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IMPLEMENTATION OF EPACT 2005 LOAN

GUARANTEE PROGRAMS BY THE

DEPARTMENT OF ENERGY

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 24, 2007

Serial No. 110–32

(

Printed for the use of the Committee on Energy and Commerce

energycommerce.house.gov
COMMITTEE ON ENERGY AND COMMERCE

JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, JR., New Jersey

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

DIANA DEGETTE, Colorado

Vice Chairman

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

BARON P. HILL, Indiana

JOE BARTON, Texas

Ranking Member

RALPH M. HALL, Texas

J. DENNIS HASTERT, Illinois

FRED UPTON, Michigan

CLIFF STEARNS, Florida

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff

GREGG A. ROTHSCHILD, Chief Counsel

SHARON E. DAVIS, Chief Clerk

BUD ALBRIGHT, Minority Staff Director
(III)

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

RICK BOUCHER, Virginia, Chairman

G.K. BUTTERFIELD, North Carolina,

Vice Chairman

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

ALBERT R. WYNN, Maryland

MIKE DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

JOHN D. DINGELL, Michigan (ex officio)

J. DENNIS HASTERT, Illinois,

Ranking Member

RALPH M. HALL, Texas

FRED UPTON, Michigan

ED WHITFIELD, Kentucky

JOHN SHIMKUS, Illinois

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

STEVE BUYER, Indiana

MARY BONO, California

GREG WALDEN, Oregon

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

MICHAEL C. BURGESS, Texas

JOE BARTON, Texas (ex officio)

PROFESSIONAL STAFF

SUE D. SHERIDAN, Chief Counsel

BRUCE C. HARRIS, SENIOR ADVISOR

LAURA VAUGHT, Policy Coordinator

DAVID MCCARTHY, Minority Chief Counsel

CHRIS TREANOR, Clerk

(V)

C O N T E N T S

Page

Hon. Rick Boucher, a Representative in Congress from the Commonwealth

of Virginia, opening statement ............................................................................ 1

Hon. J. Dennis Hastert, a Representative in Congress from the State of

Illinois, opening statement .................................................................................. 2

Hon. Joe Barton, a Representative in Congress from the State of Texas,

opening statement ................................................................................................ 3

WITNESSES

Dennis R. Spurgeon, Acting Under Secretary, Department of Energy ............... 5

Prepared statement .......................................................................................... 8

Answer to submitted question ......................................................................... 76

James C. Cosgrove, Acting Director, Natural Resources and Environment,

Government Accountability Office ...................................................................... 25

Prepared statement .......................................................................................... 28

Julie Jorgensen, co-president and chief executive officer, Excelsior Energy,

Incorporated .......................................................................................................... 36

Prepared statement .......................................................................................... 37

Denny Devos, director, corporate finance, POET .................................................. 39

Prepared statement .......................................................................................... 41

Christopher Crane, president and chief nuclear officer, Exelon Generation ...... 46

Prepared statement .......................................................................................... 47

Answers to submitted questions ...................................................................... 81

SUBMITTED MATERIAL

The Mesaba Energy Project .................................................................................... 58

Gary L. Kepplinger, General Counsel, U.S. Government Accountability Office,

letter of April 20, 2007 to Messrs. Visclosky and Hobson ................................ 67
(1)

IMPLEMENTATION OF EPACT 2005 LOAN

GUARANTEE PROGRAMS BY THE DEPARTMENT OF ENERGY

TUESDAY, APRIL 24, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY

AND AIR QUALITY,

COMMITTEE ON ENERGY AND COMMERCE,

Washington, DC.

The subcommittee met, pursuant to call, at 3:15 p.m., in room

2322 of the Rayburn House Office Building, Hon. Rick Boucher

(chairman) presiding.

Members present: Representatives Butterfield, Melancon, Barrow, Markey, Doyle, Gonzalez, Inslee, Hastert, Shimkus, Shadegg,

Walden, Burgess, and Barton.

Staff present: Sue Sheridan, Bruce Harris, Chris Treanor, Bud

Albright, David McCarthy, Kurt Bilas, Peter Kielty, and Matthew

Johnson.

OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH

OF VIRGINIA

Mr. BOUCHER. The subcommittee will come to order. The Energy

Policy Act of 2005 enacted two loan guarantee programs. Title XV

authorized the provision of loan guarantees for the processing and

conversion of municipal solid waste and cellulosic biomass into fuel

alcohol and other commercial byproducts. Title XVII provides loan

guarantees for projects that avoid, reduce, and sequester air pollutants for anthropogenic emissions of greenhouse gases. To date, the

Department of Energy’s focus has been on the implementation of

the title XVII program, which includes 10 categories of projects

that are eligible for loan guarantees. But no loan guarantees, as of

today, have been awarded.

In response to widespread concern surrounding the length of

time associated with the making of any awards under the program,

the continuing resolution providing appropriations for fiscal year

2007 addressed DOE’s delays. The resolution provided for up to $4

billion in loan guarantees during the course of fiscal year 2007 and

directed to DOE to complete a rulemaking on title XVII within 6

months. It further stipulated that no loan guarantees could be

awarded until the final regulation has been issued.

However, at a March hearing before the Appropriations Committee, Secretary Bodman stated that it is likely impossible to promul-
2

gate a final rule by that August deadline. In the meantime, a number of energy industries, including cellulosic ethanol producers,

have expressed the strong need for the title XV loan guarantee program in order to begin the commercial deployment phases of their

technologies. Since DOE’s focus has been exclusively on the title

XVII program, title XV loan guarantees have not been awarded, either.

Other problems have also been voiced. For example, the statute

allows for projects to self-fund the Government’s risk in issuing a

loan guarantee as an alternative to obtaining an appropriation to

fund that risk. However, the initial DOE guidelines require that

each project still receive an approval in an appropriations bill notwithstanding that self-funding authorization.

Today’s witnesses will enable us to examine the current state of

the implementation process, as well as to hear from a number of

witnesses whose projects have been affected by the fact that no

awards have been made through either program at this time. We

will also learn, from the witnesses, their recommendations for

changes which would enable an expeditious implementation of the

loan guarantee program.

I want to say welcome to each of our witnesses and we will turn

to their testimony momentarily. It is now my privilege to recognize

the ranking Republican member of this subcommittee, the gentleman from Illinois, Mr. Hastert, for his 5-minute opening statement.

OPENING STATEMENT OF HON. J. DENNIS HASTERT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. HASTERT Thank you, Mr. Chairman. Thank you for holding

this hearing on the status of the loan guarantee program of title

XVII of the Energy Policy Act of 2005. I also want to thank our witnesses for agreeing to testify today. Your testimony is important to

give perspective on the status of this program. Title XVII established a loan guarantee program at the Department of Energy to

provide guarantees for new and innovative energy projects. These

types of projects include ethanol, clean coal facilities, and nuclear

power plants; all technologies I support.

We need to get the next generation of these technologies and others like cellulosic and coal-to-liquid technology to the market as

soon as possible. Doing so will help reduce our dependence on unstable foreign sources of energy. This increases our national security by providing the right energy here at home that we need to

power the American economy in the future. However, after 20

months, no loan has yet to be guaranteed. That is too long. There

have been a number of reasons why the program has been slow to

start and I am sure that we will hear about them today.

But the bottom line is that we need to get this loan guarantee

program operational soon. Congress intended to have these loans

guaranteed at a full 80 percent of the project cost, not to 80 percent

of 80 percent that we are now hearing some spin. This full financing is essential for the future of energy innovation in this country.

Title XVII provides the loan guarantees to get new technology like

clean coal, carbon capture and sequestration, and the next generation nuclear and ethanol on the ground running and into the mar-
3

ket. Not only do these technologies improve our energy security,

but they will also improve our environment. But again, to get

there, we need new technology; that is why title XVII is so important. Properly operated, the title XVII loan guarantees could bring

these new technologies to market with benefits that all Americans

are certain to realize.

I look forward to today’s hearing on title XVII; what has happened or not happened and why, and where this program is going.

And if there are things in Congress and on this committee in particular that we can do to make this program work or changes that

must be needed, let us hear about it. Mr. Chairman, I am somewhat anxious to hear the reasons why we are not getting this program in place and why some in the White House are trying to

shave this down to 64 percent. With that, I want to get on with

the hearing and yield back. Thank you, sir.

Mr. BOUCHER. I thank the gentleman for his very well structured

comments. The gentleman from Georgia, Mr. Barrow, is recognized

for 5 minutes.

Mr. BARROW. I will waive.

Mr. BOUCHER. The gentleman from Georgia waives. I would note

that any Member who waives an opening statement will have the

time allotted for that opening statement added to that Member’s

period for posing questions. The gentleman from Washington State,

Mr. Inslee, is recognized.

Mr. INSLEE. I will waive, Mr. Chairman.

Mr. BOUCHER. Mr. Inslee waives. The gentleman from Massachusetts, Mr. Markey, is recognized.

Mr. MARKEY. I would like to waive.

Mr. BOUCHER. Mr. Markey waives. The gentleman from Texas,

Mr. Gonzalez, is recognized.

Mr. GONZALEZ. I will waive.

Mr. BOUCHER. He waives, also. The gentleman from Texas, Mr.

Barton, ranking member on the full committee, is recognized for 5

minutes.

OPENING STATEMENT OF HON. JOE BARTON, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. BARTON. Thank you, Mr. Chairman, for holding this hearing

today. I want to welcome our witnesses, also. We are here today

to talk about the loan guarantee program that we authorized in the

Energy Policy Act of 2005. I would like to point out that I was the

chairman of that conference, in conjunction with the Senate. Senator Bingaman, Senator Domenici, and Chairman Dingell were the

four major conferees on the Energy Policy Act.

We first saw the proposal for loan guarantee in the Senate version of the EPAct. Because I did chair the conference, I had the

ability to change it or at least recommend that it be changed, but

Senator Domenici and Senator Bingaman felt so strongly, on a bipartisan basis, that the program was well-crafted, that Congressman Dingell and myself decided to accept that. That was one of the

things that we did accept from the Senate with no changes. Since

it has been enacted, this program has run into one problem after

another.
4

The plain language of EPAct says that there shall be a Government loan guarantee of 80 percent of the capital cost of the project,

not 80 percent of 80 percent. What a crock of horse hockey to come

here and have to debate what 80 percent means. If we had known

then what we know now, we would have put in an example about

what 80 means. It means if you borrow a billion dollars or you need

a billion dollars, you can borrow up to 80 percent of it and get a

Federal loan guarantee on $800 million. That is what it means. It

doesn’t mean $640 million or 64 percent.

There was never one bit of conversation between Mr. Bingaman,

Mr. Domenici, Mr. Dingell and myself about 80 percent meaning 64

percent, not once. So if we can get anything into the record in this

hearing, Mr. Chairman, let us at least say that the intent of the

conferees was that 80 percent meant 80 percent of the entire loan,

period. I mean, plain language. And I think that Senators Bingaman and Domenici and Chairman Dingell will back me up on that.

Having decided in their own infinite wisdom that somehow 80

percent means 64 percent, the CBO has now come out and said

that even though you can only borrow $640 million that is guaranteed, you are at risk in terms of CBO scoring for the entire $1 billion. Well, what the hey is going on here? If the most you can borrow is $640 million that mostly can be guaranteed by the Federal

Government, then most of the Federal Government’s risk, apparently, should be $640 million. So it just seems like the gods have

it in for this loan guarantee program, that no matter which way

you go, it is being viewed exactly the opposite way that the congressional intent was when we passed the law.

Our friends at OMB and CBO are not the only problems, however, for this program. The appropriation committees in both the

House and the Senate have had misgivings about this and about

committing real dollars. EPAct is, we need to point out, only authorized spending. It is up to the appropriation committees to put

muscle behind those authorizations and I am of the opinion that

this is, if we really want to get some of these alternative energy

programs going, if we really want to get our commercial nuclear activities going, we need to go ahead and put some real money into

the loan guarantee program and get it moving.

