual experience is not 
available, such as the Title XVII program, OMB works closely with 
agencies to create or revise credit subsidy models. OMB also reviews 
any programmatic or legislative changes that impact the subsidy cost of 
new and existing credit programs.
    OMB's role does not overlap with or impede DOE's statutory 
authorities for the Title XVII loan guarantee program, and the law does 
not give OMB any role in accepting or rejecting projects. Instead, OMB 
ensures that the costs of direct loans and loan guarantees are 
presented, and reflect estimated risks, consistently across Federal 
agencies so that taxpayer funds are invested in a prudent and effective 
fashion. OMB's role for the Title XVII program is consistent with that 
for other credit programs Title XVII loan guarantees provide relatively 
large guarantees where characteristics, terms, and risks vary greatly 
from project to project and require cost estimates on a loan-by-loan 
basis. This is the same approach we use for loans or loan guarantees of 
other similar programs that involve larger deals or new structures, 
such as the Overseas Private Investment Corporation and the Export-
Import Bank. In addition, most of these programs have existed for a 
number of years, which allows them to draw on historical experience in 
estimating costs.
    OMB carries out its responsibilities as expeditiously as possible, 
and substantially increased its allocation of staff resources to this 
program over the past year to ensure timely review of DOE's 
submissions. OMB will continue to allocate the resources needed for 
this program, including providing the resources needed to meet the 
Department of Energy's target of completing four to five projects a 
month. Before this Administration took office, no projects were 
approved under this program. Since then, OMB has completed its review 
of 17 projects that DOE submitted to OMB for loan closing or a 
conditional commitment and continues to review projects as 
expeditiously as possible. As of October 15, 2010, OMB has one loan 
guarantee application under review for a conditional commitment, and 
expects to complete its review of this project by next week. The large 
majority of Title XVII loan guarantee projects reviewed by OMB to date 
have been reviewed within 30 days, and in several cases considerably 
more quickly. However, each project is a complex financial transaction, 
often involving billions of dollars and first-of-a-kind structures. 
There are many factors that might not be predictable in advance or are 
not in OMB's control that would make impractical a statutory time limit 
on OMB review. Flexibility in the OMB review timeline is needed to 
ensure that OMB is able to complete the review needed to ensure that 
Federal taxpayers' interests are protected in these transactions.
    It is OMB's understanding that DOE is proceeding with due diligence 
on 35 additional projects under the Section 1705 authority provided in 
the American Recovery and Reinvestment Act that have not yet been 
submitted to OMB for review. It is difficult to predict how long 
negotiations and due diligence for these projects will take, given the 
size and complexity of these types of deals. As in the private sector, 
the due diligence and negotiations surrounding such transactions often 
takes many months, and involve many parties with varied interests. 
However, OMB and DOE are working diligently to meet the statutory 
deadline for the Section 1705 authority. We are continuously assessing 
both administrative and legislative changes that can be made to 
streamline processing of these loan applications consistent with 
fulfilling our statutory responsibilities to protect taxpayer funds. 
The program appears to have sufficient funding to address the needs of 
the projects in the pipeline, and I can assure you we are making every 
effort to complete these applications and obligate all available 
Section 1705 funds by the statutory deadline.
    Thank you, again, for your letter regarding OMB's role in the Title 
XVII loan guarantee program.
            Sincerely,
                                         Jeffrey D. Zients,
                                                   Acting Director.
                                 ______
                                 