Now, last week, to top it off, our friends at GAO have said that

even the initial steps that the Department of Energy has taken to

set up an office and start communicating with potential applicants

have gone too far, so every way we turn, what looked to be on

paper, back when we actually did the Energy Policy Act, to be a

pretty straightforward, simple program is turning into some sort of

a Nightmare on Elm Street hypothesis, except it is Independence

Avenue and we need to change that.

So I am glad, Mr. Chairman, that you are having this hearing.

I am glad to hear we are here to talk about what I consider to be

a very important part of the Energy Policy Act. I think it is central

to our discussions about climate change and reducing CO2 emissions. The very purpose of the loan guarantee program is to bridge

the gap between the capital new alternative energy projects need

to get built and the amount that investors are actually willing to

invest and put their own capital at risk. So this is a program that

we need to get moving. I hope that this hearing facilitates some
5

clear thinking and some re-emphasis and renewed commitment to

make this program move forward. With that, I yield back.

Mr. BOUCHER. Thank you very much, Mr. Barton. The gentleman

from Arizona, Mr. Shadegg, is recognized for 5 minutes.

Mr. SHADEGG. Mr. Chairman, I am going to commend you for

holding this hearing and welcome our witnesses. I will waive.

Mr. BOUCHER. Thank you, Mr. Shadegg. The gentleman from Oregon, Mr. Walden, is recognized.

Mr. WALDEN. Mr. Chairman, I, too, am going to waive and look

forward to the testimony of our witnesses. Thank you.

Mr. BOUCHER. Well, all Members having either given an opening

statement or waived that opportunity, we now welcome our first

witness and I am pleased to welcome to the subcommittee Mr. Dennis Spurgeon, who is the acting Under Secretary of the Department

of Energy, with expertise on a number of DOE initiatives and

projects, including the current status of the implementation of the

loan guarantee program. We are glad to have you here this afternoon. We will have, I am sure, a rather candid discussion about

these issues and before we turn to that, we would welcome your

opening statement. Without objection, your full written statement

will be made a part of the record and we would welcome your oral

summary of approximately 5 minutes.

STATEMENT OF DENNIS R. SPURGEON, ACTING UNDER

SECRETARY, DEPARTMENT OF ENERGY

Mr. SPURGEON. Thank you, sir. Chairman Boucher, Ranking

Member Hastert and Mr. Barton, and members of the subcommittee, I am pleased to be with you today to address the important

steps underway at the Department of Energy to implement the

Loan Guarantee Program contained in title XVII of the Energy Policy of Act of 2005.

Title XVII authorizes the Secretary of Energy, after consultation

with the Secretary of the Treasury, to make loan guarantees for

projects that ‘‘avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases and employ new or significantly improved technologies as compared to commercial technologies’’ in service in the United States at the time the guarantee

is issued. Under EPAct 2005 many types of energy related projects,

including renewable energy systems, efficient electric generation

and transmission systems, coal gasification, carbon sequestration,

advanced nuclear energy facilities, biomass projects such as waste

to cellulosic ethanol and refineries, among others, are eligible for

loan guarantees under this title.

A principal goal of title XVII is to encourage commercial use in

the United States of new or significantly improved energy related

technologies at an earlier date than the marketplace might otherwise support. DOE believes that accelerated commercial use of new

and improved technologies will help to sustain economic growth,

yield environmental benefits, enhance energy security and produce

a more stable and secure energy supply and economy for the

United States. We believe that consumers will also benefit economically from a carefully implemented title XVII loan guarantee program. Because of the lower cost of capital achieved through loan
6

guarantees, consumers should experience lower utility rates and

lower costs for other sources than without loan guarantees.

Moreover, Title XVII Loan Guarantee Program may provide the

necessary assurance to the capital finance market to enable financing for new technologies and those not yet proven in U.S. markets,

such as bio-refineries or coal-to-liquids facilities that would not otherwise be able to obtain financing at a rate competitive enough to

undertake construction and operation.

Although Congress enacted title XVII in August 2005, the Department received the first necessary funding and authorizations

needed under the Federal Credit Reform Act of 1990 in the continuing resolution enacted February 15, 2007. Requests by the Department in 2006 for congressional approval to reprogram funds in

fiscal year 2006 to fund the Loan Guarantee Office were unsuccessful. The CR provided $7 million in funding for administrative expenses of a Loan Guarantee Program Office and the 2008 budget

$8.4 million for these expenses. The CR also included authority to

issue guarantees for up to $4 billion in loans. The Department anticipates having authority available to guarantee $9 billion in loans

in fiscal year 2008. I want to assure you that the Department is

moving aggressively to implement Title XVII Loan Guarantee Program, as this program is a high priority for everyone at DOE from

the Secretary on down.

Indeed, even before the CR gave the Department authorizations

and funding needed to carry out the Title XVII Loan Guarantee

Program, the Department was hard at work addressing the twin

objectives underpinning title XVII: advancing the early commercialization of new and improved energy technologies beneficial to

the environment and minimizing the financial exposure of the

United States.

Thus, to move the effort forward and to gain needed experience

with the statutory, regulatory, and commercial concerns integral to

the operation of a loan guarantee program, the Department, in August 2006, published guidelines in the Federal Register that specified the process by which DOE would review and approve the first

round of loan guarantee applications. At the same time, we issued

a solicitation under the guidelines that invited project sponsors to

submit pre-applications for projects in support of the President’s

Advanced Energy Initiative.

We received 143 pre-applications in response to the August 2006

solicitation and are now working to evaluate them. Invitations to

submit full applications will be issued to selected applicants as

soon as possible. Under the CR, however, the issuance of loan guarantees in response to the August 2006 solicitation and pursuant to

any future solicitations, cannot occur until the Department issues

final regulations for the title XVII program. The CR states that the

final regulations must be issued within 6 months of the date of enactment, or by August 15, 2007.

The August 2007 deadline for issuance of the final regulations is

a challenge for the Department of Energy. Nonetheless, in response

to this requirement, the administration is working very hard on a

proposed rule which we hope to issue for public comment in the

very near future. The draft rule was transmitted by DOE to the Office of Management and Budget on March 16, 2007, and is cur-
7

rently in interagency review process. While I cannot speak to the

details of the draft notice of proposed rulemaking at this time, we

will provide briefings to this subcommittee and others in Congress

as soon as possible.

At the same time, we are reviewing the initial round of pre-applications under the August 2006 guidelines and developing final regulations. The Department is also moving aggressively to staff its

Loan Guarantee Program Office. The Secretary has issued a charter for the Credit Review Board, a requirement under the policies

governing Federal credit programs in OMB Circular Number A–

129 and the Secretary has designated officials within the Department to serve on this board.

In addition, we are actively seeking to recruit a qualified individual to supervise the office’s operations now that funding has been

appropriated for the Loan Guarantee Office. Moreover, for the interim period, while we work through the process of hiring the appropriate technical experts to run this office, the Department has

secured the services of certain employees with subject matter expertise detailed from elsewhere in the Federal Government.

This should give you a sense of the determination of the Department to fully implement Title XVII Loan Guarantee Program as expeditiously as possible, consistent with the requirements of the law.

That concludes my prepared testimony. I would be happy to respond to any questions you may have, sir.

[The prepared statement of Mr. Spurgeon follows:]
8
9
10
11
12
13

Mr. BOUCHER. Well, thank you very much, Mr. Spurgeon. We appreciate your informing us of the status of the program from your

perspective. Do you now believe that with the passage of the continuing resolution and the allocation of resources specifically to

your department in order to carry forward the Loan Guarantee

Program, that you have adequate staff and resources in order to

perform this work?

Mr. SPURGEON. Well, we are in the process of obtaining adequate

staff. We believe we have adequate resources at this time, sir.

Mr. BOUCHER. All right. Let me try to get you to be a little bit

more precise about when your final rule is going to be implemented, allowing you to move forward with the program. The Appropriations Committee and the continuing resolution requires you

to have that rule in place by August of this year. By August of this

year, it will have been 2 years since the enactment of EPAct 2005

that established the Loan Guarantee Program and while I understand your explanation that you did not receive funding, specifically, to carry this work forward, it seems to me that from the time

the CR was adopted until August you would have had a period of

what, 5 or perhaps 6 months? That occurred, I think, in January

or early February. And so the question really now is why can’t you

get this finished by August? What stands in the way of doing that?

Secretary Bodman recently testified that it was highly unlikely

that would happen. Why not?

Mr. SPURGEON. Well, I think the Secretary is reflecting the reality of a very important rule that we do anticipate that will have

substantial public comment and input when we do issue the draft

rule. For a rule of this type, 6 months is a short period in time.

We do recognize we got a very late start, but we did, as I testified,

and it is a matter of public record, get our draft notice of proposed

rulemaking into interagency comment within 1 month of having

the continuing resolution passed, so it is a priority. It is a personal

priority of Secretary Bodman and I can attest to that because it is

a personal priority of mine, as well.

Mr. BOUCHER. So you are saying that it is essentially out of your

hands at this point; it is in the hands of OMB and other agencies

that have to review it.

Mr. SPURGEON. But we do go through the interagency review and

concurrence process and this is obviously a very important issue to

agencies other than just the Department of Energy.

Mr. BOUCHER. All right. The statute adopted in August of 2005

also says that project applicants for a loan guarantee can self-fund

the Government’s risk in issuing the loan guarantee, meaning that

you would not have to get an appropriation and yet, your preliminary guidance to the applicants says that you will not approve loan

guarantees until you have approval of the projects from the Appropriations Committee. Well, I see a puzzled look on your face. If that

is not accurate, tell me it is not accurate. It is our information that

your preliminary guidance did, in fact, contain that statement. Is

that not accurate?

Mr. SPURGEON. Yes, sir. At that time. It was before there had

been an authorization in an appropriations bill.

Mr. BOUCHER. Well, but that avoids the question. When the applicant can self-fund the Government’s risk, you would not need an
14

authorization in an appropriations bill. Why did you ask for one,

anyway?

Mr. SPURGEON. I can only answer that it is my understanding

and obviously, I would like to give you a better answer than what

I can do here, personally, for the record, but it is my understanding

that we did require an authorization in an appropriations bill notwithstanding the issue of the self-funding.

Mr. BOUCHER. Well, that is right and my question is why did you

do that?

Mr. SPURGEON. Let me give you that answer.

[Mr. Spurgeon responded for the record:]

Section 20320(a) of Public Law 110-5, the Revised Continuing Appropriations Resolution, 2007 only authorized the DOE to accept credit subsidy cost payments from

borrowers for the full subsidy costs of loan guarantees. Consistent with Public Law

110-5, no appropriation has been sought or received to cover the credit subsidy

costs, which, under Public Law 110-5 and the Department’s proposed final regulations must be self-funded by the loan guarantee applicant. However , the Department is required under the Federal Credit Reform Act to obtain budgetary authority

to cover the loan volumes that are going to be guaranteed. For fiscal year 2007, Congress authorized the Department to issue up to $4 billion in loan guarantees under

title XVII of the Energy Policy Act of 2005. Additionally, the Department is required

to seek and has obtained budgetary authority and an appropriation in the amount

of $7 million for the administrative costs of operating the Loan Guarantee Program

in fiscal year 2007.

Mr. BOUCHER. Because that has significantly delayed projects,

and in the minds of a number of project applicants who have expressed to this committee great frustration with the fact that that

requirement was put in place, I would say, needlessly. Why the 64

percent cap on the amount of a project cost that will be subject to

loan guarantee when the statue authorizes 80 percent?

Mr. SPURGEON. Well, what will come out in the final rule is yet

to be determined. I certainly recognize the question that you ask.

I certainly recognize, and we do take into consideration, the significant amount of comments that we have received following that initial effort.