                         Executive Office of the President,
                                      Department of Energy,
                                                  November 5, 2010.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Bingaman: Thank you for your continued interest in, 
and support for, the Section 1705 energy loan guarantee program. We 
share your view that the program plays an important role in advancing 
the deployment of clean energy technologies and the creation of jobs in 
the manufacturing, construction, and utility sectors. In response to 
your letter of October 14, 2010, we wanted to provide an update on 
progress to improve implementation of this program while we work on the 
detailed information you requested.
    Since the start of this program, the Administration has continued 
to work to improve the process of soliciting applications, undertaking 
due diligence on the technological, financial, credit, legal, 
contractual. environmental, and operational aspects of each project, 
structuring the deals, and then scoring and reviewing them for 
conditional commitment in the 1705 program. As one part of this effort, 
our staffs have worked together to develop a more streamlined approach 
to the processing of these projects, including the credit subsidy 
scoring and policy review component of program implementation. At the 
same time, we have improved systems within the Administration to 
protect taxpayers' investment by rigorously reviewing the costs and 
estimated risks of these loans and ensuring that this information is 
presented accurately and consistently across Federal agencies.
    Since October 1, 2009, OMB has completed the credit subsidy scoring 
review for all projects in the 1705 program submitted for conditional 
commitment, with a review time averaging 18 business days. DOE has 
added an online application portal which has reduced the initial 
eligibility decision from three to four months to about 10 days, and 
improved the diligence and negotiation process so it can be completed 
responsibly in several months. As you know, it had previously taken 
more than a year. DOE, OMB, and Treasury have made a concerted effort 
to identify new ways of streamlining the review process while still 
protecting taxpayer resources. As a result of this work, the 
Administration will commit to a goal of no more than 20 business days 
for OMB and Treasury to review any project that DOE has completed the 
due diligence necessary for a conditional commitment, and strive for a 
five-business day review when possible.
    The Administration is committed to ensuring that the length of the 
review process will not stand in the way of advancing worthy projects 
in DOE's pipeline for the 1705 program. We can assure you that the 
interagency process is ready to review applications responsibly and 
quickly, while protecting taxpayer interests.
    Thank you again for your interest and support of the energy loan 
guarantee program.
            Sincerely,
                                         Jeffrey D. Zients,
                                              Acting Director, OMB.
                                                Steven Chu,
                                                    Secretary, DOE.
                                 ______
                                 
     Statement of the U.S. Partnership for Renewable Energy Finance

    IMPACT ON JOBS THROUGH THE EXTENSION OF THE ARRA 1603 CASH GRANT

    The American Recovery and Reinvestment Act's 1603 cash grant for 
the construction of renewable power plants stands as a policy success 
story over the past two years. However, this success is in jeopardy as 
the 1603 program sunsets after 2010, which is already having an effect 
on project pipelines. We estimate that the extension of the 1603 grant 
program can help to create or preserve over 100,000 ``green'' jobs.
extension of the 1603 grant and 48c manufacturing tax credit will have 

                            POWERFUL EFFECT

    The 1603 grant program is effective policy in its own right, 
creating economic activity and jobs, and has the double effect of 
``underpinning'' the economic activity that is created by the 48C 
manufacturing tax credit. The 1603 cash grant provides more certainty 
of renewable tax equity financing, giving developers the confidence to 
make large capital equipment purchases from the renewable manufacturing 
base. The 48C manufacturing tax credit is stimulating a US domestic 
supply response to meet this demand. Thus, by providing tax equity 
financing certainty, 1603 helps to ensure demand for the supply being 
created under the 48C program. We see the extensions of 1603 and 48C as 
a 1+1=3 proposition.
    It is also worth noting that in the recently released ``The 
Recovery Act: Transforming the American Economy through Innovation,'' 
the Administration has reiterated the view that the US is on a track to 
``doubling US renewable energy generation capacity and the US renewable 
manufacturing capacity by 2012.'' Meeting this goal would require 
approximately 12 GW of capacity additions in 2011, assuming 6 GW of 
wind is installed by the end of 2010. We would see this goal as 
difficult to achieve even with an extension of 1603, along with the 
extension of 48C, and virtually impossible without such timely 
extensions.
    With the above explanation of how the 1603 grant and the 48C 
manufacturing tax credit work together in the marketplace to create 
jobs, this paper goes on to explain how the 1603 grant is effective at 
mobilizing capital to project development in the United States.

                SUCCESS SO FAR FROM THE 1603 CASH GRANT

    First introduced in The American Recovery and Reinvestment Act 
(ARRA) in 2008, the 1603 cash grant allowed project developers to 
convert the existing investment tax credit (ITC) and production tax 
credit (PTC) for renewable energy investments into direct cash grants 
worth up to 30 percent of a project's capital cost. Most project 
developers have insufficient taxable income to use the tax credits 
effectively, which in the past has been addressed by bringing in 
passive ``tax equity'' investors--mostly large financial institutions. 
However the financial crisis sharply cut these institutions' own 
taxable income and led to the demise of a number of prominent tax 
equity providers. That meant that tax equity was particularly scarce 
and therefore not effective in spurring construction in renewable 
energy projects such as wind and solar.
    The 1603 grant program has been a notable success. Despite the 
recession, and because of the 1603 Program, wind power installations 
reached nearly 10 GW in 2009, exceeding the previous record of 8.3 GW 
set in 2008 by 20%. Solar PV installations also continued strong 
growth, reaching 429 MW in 2009, 38% above the 2008 total.
    Recent work conducted by the Lawrence Berkeley National Laboratory 
(LBNL) and The National Renewable Energy Laboratory (NREL) have so far 
estimated that the 1603 cash grant could create approximately 143,000 
jobs in the wind industry, both in direct and indirect terms.
    The Solar Industries Energy Association (SEIA) and International 
Solar (EUPD) [two renewable energy research institutes] have estimated 
that in the solar sector some 58,000 jobs will be created through the 
program so far out to 2016.
    Over the last few years, the wind industry has demonstrated the 
importance of steady demand for renewable energy technologies in 
creating a domestic supply chain and jobs. According to Lawrence 
Berkeley National Lab, between 2006 and 2009, the domestic content of 
wind turbines installed in the US rose from 15% to 60%. We attribute 
this shift to the stability of the PTC during this period, which 
created a steady demand for wind turbines in the US. The $2.3 billion 
of 48C tax credits awarded in January 2010 as well as future awards may 
further increase domestic content if there is sufficient demand for 
these technologies.
                outlook from 2011--100,000 jobs at risk*
---------------------------------------------------------------------------
    * All tables and their respective footnotes have been retained in 
committee files, including all graphics.
---------------------------------------------------------------------------
    The 1603 cash grant is scheduled to sunset in the year 2011 (as 
does the 48C manufacturing tax credit which has already been fully 
allocated). Work done by members of US PREF shows that the expiration 
will have a significant impact in the face of a continuing constraint 
in the tax equity market, set out in detail in the recently released 
paper ``Prospective 2010-2012: Tax Equity Market Observations''\4\ and 
``U.S. Renewable Energy Tax Equity Investment and the Treasury Cash 
Grant Program.'' \5\
---------------------------------------------------------------------------
    \4\ US PREF, ``Prospective 2010-2012: Tax Equity Market 
Observations (v1.2),'' July 2010. http://www.uspref.org/whitepapers/ .
    \5\ US PREF, ``U.S. Renewable Energy Tax Equity Investment and the 
Treasury Cash Grant Program (v2.1)'' 2010. http://www.uspref.org/white-
papers/ .
---------------------------------------------------------------------------
    We have now looked at the impact that ending the cash grant would 
have on employment. In order to do this we first estimated what we 
considered to be the 2011 demand for renewables, in terms of MW's 
financed each year, based on industry consensus data. From this 
starting point we applied current industry cost estimates to derive the 
total investment capital needed, and estimated the share likely to be 
financed as separate projects (as opposed to projects financed by their 
owners at the corporate level) based on historical trends. The likely 
capital structure of these projects, assuming the 1603 grant is not 
renewed, comes from US PREF members' experience as lender and investors 
in the renewable energy project market. The result of this analysis is 
a need for an estimated $9 billion of ``tax equity'' commitments in 
2011, as shown in Table 1:
    Attracting $9 B of tax equity capital per year will likely be very 
difficult given only $6.1 B was raised in 2007, the industry's most 
prolific year, in a credit environment not likely to repeat itself 
soon. A June 2010 survey of all of the major renewable energy tax 
equity investors conducted by US PREF concluded that around $3 billion 
per year of tax equity might be available in 2011 and 2012. Table 2 
shows the potential renewable deployment with that constraint:
    Then using the NREL Jobs and Economic Development Impact (JEDI) 
models (used also by LBNL) we looked at the gap between the 
unconstrained scenario which would be supported by a 1603 cash grant 
extension, and the constrained tax equity outcome:
    A key assumption is how much of the manufacturing is done onshore. 
While domestic manufacturing may grow in the future (possibly assisted 
by the expansion of the 48C manufacturing tax credit), we assumed that 
the level of domestic production would not change substantially in the 
near term. US manufacturing of wind turbines and their components has 
been increasing, Lawrence Berkeley National Lab estimates that imports 
represented 39% of the value of wind turbines installed in the US in 
2009, down from 85% in 2006. (Source: 2009 Wind Technologies Market 
Report, R. Wiser and m. Bollinger, LBNL, August 2010.) Our analysis 
assumed that 50% of the value of wind turbines financed would be 
imported. The US is a small producer of solar modules, with a 7% share 
of the global market. (Source: U.S. Solar Industry Year in Review, 
Solar Energy Industry Association, May 2010.) Our analysis assumed that 
none of the solar modules, inverters, or other materials or equipment 
were manufactured domestically.
    On this basis US PREF estimated around 104,000 jobs are forgone by 
not extending the 1603 cash grant through 2011 and on in to the future, 
where even more jobs would be created. And, as explained above, the 
extension of the 1603 cash grant would make more successful any 
extension of the 48C manufacturing tax credit in terms of job growth.
                                 ______
                                 