[Mr. Spurgeon responded for the record:]

To harmonize and balance the twin goals of issuing loan guarantees to encourage

the use of new or slightly improved technologies while limiting the financial exposure of the Federal Government, the Department expressed a preference in the August 2006 guidelines that accompanied its initial solicitation for guaranteeing no

more than 80 percent of project costs. Assuming that 80 percent of a project’s cost

is financed by debt guaranteed by the Federal Government under title XVII, this

created a theoretical limit on the amount of a guarantee under the initial solicitation equal to 64 percent of project costs.

The Department is currently reconsidering the appropriate limit to place on the

percentage of debt instruments eligible for loan guarantees. In a May 16, 2007 Notice of Proposed Rulemaking, the Department proposed to raise 90 percent the portion of debt instruments that it would guarantee. Comments on the NOPR were due

by July 2, 2007. Upon review of the comments, the Department will determine

whether the proposed 90 percent limit, some other limit, or no limit should be

adopted.

Mr. BOUCHER. All right. Well, I would leave it to you to consider

very carefully that and hopefully you will come forward with 80

percent. One other question, Mr. Secretary, why a cap on the total

amount of loan guarantees to be issued when applicants obviously

have the opportunity to self-fund? Why is that necessary?
15

Mr. SPURGEON. Well, I believe there is a requirement under

FCRA that there be a cap. In other words, we can’t issue loan guarantees for an uncapped amount.

[Mr. Spurgeon responded for the record:]

The Federal Credit Reform Act of 1990 requires that there be budgetary authority

which caps the loan volume to be guaranteed.

Mr. BOUCHER. Where does that requirement come from?

Mr. SPURGEON. Well, let me try one of two things. I would have

to turn around and ask one of my attorneys or be able to give you

an answer and I would prefer to give you the answer for the record,

sir.

[Mr. Spurgeon responded for the record:]

Specifically, the requirement that loan guarantees be covered by budgetary authority is contained in the Federal Credit Reform Act of 1990 at 2 USC §661c(b).

Mr. BOUCHER. Well, I will look forward to receiving the answer.

The CR imposes a cap, but only for a 1-year period and so that

would not be a cap for the long-term program and if applicants can

self-fund, there is no need for a cap and I would encourage you not

to impose one as you put this final rule forward. My time has expired and I recognize the gentleman from Illinois, Mr. Hastert, for

5 minutes.

Mr. HASTERT. I thank the chairman and some of your answers

really puzzle me. Explain to me, it has been 20 months after we

passed this piece of legislation. How come loan guarantees have not

yet been made?

Mr. SPURGEON. Well, sir, first of all, and I believe Mr. Barton

also referred to it, we did request authority to reprogram funds

within the Department in order to stand up a loan guarantee office

very shortly after the Energy Policy Act was passed. That reprogramming request was not approved, sir, therefore we did not

have the authority to stand up a loan guarantee office, to hire the

people that would be responsible for reviewing and making recommendations to the Secretary relative to the issuance of those

loan guarantees, so we went forward with doing what we thought

we could, legally and responsibly.

Mr. HASTERT. But what was that?

Mr. SPURGEON. Well, that was the initial solicitation that was

issued in the summer of 2006 in order to get preliminary solicitation for projects that would potentially, then, be eligible for those

guarantees.

Mr. HASTERT. So you said 6, 7 months ago you had ability now

to move forward and solicit?

Mr. SPURGEON. No, we went out for pre-solicitation.

Mr. HASTERT. Stand-up solicitation.

Mr. SPURGEON. Yes, to stand up the office and we issued a request that, to get the ball rolling, if you will, to indicate these are

not applications, but they are pre-applications from parties that

might be interested in loan guarantees in order to be able to get

experience, as I indicated in my testimony, with the kind of system

and regulations that we were going to need to put in place to actually fully implement this program. But we did not feel, at the time,

that we had the authority to actually issue loan guarantees. We

were trying to move the process forward.
16

Mr. HASTERT. Why?

Mr. SPURGEON. Because, as I mentioned, we did not have an authorization in an appropriations bill.

Mr. HASTERT. But, as the chairman said, you don’t have to appropriate money.

Mr. SPURGEON. Well, we don’t have to appropriate money for the

cost, the administrative cost of carrying out the loan or for what

we would call the subsidy cost if it is self-funded, that is correct.

So it still comes down to did we feel we had the authority to issue

a loan guarantee and we did not. It was the opinion of the Department and, I believe, supported by the administration, that at that

time, lacking an appropriations bill. We anticipated that we would

get this in the appropriations bill that never happened.

Mr. HASTERT. OK, the Department of Energy lacks the will to

make the decision on this, is that what you are saying?

Mr. SPURGEON. Not at all. We have the authority at this point

and we are moving forward aggressively, sir.

Mr. HASTERT. All right. Where does this whole idea of 80 percent

of 80 percent come from?

Mr. SPURGEON. The basis of 80 percent of 80 percent and obviously, as I indicated, this is something that will be part of the rulemaking process and part of the comment process.

Mr. HASTERT. But rulemaking, you read the language of the bill;

it said 80 percent.

Mr. SPURGEON. It does, the authorization——

Mr. HASTERT. The legislative intent was 80 percent.

Mr. SPURGEON. I understand that, sir.

Mr. HASTERT. It was the intent of this committee of 80 percent.

Mr. SPURGEON. I understand that.

Mr. HASTERT. It was the intent of the Speaker of the House at

that time, it was 80 percent, not 80 percent of 80 percent. Why are

you looking at something different?

Mr. SPURGEON. Well, what we will actually look at is not through

the interagency process yet relative to what the recommendation——

Mr. HASTERT. That is not an answer.

Mr. SPURGEON. It is a difficult one. I have to say it is a difficult

question for me because—it shall not exceed 80 percent is the language.

Mr. HASTERT. Not 90 or 100 percent.

Mr. SPURGEON. But I understand. But we also have the consideration of FCRA and whether that imposes a limit through its implementation, I think, was somewhat of the question, but nonetheless,

I want to assure you that that issue is one that is receiving a great

deal of attention within the administration as to what the recommended limitation on the amount of the guarantee for a loan

will be and that is something that will be discussed. It will be subject to public comment and will eventually be decided on, on a

broad interagency governmental basis.

Mr. HASTERT. Well, let me just say two things in closing. If there

is anything that this committee is probably united on, was the intent of what that bill said and for you to do something different,

I think it would be catastrophic. Second thing is if your administration was involved in World War II and it was 20 months before any
17

decision was made at all before we made a decision on what we

were going to do in the D-Day invasion, we wouldn’t have ships,

we wouldn’t have tanks, we wouldn’t have anything to move forward with. I think what we are trying to do on energy independence and energy security in this country not quite lines up with

World War II, but it is pretty important and I think your agency

has been sorely lacking in making progress. I yield back.

Mr. BOUCHER. I thank the gentleman for his questions. The gentleman from Georgia, Mr. Barrow, is recognized for 8 minutes.

Mr. BARROW. Thank you, Mr. Chairman. Mr. Spurgeon, my

Uncle Bill, the legendary Dean Tate at the University of Georgia,

was fond of saying that working with a sorry boy who won’t try is

a little bit like going bird hunting and having to tote the dog. But

I listened to Speaker Hastert’s questions and I listened to your

statement, I am not sure who thinks who is the dog in this picture,

but I am kind of concerned to make sure, at least, we are all hunting the same thing. So I want to ask a couple of questions, at least

to make sure that we are not in for a surprise at the end of this

round.

If I understand correctly, we are not moving forward much with

implementing the title XV. We are still working on the title XVII

and what concerns me is there is clearly a gap between the two in

terms of their purpose and their intent. But I want to make sure

there is something I am very concerned about that is squarely authorized under title XV is not going to wait its turn while we are

trying to go forward with title XVII only to find out that it is not

going to be foursquare inside of what you all have in mind.

When I look at the title XVII, we are talking about new technologies for things like cellulosic ethanol, for example. Cellulosic

ethanol is something I am very interested in because we are going

to break ground this year, in my district, on the first commercially

viable cellulosic ethanol plant in the country and it should be operational by the end of this year. But we are going to need 13 plants

like that in order for Georgia to become self-sufficient in its transport energy needs, self-sufficient; 13 of those things can do it.

Now what I am concerned about is to make sure that we are not

going to find some surprise at the end of this current delay in trying to get title XVII loan program up and running to find out that

that is just going to be for research and development and new technology. It is not going to be available to implement existing technology. I want to make sure the folks are doing what the range

fuels people are doing in Treutlen County, GA is something they

are going to qualify for at the end of this current waiting period,

that we are both hunting after the same opportunity for them or

people like them to be able to get going with what you are working

on right now. Is that true?

Mr. SPURGEON. It is true. The whole purpose of title XVII is commercialization, sir, and you are speaking of cellulosic ethanol; that

fits squarely within the intent of the program. That is a program

that has a high priority within our department. It has a high priority with the Secretary.

Mr. BARROW. So you are assuring me and the industry that the

end of this rulemaking process, when the regs are finally issued

and the authority is there under the CR and under the appropria-
18

tion for the next budget, that folks who want to build something

with existing technology is going to be able to apply for and qualify

under the title XVII you are working on right now?

Mr. SPURGEON. Right. Yes, sir. It does apply to new and innovative technology. Something that is already in commercial application would have to be looked at based on that, but title XVII does

relate to new, innovative technologies. It is not designed for something that is already in the marketplace.

Mr. BARROW. Well, this new and innovative technology that is on

the drawing board, there is an experimental plant that is going up

in Treutlen County, GA that just qualified for a $77 million assistance grant because it is the first one going. Is that fact that they

are going to be first basically going to disqualify everybody else in

the field from doing it because it is existing technology?

Mr. SPURGEON. No.

Mr. BARROW. I want to make sure that isn’t going to happen.

Mr. SPURGEON. It is a matter of being commercial, sir, not

being—you want technology that has been proven. Title XVII is not

an R&D type program. Title XVII is a commercialization program.

Mr. BARROW. Fair enough.

Mr. SPURGEON. And so the issue is, is it in commercial use?

Mr. BARROW. So the question is going to be what is somebody

who wants to replicate what they are going to do in Treutlen County at the range fuels place, what can they expect by the end of this

year? What is going to be available to them and what are they

going to be able to do?

Mr. SPURGEON. I am going to try and be realistic as to how long

it will take to actually get loan guarantees issued through the Department.

Mr. BARROW. Exactly. That is what I want an answer to.

Mr. SPURGEON. And I would say it would be very aggressive to

have a loan guarantee program that is actually issuing loan guarantees by the end of this year.

Mr. BARROW. What is going to be very realistic as opposed to

very aggressive, because very aggressive says it isn’t going to happen. You are basically saying right up front it isn’t going to happen

in this timeframe, so what is the realistic timeframe? When can

folks expect to apply for something and qualify for it and actually

get something?

Mr. SPURGEON. Actually get it, I would say, early in 2008, sir.

Mr. BARROW. How early? Middle of the year?

Mr. SPURGEON. No, I think it can be earlier than that. I think

our target is to have it up and running so that these can be issued

in the first, early part of the year but now I am off in the projection

area before we even have the rule out and before we even implement it, so there is nobody who wants to have this program executed correctly more than do I.

Mr. BARROW. Oh, actually I think I want it executed much more

correctly than you do because I have got something going in my

district and my State has got a lot to offer in the cellulosic ethanol

field, but I still want to have a realistic estimate and your desire

and your anxiety to do this is commendable, but I want to know

when you think it is going to happen. The first quarter of next

year?
19

Mr. SPURGEON. That would be my guess and I am going to

phrase it just like that. That is a guess.

Mr. BARROW. What is your best estimate?

Mr. SPURGEON. It would be the same. It would be the same period.

Mr. BARROW. OK. Thank you, sir. I yield back.

Mr. BOUCHER. Thank you, Mr. Barrow. The gentleman from Arizona, Mr. Shadegg, is recognized for 8 minutes.

Mr. SHADEGG. Thank you, Mr. Chairman. Mr. Spurgeon, I feel

your pain. I don’t want to beat up on you, but I have got to tell

you, I am a little bit of a skeptic about Government programs and

if I were, perhaps, trying to teach a class why I have some skepticism about the ability of government to innovate or to implement,

I might want to encourage them to read your opening statement

and review your testimony here today.