                             Flambeau River Biofuels, Inc.,
                                                September 22, 2010.
Hon. Jeff Bingaman,
703 Hart Senate Office Building, Washington, DC.
    Dear Senator Bingaman, Flambeau River BioFuels Incorporated is a 
Development-stage Company that is committed to advancing the 
commercialization of cellulosic biofuel technologies and producing 
energy, transportation fuels and chemicals from renewable biomass 
resources.
    Our project in Park Falls, Wisconsin will be an important first 
step in the development of wood-based biorefineries. The facility will 
transform 1000 dry tons per day of woody biomass into over 18 million 
gallons per year of renewable transportation fuels and green bio-based 
chemicals. In addition, we will capture waste heat from our process and 
export 21 million Btu/hr of green power to our adjacent Flambeau River 
Papers (FRP) mill, making FRP the first integrated pulp and paper mill 
in North America to be fossil fuel free. We believe the biorefinery at 
Park Falls will be a model for integrated biorefinery operations and 
will be especially attractive to pulp and paper companies that are 
looking to diversify their operations. Our biorefinery will lower 
greenhouse gas emissions, create 165 good, green jobs, preserve the 365 
current jobs at the pulp and paper mill, and support rural development.
    We believe that our project has significant merit as it meets the 
congressional intent for developing the alternative fuels industry. The 
Department of Energy Biomass Program selected our project in 2008 as 
one of the demonstration biorefineries that will be deployed across our 
nation. As a result of that selection we were awarded $30,000,000 in 
financial assistance. This year the DOE Biomass Program reaffirmed 
their support of our project by increasing their overall level of 
financial assistance.
    For our project to succeed, we will need assistance from the DOE 
Loan Guarantee Program. The realities of today's economic climate have 
made banks extremely reluctant to lend to new ventures like ours. 
Unfortunately, it appears as though the DOE Loan Guarantee Office has 
established exceedingly restrictive funding criteria that will 
disqualify most, if not all, alternative transportation fuels projects, 
which is contrary to Congressional intent.
    Specifically, we have spoken with other companies that have 
received DOE Biomass Program awards and that have applied for DOE Loan 
Guarantee Program assistance, and it is clear that the DOE LG Office 
has adopted criteria for biomass that is more restrictive than those 
applied to solar and wind projects. Moreover, the DOE created new rules 
after applications where submitted, thus putting applicants at a 
significant disadvantage. In this regard, one would certainly have 
thought that the DOE LG Office would have worked with the applicants to 
help them achieve success before simply rejecting them. Small firms, 
such as ours, were advised to find large partners like British 
Petroleum. This type of discrimination is a slap in the face to small 
business. It is the entrepreneurs who create jobs and are willing to 
take risks in fulfilling our nations needs to become energy 
independent.
    I would ask that you please review the situation and direct the DOE 
Loan Guarantee Office to meet your intent to promote alternative 
domestic green fuels. The lack of biomass to transportation fuels 
projects in the DOE LG portfolio is evidence that the DOE LG staff 
needs additional congressional direction. If you or your staff has 
questions for me about this project please do not hesitate to contact 
me.
    As a Nation we continue to fail to meet the Congressional goal for 
domestic Cellulosic Biofuel production. Without reinforced direction 
from Congress it is my fear the DOE Loan Guarantee Office will continue 
to derail Congress' vision of creating a green economy that will bring 
new jobs well into the future.
            Sincerely,
                                   William (Butch) Johnson,
                                                               CEO.

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