It says to me if you want government to innovate and move fast,

you picked the wrong entity to do it because it is not government,

it is going to be the private sector, which causes me to have a little

bit of concern about my colleagues’ enthusiasm for a loan guarantee program by government. As a matter of fact, it causes me to

say if we are counting on government to solve these problems, you

may be picking the wrong horse to ride.

Having given that preamble, let me begin by saying first, I want

to give you an opportunity to, in your words, tell me what you

would say, in a sentence or two or a paragraph, to my constituents

who believe that renewable energy systems, efficient electricity

generation and transmission systems, coal gasification and carbon

sequestration, advanced nuclear and biomass projects are vitally

important, what would you say to them in plain English at, say,

a town hall meeting about where we are in the process and why

there has been some delay?

Mr. SPURGEON. We are in the beginning of the process at this

point. We can put a lot of reasons behind the delay, not having the

necessary funding to begin the office, not getting started with the

rulemaking until that point in time. We are now going through

that process and it is a sometimes painful step-by-step process to

put forward a major rulemaking in government and I have to say

my whole career has been outside of government, not in government, so this is frustrating to me, as well. But I would explain the

process.

I would explain the need to not only pursue, as aggressively as

possible, loan guarantees that can be supportive of introducing this

advanced technology sooner than it might otherwise have been able

to support how doing this can perhaps reduce the cost of the product from that technology to the consumer, but also recognizing that

we cannot afford to have programs implemented that do not protect

the American taxpayer and that they are done properly. And so we

are going through a painful process, but the proper process in order

to allow that to actually happen and unfortunately, it is slow.

Mr. SHADEGG. And would you say a part of the fault lies with

the appropriations process in the Congress? Or you are not willing

to go that far?

Mr. SPURGEON. Well, I would only say we did request a reprogramming and it was not approved.
20

Mr. SHADEGG. My constituents would say what is a reprogramming? Since we are talking in town hall terms. So on one hand, the

Government is telling you to do it immediately and on the other

hand, the Government is saying well, we won’t give you the money

to do it immediately. Is that correct?

Mr. SPURGEON. I think we have had a divergence of opinion relative to the loan guarantee issues across the board in our Government.

Mr. SHADEGG. I believe just a moment ago, I think in response

to Mr. Barton, you said we now do have the authority to proceed?

Mr. SPURGEON. Yes, sir.

Mr. SHADEGG. And yet, in response to my colleague from Georgia’s comments, you said we would have to be very aggressive to

get it by the end of this year and more likely it is sometime early

next year. That is correct?

Mr. SPURGEON. That is an honest guess.

Mr. SHADEGG. Again, talking to my town hall, not talking to a

congressional hearing, we are talking to my town hall in Phoenix,

AZ, walk me through what you have left to do that could delay us

beyond the end of this year? Just in layman’s terms each step that

needs to be accomplished and I am going to ask you at the end to

say what this Congress might do to expedite that, if anything.

Mr. SPURGEON. Well, first step is the rule. We need to establish

a rulemaking that will establish the process by which these loan

guarantees can be applied for, the process by which one can calculate the self-funding aspect of what the subsidy costs.

Mr. SHADEGG. I want to make sure that one of my environmentalists couldn’t raise his hand and say well, couldn’t you have

done this rule earlier?

Mr. SPURGEON. Well, we seem to be a little bit, I don’t mean to

put it a little bit damned if we do and damned if we don’t because

on the one hand——

Mr. SHADEGG. Well, you would be the first Government agency

in that position.

Mr. SPURGEON. Going slow and on the other hand we are being

criticized because we have gone beyond what our authority might

have been.

Mr. SHADEGG. We are going to get a rule?

Mr. SPURGEON. Yes, sir. We have got to get a rule and that the

mandated timeframe for that is August 15 and we have been quite

forthcoming in saying we are going to do everything we can to meet

that date, but the Secretary is on record as saying that is a very

aggressive date and so that is the next step. Then what we have

got to do is we are going to have to implement that rule and that

is going to be obtaining, going out and getting the proposals.

Mr. SHADEGG. Those will be the official proposals?

Mr. SPURGEON. Those will be the official proposals.

Mr. SHADEGG. Not the preliminary proposals?

Mr. SPURGEON. Yes. And some of the ones that were part of the

preliminary package can still go forward. I am not saying that—

now that we have the authority, those can be evaluated and they

are being evaluated at the Department at this time. But you are

now looking at getting these applications in, reviewing the applications and that needs to be a careful process, so by the time you go
21

through that, if we are looking at the 1st of September or thereabouts for having the rulemaking done, then you are looking at the

time needed to get applications in, to review those applications and

to do all of the final due diligence that would be needed in order

to then issue a loan guarantee for that project. And just looking realistically, that is something that would be very difficult to do in

less than 90 days and that is where you get to the timeframe.

Mr. SHADEGG. So let us review. It is establish a rule, process the

applications.

Mr. SPURGEON. Well, basically issue the loan guarantee.

Mr. SHADEGG. And is there anything this Congress can do to expedite that, in light of the fact that we face serious energy problems? Any recommendation you can make to this committee?

Mr. SPURGEON. Not in that process. I think that process is going

on and your support, I think, obviously, when we know as an agency, that we have the strong support of the Congress to make this

move in a hurry and that it is not unanimous. That is always a

little bit of a stretch. But when it is a solid mandate that loan

guarantees are important, that is always helpful to us.

Mr. SHADEGG. Nothing further. I yield back.

Mr. BOUCHER. Thank you, Mr. Shadegg. The gentleman from

Texas, Mr. Barton, is recognized for 5 minutes.

Mr. BARTON. Thank you. And I apologize, Mr. Secretary, if I

asked something that you have been asked while I am out of the

room. My first question is pretty straightforward. Are we clear that

the congressional intent 80 percent is 80 percent?

Mr. SPURGEON. You certainly have made that clear to me.

Mr. BARTON. Is there something that we need to do to officially

follow up with DOE or OMB? I am dumbfounded that there is a

debate about 80 percent isn’t 80 percent.

Mr. SPURGEON. It would not be for me to tell the ranking member the means by which to exert influence, but that is something

that is a matter of debate.

Mr. BARTON. If we could get Mr. Boucher and Mr. Hastert and

Mr. Dingell and myself, send a letter, that might be helpful?

Mr. SPURGEON. I think it would be going beyond my position, sitting here, to suggest how one might proceed to have influence in

the process.

Mr. BARTON. Well, let us go to the next question. What has been

the real problem in meeting this deadline? Is it a policy problem?

Is it a manpower problem? Is it a disagreement in the administration that you really don’t want a loan guarantee? It would seem to

me that it might take you some time to sort through the applications. I understand that and there have been a lot of preliminary

requests for loans, but I don’t understand why it would take a long

time to set the rule up, itself. It is pretty straightforward. The law

says what qualifies. You have got to put some definitions, put some

timelines complying with Government procurement requests for

proposals, but it is pretty straightforward. What has been the real

hang up here?

Mr. SPURGEON. Well, I think it, as I mentioned in the opening

testimony, we did issue a notice of proposed rulemaking, meaning

our draft rule and put it into interagency comment within a month

of actually having the continuing resolution passed and actually,
22

within about 2 weeks or so, of having funds allocated. The allocation of funds didn’t come right instantly when the continuing resolution was passed, so we did move very quickly within the Department, very aggressively, to establish a proposed rule and we have

put that into the interagency process, we do this in consultation

with——

Mr. BARTON. Has there been some huge kickback? Has there

been some amazing amount of consternation about the proposed

rule that just you have gone beyond the payola and, oh my God,

I can’t believe that is the way you want to do it? I have not heard

it. Nobody has called at my office and said you know, former Chairman Barton, you won’t believe what those bozos at DOE did in the

proposed rule. It would seem to me that unless you have got a

manpower problem like Chairman Boucher talked about, that we

could get this thing out there by the August deadline.

Mr. SPURGEON. Well, I think the next step will be, we will get

comments back from the review process and then we will make

modifications to the draft rule that was drafted by the Department

and that that will then be for public comment.

Mr. BARTON. Have there been any unforeseen comments? Have

there been something that a light went on and you said we didn’t

really think about that?

Mr. SPURGEON. I would not put it in that context, no.

Mr. BARTON. OK. My last question, why did you not allow nuclear projects to qualify for your original loan solicitation? What

was the decision process there?

Mr. SPURGEON. It was, I think, in plain English, a little bit of

a walk before you run. The total loan limitation that was established for this initial round was $2 billion and a nuclear plant

would most likely be above that number, but also practically speaking, we did not see, in this timeframe for that initial round, that

there would be nuclear plants that would be in position——

Mr. BARTON. So there is no philosophical opposition?

Mr. SPURGEON. There is no philosophical opposition and I think,

many times in public, as well as the Secretary, we have spoken to

the applicability of loan guarantees——

Mr. BARTON. And once we get this rule in place, you fully expect,

as we ramp up the actual loan guarantee authorization, the availability of loans, that there will be solicitation for nuclear projects?

Mr. SPURGEON. We do anticipate that.

Mr. BARTON. It is very important. It is very important that we

get that first one. We put a limitation in the Energy Policy Act. It

wasn’t open ended. I think it is the first five. There is a specific

number.

Mr. SPURGEON. Well, there is not a limitation on a number in the

loan guarantee section, sir. We do have, in standby support, a section of the Energy Policy Act that applies. The standby support

would apply to the first six and there is a limitation of $500 million

for the first three.

Mr. BARTON. But it is really important to get that first one to

show the world that we can build a new generation of nuclear

power plants in this country.
23

Mr. SPURGEON. I absolutely agree with you, sir, not just the first

one, but that we then sustain this growth of nuclear energy in the

United States.

Mr. BARTON. Thank you, Mr. Secretary, and thank you, Chairman Boucher.

Mr. BOUCHER. Thank you very much, Mr. Barton. I ask unanimous consent to place in the record a letter to Peter Visclosky,

chairman of the Energy and Water Development Subcommittee of

the House Appropriations Committee, and the Honorable David

Hobson, the ranking Republican member of that subcommittee, a

letter from the GAO dated April 20, 2007, which states that EPAct

confers upon the Department of Energy independent authority to

make loan guarantees notwithstanding the requirements of the

Federal Reporting Act and for your information, that letter so

states. So without objection, that letter will be made a part of this

record.

The gentleman from Illinois, Mr. Shimkus, is recognized for 5

minutes.

Mr. SHIMKUS. Mr. Spurgeon, you are a service academy guy, I

find out and you know, we academy guys, we have these interesting relationships. When we are together alone, we like to pick on

each other and make fun of each other, but when the going gets

tough and one is under the gun, we want to be around to be supportive. So and you are a nuke guy.

And I liked John Shadegg’s line of questioning because another

case study is how people who have been in the private sector come

into the Government agencies and they just get eaten up by them,

the bureaucracy. There are all these case studies about these great

heads of major corporate America that come in that are going to

be the guy to affect the bureaucracy and they usually leave with

their tail between their legs because it is just too big of a monster

to get a handle on.

A couple of quick questions. In your testimony you mentioned

that the loan guarantees benefit consumers as opposed to a 50 percent debt/50 percent equity. Can you explain that quickly for me?

Why do you believe that?

Mr. SPURGEON. Well, just based on the cost of capital. If you are

financing a plant with 50 percent debt/50 percent equity, equity is

going to cost for a new nuclear plant something in the neighborhood of 15 to 18 percent. Debt is going to be, if it is guaranteed

debt, it could be around 6.5 percent or so. If it is straight debt, unguaranteed, it could be somewhere in the 12 percent range, but

nonetheless, the greater you can leverage a project, the lower the

average cost of capital will be. And those who might be attacking

the loan guarantees as subsidy to major energy interests, there is

probably a consumer benefit to this, as we move forward.

Mr. SHIMKUS. Isn’t it true that the Export-Import Bank provides

loan guarantees with 100 percent of loan coverage and that the

Overseas Private Investor Corporation does the same, that the

Transportation Infrastructure Financing Authority provides 100

percent loan coverage, that the Small Business Investment Corporation loan guarantees provide 100 percent loan coverage? Isn’t

it true that 100 percent loan coverage is a norm rather than exception?
24

Mr. SPURGEON. Well, there are many agencies, as you point out,

that do offer 100 percent loan coverage and in the private sector,

I actually had one of those kind of loans, so I understand that.

Mr. SHIMKUS. So you can understand that when we go with 80

percent and we think that is our intent, that we want to do everything we can to ensure that that is the intent? Another case study

as to once the law that has been passed by the legislature is signed

into law and then the Federal agency changes that and so many

times we have hearings and we have to address new legislation

and it is a ping pong ball that goes back and forth, which doesn’t

make a lot of sense to a lot of us.

Is it correct that a new electricity generation project to be built

overseas can get a more favorable term from the Export/Import

Bank than it could receive under the August 2006 loan guarantee

guidelines published by the DOE?

Mr. SPURGEON. It is certainly possible.

Mr. SHIMKUS. Hence our frustration. This is a big issue for all

of us; energy independence, a lot of great technology out there. The

chairman wants to move legislation and we want to encourage and

help and assist in that. A lot of that will be built upon the success

of EPAct or the failure of EPAct based upon what we intended to

do and what didn’t occur based upon the timeline, so I think you

have received enough of our frustration. We would encourage you

to move expeditiously to help us move forward. And with that, Mr.

Chairman, thank you for recognizing me and I yield back.

Mr. BOUCHER. Thank you very much. I appreciate the gentleman’s questions. The gentleman from Texas, Mr. Burgess, is recognized for 5 minutes.

Mr. BURGESS. I apologize, Mr. Chairman, for not being here at

the start of the hearing. We are having some bad weather back

home and I needed to make sure everyone was OK. And I am also

sensitive to the fact that we have got a vote in a few minutes, so

I will try to be brief.

Mr. Secretary, thank you for being here today. I am sure that the

concern has been expressed over and over again by the members

of the committee about the fact that we haven’t had a new nuclear

facility construction in this country in 30 years. We are now faced

with the possibility that some of us, some in Congress are going to

want to cap carbon emissions and reliance on nuclear energy or nuclear generation for electricity seems to make a great deal of sense

to me. You talked, in your testimony, about the authorization

under title XVII and the documents indicate a possible allocation

for $4 billion of the $9 billion for central power generation facilities. May we then assume that nuclear coal-based technologies are

going to have to compete for funding under this cap?

Mr. SPURGEON. Well, the $4 billion is not stated as either a cap

or a floor within the $9 billion, but I think it is a recognition of

the desire to have a somewhat balanced portfolio, but obviously, we

have, as the testimony shows or as the record shows, we have more

in applications, even under the preliminary applications for loan

guarantees than there is loan guarantee ceiling available to us, so

there obviously will be some competition for loan guarantee funds.

Mr. BURGESS. And again, the rationale for that competition?
25

Mr. SPURGEON. It is the idea of how much ceiling would be available to issue loan guarantees.

Mr. BURGESS. But do we run the risk of being in the position of

either us or the administration picking winners and losers?

Shouldn’t we just allow the competition to proceed and see where

the market goes?

Mr. SPURGEON. Well, if there is a budgetary ceiling on the

amount of loan guarantee ceiling available, bad sentence, but the

idea being, then we are going to somehow have to select among

those projects.

Mr. BURGESS. Thank you, Mr. Chairman. In the interest of the

vote, I will yield back the balance of my time.

Mr. BOUCHER. Thank you very much and Mr. Burgess, the gentleman from Louisiana, Mr. Melancon, waives questions. Well, Mr.

Spurgeon, you are now excused and we thank you very much for

your attendance here today. We are going to be submitting some

follow-up questions to you by a letter and we would appreciate your

expeditious response. The letter and the responses will be made a

part of today’s proceedings. Thank you, Mr. Spurgeon.

Mr. SPURGEON. Thanks.

Mr. BOUCHER. Let me welcome our second panel of witnesses.

Mr. James Cosgrove is the Acting Director of the Natural Resources and Environmental Division of the Government Accountability Office; Julie Jorgensen is the co-president and chief executive officer of Excelsior Energy, a company developing an integrated gasification cycle facility in northeastern Minnesota; Denny

DeVos is the director of corporate finance for POET, the largest dry

mill ethanol producer in the United States, formerly known as

Broin Companies. POET is located in Sioux Falls, South Dakota.

Christopher Crane is the senior vice president of Exelon Corporation and the president and chief nuclear officer of Exelon Nuclear.

I want to say welcome to each of our witnesses and thank each of

them for joining us here this afternoon. Without objection, your

prepared written statement will be made a part of the record and

we would welcome your oral summary, hopefully contained within

5 minutes. Mr. Cosgrove, we will be happy to begin with you.

STATEMENT OF JAMES C. COSGROVE, ACTING DIRECTOR,

NATURAL RESOURCES AND ENVIRONMENT, GOVERNMENT

ACCOUNTABILITY OFFICE, WASHINGTON, DC

Mr. COSGROVE. Thank you, Mr. Chairman, Ranking Member

Hastert, members of the subcommittee. I am pleased to be here

today to discuss DOE’s implementation of a loan guarantee program authorized by title XVII of the Energy Policy Act of 2005. As

you have heard, this program is intended to encourage innovative

technologies that show promise of decreasing air pollutants and

manmade greenhouse gases. My remarks this afternoon are based

on the results of our February 2007 report which reviewed DOE’s

initial efforts to launch the new loan guarantee program.

The findings of this report highlight the need for adequate planning and sound management, both essential to minimize Federal financial liabilities and to ensure the program’s success. As you

know, by guaranteeing a loan for a project, the Government shoulders some of the projects financial risk. Private lenders are thus
26

more willing to finance projects and borrowers gain access to credit

on morer favorable terms. However, if a borrower defaults on a

loan, Federal taxpayers are on the hook to repay the lender.

DOE’s program guidelines call for borrowers to be charged fees

that cover all program costs, including the costs associated with potential defaults and program administration. Nonetheless, depending on the details of how DOE implements the program, substantial financial risks for taxpayers would remain and let me explain

why.

First, taxpayers could be stuck with a bill if DOE underestimates

the agency’s administrative costs over the life of the loans. DOE intends to require borrowers to pay a fee to cover these expenses. At

the time of our review, however, DOE had not determined how it

would estimate its administrative costs, recover those costs from

borrowers, or fund revenue shortfalls if it collects too little.

The program’s subsidy costs also poses financial risk for taxpayers. This cost is essentially the net amount the Government

would have to pay a lender in the case of a loan default. All Federal agencies are required to estimate the expected subsidy

amounts and set aside sufficient funds in a special treasury account. Estimating default risk and subsidy cost is difficult, especially for the types of innovative projects that would qualify for the

program. This is because, in addition to the technological uncertainties, volatile energy prices also effect the economic viability of

these projects.

DOE will have to estimate the subsidy cost to determine the

amount to charge borrowers, but it had not established policies or

procedures for doing so at the time of our review. Instead, DOE

had asked potential borrowers, who have an incentive to underestimate these costs, to provide preliminary subsidy cost estimates. If

DOE’s final subsidy cost estimate is too low, the resulting shortfall

would be automatically charged to taxpayers through a permanent

indefinite appropriation, not through the annual appropriations

process.

Our report identified multiple steps that DOE needs to take to

achieve reasonable assurance the program will be well-managed,

including the following five key steps: issue regulations, establish

a credit review board, set policies and procedures for selecting and

monitoring loans and lenders, set policies and procedures for estimating administrative and subsidy costs and accounting for loan

guarantees, and set program goals and objectives.

We found that DOE’s actions address these five steps either incompletely or not at all. For example, DOE had not issued regulations for implementing the program. Instead of a plan to rely on

guidelines for awarding the first $2 billion in loan guarantees, regulations are preferable to guidelines because regulations are more

transparent to policymakers and the public, carry the force of law

and hold the agency implementing the program and participants

accountable to the terms specified.

In conclusion, at the time of our review, DOE did not have in

place the critical policies, procedures, and mechanisms necessary to

ensure the program’s success. In our report we recommended that

the Department complete the five key steps just discussed before

issuing loan guarantees. Since we completed our audit work, the
27

Revised Continuing Appropriations Resolution for fiscal year 2007

directed DOE to implement most of our recommendations by

issuing final regulations before awarding loan guarantees.

The resolution also requires GAO to review the loan guarantee

program annually and to report our findings to Congress. We look

forward to working with you and others in Congress to help ensure

the success of this program. Mr. Chairman, this concludes my prepared statements. I would be happy to respond to any questions

you or the members of the subcommittee may have.

[The prepared statement of Mr. Cosgrove follows:]
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Mr. BOUCHER. Thank you very much, Mr. Cosgrove. Ms.

Jorgensen.

STATEMENT OF JULIE JORGENSEN, CO-PRESIDENT AND CEO,

EXCELSIOR ENERGY, INC., Minnetonka, MN

Ms. JORGENSEN. Good afternoon, Chairman Boucher, Congressman Hastert and members of the subcommittee and thank you for

the invitation to appear before you today. My name is Julie

Jorgensen and I am the co-president and CEO of Excelsior Energy.

We are an independent power company located in Minnesota and

we are the developers of the Mesaba Energy Project, which is a 600

megawatt IGCC facility to be located in northeastern Minnesota.

Excelsior is appreciative of the very strong local, State, and Federal

support we have received.

In 2003, Minnesota passed groundbreaking enabling legislation

for the Mesaba Project that created a market for its output and removed the barriers to entry for the IGCC technology that were

within the State’s control. Several State agencies also provided important early funding for the Mesaba Project. In 2004, the United

States Department of Energy selected the project for funding under

Round II of the Clean Coal Power Initiative.

The project will use ConocoPhillips’ E-Gas Technology and has

the ConocoPhillips Wabash River IGCC facility as its design starting point. The Mesaba Project will pave the way for the use of

western coal in IGCC applications, a key impediment to widespread IGCC market adoption. We appreciate the leadership of

Congress in authorizing the DOE loan guarantees for advanced

technologies like IGCC. We particularly appreciate the specific authorization for a loan guarantee for our Mesaba Project in EPAct

title XVII. EPAct also specifically provides that the Project’s Clean

Coal Power Initiative award can be used as budget authority for

the loan guarantee.

The project is in the advanced development phase with all permits filed and the joint State and Federal EIS expected to be published in the next several months. Implementation of the loan

guarantee program authorized by EPAct is now directly on the

project’s critical path schedule. With the loan guarantee, the

project’s costs of capital is reduced so that its cost of energy can

compete with a conventional coal plant. This is achieved by reducing the interest rate on the debt and ensuring that adequate leverage levels are achieved. Both of these are critical to the goal.

In addition to bringing down the costs of capital for the first

mover IGCC plants, the guarantee serves as an essential catalyst

to the financing of these facilities. The Mesaba Energy Project is

structured to meet all of the credit quality requirements for an investment grade financing. Nonetheless, the rating agencies indicate

that an investment grade rating will not be possible for the first

fleet of IGCC plants. Without the guarantee, there may simply not

be debt capacity in the markets for these first mover projects, given

their $2 billion size.

Every day the first movers are delayed spells delay for the market shift to carbon capture ready IGCC. We believe that the proposed guidance to limit the guarantee to less than 80 percent of

total project costs and to require lenders to hold both guaranteed
37

and un-guaranteed debt creates problems and adds complexity that

work against Congress’s goal in enacting EPAct. Instead, we believe the best approach is to guarantee debt representing 80 percent of total project costs with the DOE obtaining the same type

of input and advice that commercial underwriters receive from rating agencies and independent engineers in order to ensure that default risk is adequately addressed.

In conclusion, the guarantee program and the specific guarantee

authorized by the Energy Policy Act for the Mesaba Project are essential to remove the final barriers to the timely implementation

of the project and the handful of other projects that are close behind it, a successful culmination of the U.S. Government’s 30-year

program to develop and implement the IGCC technology. Again, I

thank you for the opportunity to appear here today and look forward to your questions.

[The prepared statement of Ms. Jorgensen follows:]

TESTIMONY OF JULIE JORGENSEN

Good afternoon Chairman Boucher, Congressman Hastert, and members of the

subcommittee, and thank you for the invitation to appear before you today. My

name is Julie Jorgensen and I am the co-president and CEO of Excelsior Energy.

Excelsior is an independent power company based in Minnesota. We are the developers of the Mesaba Energy Project, a 600MW Integrated Gasification Combined

Cycle (IGCC) plant to be located in northeastern Minnesota.

While I am sure the subcommittee is familiar with IGGC technology, let me briefly describe the process. The plant we are developing will combine a gasification

process with a combined cycle power plant to produce electricity from coal with less

air pollution. In an IGCC plant, coal, petroleum coke, or blends of coal and petroleum coke are crushed and then slurried with water. The slurry is pumped into a

pressurized vessel (the gasifier) along with sub-stoichiometric amounts of purified

oxygen. In the gasifier, controlled reactions take place, thermally converting the

feedstock materials into a gaseous fuel known as synthesis gas, or syngas. The

syngas is cooled and cleaned of contaminants prior to combustion. Cleaning the fuel,

rather than scrubbing stack emissions, is inherently more efficient because the fuel

is at high pressure and temperature, and requires treatment of 1/130 of the volume

of gases that require scrubbing in conventional coal plants. Carbon dioxide can also

be captured efficiently at this pre-combustion stage. IGCC results in-highly efficient

power generation with lower levels of air emissions through the operation of a combustion turbine and a steam turbine generator in tandem.

The plant will be fuel flexible and will run on fuel blends including 100 percent

Powder River Basin sub-bituminous coal, Illinois 6 bituminous coal and coal/petcoke

blends. I have attached a more extensive description of the Mesaba Energy Project

for the record.

Excelsior is appreciative of the strong local, State and Federal support we have

received. In 2003, Minnesota passed groundbreaking enabling legislation for the

Mesaba Project that created a market for its output and removed the barriers to

entry for the IGCC technology that were in the State’s control. Several state agencies also provided important early funding for the Mesaba Project.

In 2004, the U.S. Department of Energy (DOE) selected the Project for funding

as part of Round II of the Clean Coal Power Initiative. The Project will use

ConocoPhillips’ E-GasTM Technology, and has the ConocoPhillips Wabash River

IGCC facility as its design starting point. The Project will have two gasification

trains rather than the single train at Wabash, with a third gasification train for

back-up and reliability, and incorporates over 1600 lessons learned in 12 years of

operation at the Wabash plant and a DOE optimization study of that facility. The

Mesaba Project will pave the way for the use of Western fuel in IGCC applications,

a key impediment to widespread IGCC market adoption.

We appreciate the leadership of the Congress in authorizing DOE loan guarantees

for advanced technologies like IGCC. In the Energy Policy Act of 2005 (EPAct), Congress recognized the strong public policy interest in advancing the commercial deployment of clean energy technologies, technologies that will enhance our energy security, reduce local air pollution, and provide tools to help reduce our emissions of

greenhouse gases.
38

We are particularly appreciative of the specific authorization for a loan guarantee

for the Mesaba Project in EPAct Title 17. EPAct also specifically provides that the

Project’s Clean Coal Power Initiative award can be used as budget authority for the

loan guarantee.

The project is in the advanced development phase, with all permits filed and the

joint state/Federal environmental impact statement expected to be published in the

next few months. All transmission planning is underway. Because of the detailed

technical work that has been completed by Excelsior, ConocoPhillips and Fluor on

the Project, and its fuel flexible, multi-train design, the Electric Power Research Institute recently selected the Mesaba Energy Project as the pioneering sub-bituminous coal IGCC template in its CoalFleet program, which is developing IGCC reference designs for the utility industry. ConocoPhillips is working on the first stage

of front end engineering design (FEED), a preparatory step to ordering long lead

equipment items and completing the engineering design required before construction starts.

The Project’s power purchase agreement (PPA) is pending before the Minnesota

PUC. The tariff structure assumes the debt is guaranteed as authorized under

EPAct. As a result, the tariff, or cost of energy, under the PPA is comparable to

that of a new utility-owned super-critical pulverized coal plant. This price parity

demonstrates that the loan guarantee program will achieve the stated goal of reducing the cost of energy from the first commercial fleet of IGCC facilities in order to

ensure rapid market penetration of the technology. This is achieved by reducing the

cost of capital by both reducing the interest rate on the debt and ensuring that adequate leverage levels are achieved. Both are critical to the goal.

In addition to bringing down the cost of capital for the first mover IGCC plants,

the guarantee serves as an essential catalyst to the financing of these facilities. The

Mesaba Energy Project is structured to meet all of the credit quality requirements

for an investment grade financing. The Project output will be sold under a long-term

offtake agreement, removing the largest default risk. The Project will have an engineering, procurement and construction turnkey contract with a world-class engineering firm that will guarantee plant performance, the other principal default risk.

Nonetheless, the rating agencies indicate that an investment grade rating will not

be possible for the first fleet of IGCC plants. Utility owned, rate-based plants will

face similar constraints due to the $2 billion size of these facilities, and their material impact on utility balance sheets. Without the guarantee, there may simply not

be debt capacity in the markets for these first mover projects. Every day the first

movers are delayed spells delay for the market shift to carbon capture ready IGCC

and further lock-in of conventional technologies that tie our hands in efforts to craft

meaningful climate policy that does not adversely affect economic activity.

By late summer, we expect to move to the financing phase of the Project. Implementation of the loan guarantee authorized by the Energy Policy Act for the Project

is now directly on the Project’s critical path schedule. We have worked with major

financial institutions, law firms and turnkey contractors to identify the optimal financing structure to implement the guarantee. We believe that the proposed guidance to limit the guarantee to less than 80 percent of total project costs, and to require lenders to hold both guaranteed and non-guaranteed debt, creates problems

and adds complexity that work against Congress’ goals in enacting EPAct. Instead,

we believe the best approach is to guarantee debt representing 80 percent of total

project costs, with the DOE obtaining the same type of input and advice that commercial underwriters receive from rating agencies and independent engineers in

order to ensure that default risk is adequately addressed.

IGCC has moved front and center as a national energy security and climate

change policy priority because of its flexibility to capture carbon dioxide emissions.

The Project is participating in the DOE’s Plains CO2 Reduction Partnership which

is spearheaded by the Energy and Environment Research Center at the University

of North Dakota. The Project has filed a carbon capture and sequestration plan with

the Minnesota Public Utilities Commission (PUC) that is the first of its kind anywhere in the United States. The plan contemplates 30 percent capture and sequestration of CO2 when the Minnesota PUC determines that it is in the ratepayers’ interests. Excelsior and Fluor have identified a means to achieve 30 percent capture

using currently commercially available technology, by removing CO2 that is present

in the syngas. This capability provides an early source of a large CO2 stream for

one of the demonstrations of carbon capture and sequestration that are essential to

the DOE’s roadmap to low carbon impact coal utilization. The DOE programs to

demonstrate large scale CO2 sequestration could be accelerated by years by the

Mesaba Project. The Project can then undertake 90 percent sequestration when the

research and development path identified by the DOE for the technology is completed and ready for implementation.
39

The Mesaba Project therefore offers an opportunity to jump start the carbon capture and sequestration demonstrations that are critical to any meaningful climate

change policy. The Clean Air Task Force has calculated that moving up the date

of commercialization of IGCC with carbon capture and sequestration by six months,

in China alone, will do more to stabilize atmospheric carbon dioxide concentrations

than all the wind capacity installed in the world.

The guarantee program and the specific guarantee authorized by the Energy Policy Act for the Mesaba Energy Project are essential to remove the final barriers to

the timely implementation of the Project and the handful of others that are close

behind it, a successful culmination of the U.S. Government’s 30-year program to develop and implement the IGCC technology.

Again, I thank you for the opportunity to appear before you today and look forward to answering any questions you may have.

Mr. BOUCHER. Thank you, Ms. Jorgensen. Mr. DeVos.

STATEMENT OF DENNY DEVOS, DIRECTOR OF CORPORATE

FINANCE, POET, SIOUX FALLS, SD

Mr. DEVOS. Thank you. Mr. Chairman and distinguished members, thank you for the opportunity to visit with you today. My

name is Denny DeVos. I am the director of corporate finance for

POET. I would like to talk with you today about challenges and opportunities to utilize loan guarantees on financing cellulosic and

other innovative renewable energy projects. POET, headquartered

in Sioux Falls, SD, is the largest dry mill ethanol producer in the

United States. POET, formerly Broin Companies, is an established

leader in the bio-refining industry. The 20-year-old company has

built 25 ethanol production facilities, marketing more than 1 billion

gallons of ethanol annually. Additionally, four projects are under

construction with several others in development.

The POET development model is unique. It started on the Broin

family farm in Minnesota and has spurred growth of investment by

thousands of farmers and individual main street investors. Just 10

years ago, most ethanol plants’ capacity was 10 to 15 million gallons per year. Those plants are small by today’s standards. Most

dry mill ethanol facilities are now designed at 50 to 125 million

gallons. Today, the design and construction costs exceed $2 per gallon, reaching upwards of $250 to $300 million. The cost to expand

an existing facility to a cellulosic ethanol facility is approximately

100 percent greater than a traditional corn-to-ethanol facility.

Project LIBERTY, POET’s commercial cellulose project for converting corn fiber and corn cobs to ethanol will expand the 50 million gallons per year traditional corn-to-ethanol plant in

Emmetsburg, IA to 125 million gallons per year bio-refinery that

will produce 25 million gallons of ethanol from corn stover and

fiber from the corn kernel. POET was fortunate to be selected as

a recipient of a Department of Energy grant for up to $80 million

to support Project LIBERTY.

In addition to producing 27 percent more ethanol from an acre

of corn, Project LIBERTY will reduce natural gas needs to operate

the 125 million gallon per year plant by 83 percent and utilize 23

percent less water. To better position the Department of Energy’s

loan guarantee program, we believe a review of the challenges we

see with the program POET has considered in the past as of value.

The programs we have considered are the Department of Energy

Loan Guarantee Program, the USDA Business and Industry Pro-
40

gram and the USDA Renewable Energy Systems and Energy Efficiency Improvement Programs.

Concerning the Department of Energy program, POET has submitted a pre-application to guarantee a $137 million loan. We see

the following challenges to a successful final application and

issuance of a loan guarantee. Statutory provision requires the Department of Energy to possess a first lien priority in the assets. It

would be difficult, if not impossible, to obtain commitments for the

un-guaranteed portion of the loan. Delays in processing our application may cause delays in construction of the project. The subsidy

cost of the expected liability to the Federal Government in issuing

the guarantee is an extreme burden and difficult to define for a

startup and expanding company.

Concerning the USDA Business and Industry Loan Guarantee

Program, the maximum loan amount of $25 million is too low.

Loans greater than $5 require national office approval. The percent

of loan guaranteed diminishes to 60 percent for loans greater than

$10 million. And lastly, the Renewable Energy Systems Program,

loans cannot exceed 50 percent of the total project cost and the

maximum loan amount is $10 million. Personal and corporate

guarantees are not possible due to the large number of investors

and the need to treat investors equally regardless of percent of

ownership.

As outlined previously, we have found challenges with the proposed Department of Energy as well past United States Department of Agriculture guarantee programs. An enhanced program

that draws from aspects of all three programs, we believe, would

be acceptable to the lending community and significantly increase

investments in new technologies. The following are highlights of

specific recommendations for proposed Federal loan guarantee program.

Eligibility. Projects that employ innovative technologies for renewable energy and energy efficiency. Benefit to lenders, provide

lenders with another tool to expand their loan portfolio, improve

the economic and environmental living climate in rural communities and allow the lenders to make loans above their loan limits.

Maximum loan amount, as it would pertain to the industry that we

are involved with would be limited to the maximum of $200 million

in loan per borrower or a $160 million 80 percent of $200 million

loan. It is important for all parties involved in financing or owning

renewable energy projects to have something at risk, therefore

POET does not support 100 percent loan guarantee.

Fees and costs. No subsidy costs should be assessed for potential

future costs to the Federal Government for making payments due

to lack of cash flow or upon liquidation. While assuring in the

event of default, 80 percent of should be paid by the Department

of Energy and 20 percent of the shortage should be covered by the

holder of the un-guaranteed portion. Concerning servicing, knowledgeable and adequate staff resources are essential to providing

prompt response to loan guarantee applications.

POET is honored to have testified to the Energy and Commerce

Subcommittee on Energy and Air Quality. Thank you.

[The prepared statement of Mr. DeVos follows:]
41

STATEMENT OF DENNY DEVOS

Mr. Chairman and distinguished committee members, thank you for the opportunity to visit with you today. My name is Denny DeVos. I am Director of Corporate

Finance for POET. I would like to talk with you today about challenges and opportunities to utilize loan guarantees when financing cellulosic and other innovative renewable energy projects.

POET, headquartered in Sioux Falls, South Dakota, is the largest dry mill ethanol

producer in the United States. POET, formally Broin Companies, is an established

leader in the bio-refining industry through project development, design and construction, research and development, plant management, ownership, and product

marketing. The 20-year old company has built 25 ethanol production facilities and

currently manages 19 plants in the United States while marketing more than one

billion gallons of ethanol annually.

Since 2000, POET Design and Construction, formally Broin and Associates, has

constructed 19 green field ethanol plants in 5 States and completed 5 major expansions of existing facilities. The value of our design build contracts since 2000 has

exceeded $900 million. Additionally, four green field projects of similar size and

scope are currently under construction with several others in development. Each

project has been successfully designed, built and managed by POET. These projects

have resulted in the addition of 875 millions of gallons per year (MGPY) of new fuel

ethanol capacity.

The POET development model is unique. It started on the Broin family farm in

Minnesota and has spurred the growth of investment by thousands of farmers and

individual main street investors. POET’s business model is to invest in, develop, design, construct and manage ethanol production facilities called Premier Partner

Plants. However, the facilities are independent limited liability companies (LLC)

owned primarily by individuals and local farmers that provide the corn feedstock.

POET employs the facilities general manager and on-site technical engineer. All

other employees are employed by the LLC. POET also has Board of Director representation at each plant.

By leveraging business size and position, POET has created the most successful

and profitable ethanol facilities in the industry. POET has achieved breakthrough

progress beyond ethanol processing, extracting extraordinary new value from each

kernel of corn.

Just 10 years ago, most ethanol plants’ capacity was 10–15 MGPY. POET’s first

plant was 1 MGPY and was one of the largest in operation at the time. Traditional

ethanol plants were built in corn producing states which put incentives in place to

stimulate investment by farmers and other local main street investors. Incentives

stimulated development of an industry at a time when new interest was sparked

by technology advancements. Public policy, which was driving these incentives, was

sparked by the oil crisis in the 1970’s and the clean air initiatives that followed.

The cost per gallon to build and fund working capital for these plants was approximately $1.75 per gallon or a total of $20–25 million.

Those plants are small by today’s standards. Most dry mill ethanol facilities are

now designed at 50–125 MGPY capacity. The cost of an ethanol plant project just

five years ago was $1.20 per gallon capacity. Today, the design and construction

costs exceed $2 per gallon, reaching upwards of $250 million to $300 million or more

to deliver a completed project. The significant increase is due to inflation of construction materials and labor. Most notably are stainless steel, concrete, other metals and qualified, skilled, manpower.

Due to additional storage, feedstock and waste handling, and pre-treatment equipment, the cost to expand an existing facility to a cellulosic ethanol facility is approximately 100 percent greater than a traditional corn-to-ethanol facility. Project

LIBERTY, POET’s commercial cellulose project for converting corn fiber and corn

cobs to ethanol, will expand an existing 50 MGPY traditional corn-to-ethanol plant

in Emmetsburg, IA to a 125 MGPY bio-refinery that will produce 25 million gallons

of ethanol from corn stover and fiber from the corn kernel. POET was fortunate to

be selected as the recipient of a DOE grant for up to $80 million to support Project

LIBERTY. In addition to producing 27 percent more ethanol from an acre of corn,

Project LIBERTY will reduce the natural gas needs to operate the 125 MGPY plant

by 83 percent and utilize 23 percent less water. Expansion costs to an existing facility are projected in the range of $4.00 per gallon expanded capacity. A cellulose facility designed and constructed on a ‘‘green field’’ site would be substantially greater

due to utility and product handling infrastructure.

The following table depicts the design and construction costs per gallon of plant

capacity:
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Corn-to-Ethanol Facility 1995 $1.75–$2

Corn-to- Ethanol Facility 2000 $1.15–$1.35

Corn-to-Ethanol Facility 2007 $2–$2.25

Cellulose-to-Ethanol Expansion Facility 2009 $4+

As technology develops and the cellulosic ethanol industry matures, the cost of

construction is predicted to go down as long as the materials of construction do not

inflate at a greater rate.

Historically, the majority of financing for ethanol plant construction has been accomplished using local individual investment and bank debt financing provided

through the farm credit system and a few other Midwestern lending groups. All

POET projects have a strong local farmer investment component, which promotes

not only delivery of corn to the plant but ownership as well.

In terms of financing cellulose-to-ethanol production facilities, success will be

achieved using new cellulosic processing technology. To achieve production at commercial volumes, we believe the use of properly designed loan guarantee programs

will be absolutely necessary to attract investors, creditors and banks. The involvement of these groups is essential in supporting rapid development of these new, evolutionary cellulosic technologies. To better position the Department of Energy in its

loan guarantee program we believe a review of the challenges we see with the programs POET has considered is of value.

POET has considered utilizing the three programs below:

• DOE Loan Guarantees for Projects that Employ Innovative Technology in Support of the Advanced Energy Initiative

• USDA Business and Industry

• USDA Renewable Energy Systems and Energy Efficiency

IMPROVEMENTS GUARANTEE PROGRAM

POET has not utilized any of the above loan guarantee programs due to the challenges detailed in the next few paragraphs.

While POET has submitted a pre-application to guarantee a $137 million loan

under this program for construction of a cellulosic ethanol facility, we see the following challenges to a successful final application and issuance of a loan guarantee:

§1702(g)(2)(b) requires, with respect to any property acquired pursuant to a guarantee, ‘‘the secretary’’ shall be superior to the rights to any other person with respect to the property. This statutory provision requires DOE to possess a first lien

priority in the assets of the project and other collateral security pledged. Therefore

any holders of non-guaranteed debt have a subordinate claim to the DOE in the

event of default and will not receive payment on their debt until the DOE is paid

in full. Since the need for a guarantee is a result of a lender’s perceived higher risk,

when compared to other lending opportunities, it will be difficult, if not impossible

to obtain commitments for the un-guaranteed portion of the loan, due to the unguaranteed portions’ subordinate position.

• The guaranteed portion of the loan must not be separated from, or stripped from

the un-guaranteed portion of the loan, or sold in secondary debt markets. To meet

this requirement, the lender that originated the guarantee is required to hold the

un-guaranteed loan. It is highly probable that a lenders risk appetite, at least one

who is willing to do a guaranteed loan, is much different than a lender who focuses

on the subordinated debt market. Since the originating lender is required to hold

both types of debt, it will be difficult, if not impossible to find a lender to hold both

portions of the loan.

• Delays in processing our application may cause delays in start-up and delays

in the commencement in construction of the project.

• The guaranteed loan cannot be subordinate to other debt. In some cases the new

loan is for expansion of an existing facility with prior debt that is still outstanding.

• Payment of fees to cover administrative cost for DOE issuing the guarantee,

servicing and monitoring costs of the DOE, and normal fees charged by the originating lender, are a significant challenge for a start-up or expanding company.

• The subsidy cost of the expected liability to the Federal Government from

issuing the guarantee, which is the estimated net present value at the time the

guaranteed loan is dispersed, is an extreme burden to a start-up or expanding company. The liability would be a result of default payments made to the originating

lender on the loan, due to lack of payment by the company from cash-flow or liquidation of the collateral. The subsidy cost is wholly distinct and separate from fees

for issuing and servicing the loan guarantee. The subsidy fee can either be an appropriation by congress or payment by the borrower.
43

At present, it is our understanding that the borrower is expected to make this

payment and no appropriation has been made. Since we do not intend to bring a

project that we do not expect to be successful, we do not feel a subsidy payment

should be required. Should the DOE, through their analysis, require an upfront cash

subsidy payment, this undo burden may keep the project from moving forward. • The Maximum Loan amount of $25 million is too low. Most renewable energy

projects are now of a capacity in excess of 50 million gallons, with total project costs

in excess of $100 million (current facilities cost $2–$2.25 per gallon to construct). • Loans greater than $5 million require national office approval. (Due to the seasonal nature of construction in cold climates, if the time to receive a commitment

for guarantee is lengthy, the project could be delayed for a full year.)

• The percent of the loan guarantee diminishes to 60 percent for loans greater

than $10 million. Lending institutions see almost no value in a guarantee at the

60 percent level.

• When adding the potential one-time 2 percent fee and the annual renewal fee

for a guarantee to a lender’s typical cost, the total financing costs are excessive and

very challenging for an expanding or start-up company.

• Since in most circumstances ownership is by a large group of rural investors,

personal and corporate guarantees are not possible.

• If the guarantee is contingent upon successful start up, performance guarantees

and no substantial deterioration in financial position, limited or no-value will be

given to the guarantee by a lender considering financing for the project. URLP

• Loans cannot exceed 50 percent of total project costs.

• The maximum loan amount is $10 million. This is too low. (Current ethanol facilities cost $2 to $2.25 per gallon to construct with most project scopes being in excess of 50 million gallons.)

• Loans greater than $5 million can only be guaranteed for a maximum of 70 percent. (This results in a maximum of 35 percent of the total project cost being guaranteed. Fifty percent of the total project costs times 70 percent.) This provides no

value to the lender.

• Loans greater than $5 million require national office approval. (Due to the seasonal nature of building in cold climates, if the time to receive a commitment for

loan guarantee is lengthy, the project could be delayed for a full year.)

• The one-time 1 percent guarantee fee and annual renewal fee along with typical

lender fees result in total financing costs that are very challenging for a start-up

or expanding company.

• Personal and corporate guarantees are not possible due to the large number of

investors and the need to treat investors equally regardless of percent ownership.

The $2 billion DOE loan guarantee program targets broad renewable energy initiatives. Federal loan guarantee programs will be essential to commercialize cellulosic ethanol plants until technology is proven and the industry is matured to a

point where conventional lending is feasible.

As outlined above, we have found challenges with the proposed DOE as well as

the past USDA programs: USDA Business and Industry Loan Guarantee Program,

USDA Renewable Energy Systems and Energy Efficiency Improvements Guarantee

program, and DOE Loan Guarantees for Projects that Employ Innovative Technology in Support of the Advance Energy Initiative. An enhanced program that

draws from aspects of all three programs, we believe, would be acceptable to the

lending community and significantly increase investments in new technologies that

will enable renewable fuels to replace our dependence on imports of fossil fuels.

The following are specific recommendations for a proposed Federal loan guarantee

program supporting the Advanced Energy Initiative:

ELIGIBLE AREAS

• Projects that employ innovative technologies for renewable energy and energy

efficiency.

• Loans can be guaranteed in cities with a population of up to 50,000.

• Priority given to applications for working in rural communities of 25,000 or less.

Eligible borrowers

• Any legal entities, including individuals, public and private organizations and

federally recognized Indian Tribal groups may borrow.

• There is no size restriction on the business. Benefits to the business:

• Assist in bringing new technology to commercial scale much sooner.

• Assist in deploying new technology on a broad scale faster.

• Higher loan amounts, stronger loan application, less equity injection, lower interest rates, and longer repayment terms assist businesses that may not qualify for

conventional lending or financing.
44

• Assist business in stability, growth, expansion, and rural development.

ELIGIBLE LENDERS

Most lenders are eligible, including national and state chartered banks, farm credit system banks, and savings and loan associations. Other lenders, such as insurance companies and mortgage companies may be eligible if approved by

USDA.Benefits to Lenders

• Provide lenders with another tool to expand their loan portfolio.

• Improve the economic and environmental living climate in rural communities.

• Guaranteed and or/un-guaranteed portion can be sold to enhance liquidity and

increase profitability while limiting financial exposure.

• Allows lender to make loans above its loan limits.

ELIGIBLE PROJECT COSTS

• Cost of acquisition, lease or rental of real property, including engineering fees,

surveys, title insurance, recording fees, and legal fees incurred in connection with

land acquisition, lease or rental, site improvements, site restoration, access roads

and fencing.

• Engineering, architectural, legal, and bond fees, and insurance paid in connection with construction of the facility and materials, labor, services, travel and transportation for facility construction start-up and test.

• Equipment purchase and start-up testing.

• Cost to provide equipment, facilities, and services related to safety and environmental protection.

• Financial and legal services and costs, including other professional services and

fees necessary to obtain required licenses and permits and to prepare environmental

report and data.

• Interest cost and other normal charges affixed by lender.

• Necessary and appropriate insurance and bonds of all types.

• Costs of start-up and commissioning.

• Cost of obtaining licenses to intellectual property necessary to design, construct

and operate the project.

• Machinery, equipment and storage facilities to support the collection and storing

of raw materials for the production of cellulosic ethanol.

• Other necessary and reasonable cost approved by the Secretary.

MAXIMUM LOAN AMOUNT

Loans would be limited to a maximum of $200 million per borrower. Loans greater than $10 million require national office concurrence.Loan Guarantee Limits

$160 million (80 percent of $200 million) It is important for all parties involved

in financing or owning renewable energy projects to have something at risk, therefore, POET does not support a 100 percent loan guarantee.

LOAN TO APPRAISE MARKET VALUE RATIOS

• 80 percent Real Estate

• 75 percent receivables

• 75 percent inventory

• 80 percent machinery and equipment

INTEREST RATE

Interest rates for loans may be fixed or variable. The rate is negotiated between

the lender and borrower and will not be more than those rates customarily charged

to other borrowers in similar circumstances. The variable rate must be tied to a nationally published rate. Variable rates cannot be adjusted any more than every 30

days.

BORROWER EQUITY REQUIREMENTS

A minimum of 15 percent tangible balance sheet equity is required for exiting

business. A minimum of 25 percent tangible balance sheet equity is required for

new businesses. Personal and corporate guarantees are not required. Tangible balance sheet equity will be determined accordance with generally accepted accounting

principles (GAAP).
45

MAXIMUM REPAYMENT TERMS

• Working capital—7 years

• Machinery and equipment—10 years or useful life

• Real estate—20 years

• Combination real estate, machinery and equipment—15 yearsFees and Costs

No subsidy costs should be assessed for potential future costs to the Federal Government for making payments due to lack of cash-flow or if upon liquidation, the

proceeds received do not fully repay the loan. A one-time guarantee fee not to exceed

one half of 1 percent of the guarantee principle amount along with an annual renewal fee not to exceed one tenth of 1 percent. It is our belief that a subsidy payment by the borrower defeats the purpose of a guaranteed loan program. Other typical lender costs may also be incurred.

APPRAISALS AND APPRAISAL REPORT

Appraisals and appraisal report prepared by an independent, qualified fee appraiser will be required on property that will serve as collateral. Appraisals will be

made in accordance with the accepted format and standards of the industry.

COLLATERAL

All collateral pertaining to the specific project supported by the guarantee shall

secure the entire loan. Repayment of the loan must be reasonably assured. Personal

and corporate guarantees are not required.

LOSS SHARING

In the event of default if the liquidation of the collateral or cash-flow payments

do not repay the guaranteed and un-guaranteed portions of the loan, shortages

would be shared on a pro-ratio basis, 80 percent of the shortage being paid by the

guarantor and 20 percent of the shortage being covered by the holder of the

unguaranteed portion of the debt.

LOAN COVENANTS/CONDITIONS

Normal and customary commercial lending covenants that are reasonably acceptable to financial institutions. Contingencies of issuing the guarantee based on successful completion and start-up of the project without financial deterioration are not

acceptable. A clause of this type will eliminate the value to a lender since the lender

must commit the loan prior to commencing construction or expansion. The lenders

greatest risk is during construction and start-up.

REPORT

Once the project has been constructed, the lender must provide the agency annual

financial reports from the borrower.

Servicing Liquidation. Knowledgeable and adequate staff resources are essential

to providing prompt response to loan guarantee applications and ongoing loan servicing requests.

Annual financial statements should continue to be required. Lender services and

liquidates with appropriate agency concurrence.

POET is honored to testify to the Energy & Commerce Subcommittee on Energy

& Air Quality. On behalf of the renewable fuels industry, we applaud the Department of Energy’s efforts in supporting the Advanced Energy Initiative through loan

guarantees. Without the enhancements to the loan guarantee program as previously

outlined, the industry would have difficult, and in some cases impassable, financial

barriers to conduct research and development, validate, and commercialize renewable fuels technology, particularly cellulosic ethanol.

Thank you for the opportunity to submit recommendations. POET looks forward

to working in partnership with the Congress and the administration to reach the

national goal of 35 billion gallons of renewable fuel produced per year by the year

2017.

Mr. BOUCHER. Thank you very much, Mr. DeVos. Mr. Crane, we

will be happy to hear from you.
46

STATEMENT OF CHRISTOPHER CRANE, PRESIDENT AND

CHIEF NUCLEAR OFFICER, EXELON GENERATION

Mr. CRANE. Mr. Chairman, Ranking Member Hastert and members of the subcommittee, thank you for the opportunity to be here

today to talk about one of the more important elements of the Energy Policy Act of 2005, the energy loan guarantee program. It is

truly absolutely imperative that this program goes forward with

the right construct to support the development, future development

of new nuclear.

My name is Christopher Crane. I am the president and chief nuclear officer of Exelon Nuclear. We have 17 operating nuclear

plants, which is approximately 20 percent of the U.S. industry.

Exelon is the largest nuclear operator in the United States. Exelon

is currently actively pursuing new nuclear development. We are developing an application for a construction and operating license for

a new nuclear plant. Several sites are being explored for that facility today. In addition, recently we received an early site permit

from the Nuclear Regulatory Commission which certifies our Clinton, IL site where we currently operate one reactor.

I am appearing here today on behalf of Exelon and also on behalf

of the Nuclear Energy Institute. The Nuclear Energy Institute is

the Washington-based policy organization. There i am the chairman of NEI’s New Plant Oversight Committee, which consists of

the chief executives or the chief nuclear officers of the companies

that are planning developing applications for construction and operating license for new facilities.

As I said, the loan guarantees are crucial. The loan guarantees

address the most significant financing challenges facing new nuclear plant construction, the cost of base load projects relative to

size, market value and financing capability of companies that will

build them. New nuclear projects are from $4 billion to $5 billion

undertakings and that is at the least. Although $4 billion to $5 billion projects are not unique to the energy business, such projects

are typically built by larger companies with market bases 10 to 15

times higher than the largest electric companies.

The combined market value of the 16 companies currently developing license applications for new nuclear plants represents approximately one-half the value of ExxonMobil. Even Exelon, my

company, with a market value of approximately of $50 billion, the

largest U.S. electric power company, is not large enough to finance

a single nuclear plant without Federal loan guarantees.

The loan guarantees are equally important for unregulated companies operating in States that have restructured the electrical

power industry and to regulated companies subject to cost of service regulation. In addition, capital markets that will provide debt

financing for new nuclear projects regard loan guarantees as essential to protect investors against potential licensing, regulatory or

political risks associated with new plant construction.

The loan guarantees must cover 100 percent of the project debt.

The Energy Policy Act authorizes the Secretary of Energy to guarantee up to 80 percent of the total loan, total project cost and in

its August 2006 guideline, the energy loan guarantee program, the

Department of Energy determined that the guarantee would cover

only 80 percent of the project debt, not 80 percent of the project
47

cost, which I think has been well-covered here today. This approach

would reduce the value of the guarantee substantially and runs

counter to the Federal loan guarantee program. Currently, the fiscal year 2007 budget includes $238 million in new loan guarantees, $177 billion of those are provided at 100 percent loan coverage. The 2008 fiscal year budget includes $289 billion in loan guarantee commitments and $217 billion provide 100

percent coverage. The program must have rigorous project evaluation criteria. The process of evaluating the projects have to be rigorous, disciplined. It must employ transparency for the project risk

evaluation criteria, similar to commercial banks.

Flexibility is essential. The terms of the project, the structure between the duration of the project. Some projects may need to be

guaranteed for the 30-year term authorized by the Energy Policy

Act and others may have shorter durations. The loan volume limitations must recognize the higher cost of major energy projects.

The President’s budget proposes $9 billion loan volume limitation

with only $4 billion of the $9 billion allotted to large power projects

like nuclear plants.

Given the costs of new energy infrastructure, including the costs

of the generation facilities, a robust, viable loan guarantee program

will require significantly larger amounts of volumes for future fiscal budgets.

In conclusion, the U.S. electric industry faces a major challenge

financing, building the generation assets required, the transmission

and distribution infrastructure necessary to support the U.S. economy’s growth and maintain reliability. And that is why we feel it is

imperative that these issues are addressed to guarantee the

growth.

[The prepared statement of Mr. Crane follows:]

STATEMENT OF CHRISTOPHER CRANE

Chairman Boucher, Ranking Member Hastert, members of the subcommittee,

thank you for the opportunity to appear today to provide the nuclear energy industry’s views on one of the most important elements of the Energy Policy Act of 2005.

The energy loan guarantee program is an absolute imperative to support the financing and construction of new nuclear power plants in the United States. I believe I

speak for the entire electric power industry in thanking this committee of its consistent and even-handed leadership in matters of energy policy and environmental

policy, and I appreciate your interest in ensuring effective implementation of this

loan guarantee program.

My name is Christopher Crane. I am president and chief nuclear officer of Exelon

Nuclear. With 17 nuclear power plants, approximately 20 percent of the U.S. nuclear fleet, Exelon is the largest nuclear operator in the United States. Exelon is

also actively pursuing new nuclear development: We are developing an application

for a construction/operating license for a new nuclear plant, and are exploring several potential sites for that facility. In addition, we recently received an early site

permit from the Nuclear Regulatory Commission, which certifies that our site in

Clinton, Illinois, where we operate one nuclear reactor, meets all necessary criteria

for construction of a new nuclear unit.

I am appearing today on behalf of Exelon and on behalf of the Nuclear Energy

Institute, the nuclear industry’s Washington-based policy organization. I am Chairman of NEI’s New Plant Oversight Committee, which consists of the chief executives or chief nuclear operating officers of the companies that are developing applications for construction/operating licenses (COLs) for new nuclear power plants.

NEI’s New Plant Oversight Committee is charged with establishing industrywide

consensus on regulatory, financial and other significant policy issues associated with

new nuclear plant development. The New Plant Oversight Committee has various

Task Forces focusing on specific issues related to new nuclear plant development,
48

including a Finance Task Force, which has been deeply involved in implementation

of the energy loan guarantee program.

Nuclear energy is a strategic national asset, and new nuclear power plants are

essential if the United States hopes to meet its energy and environmental goals.

Consider the following facts:

Nuclear power is essential in any program to reduce greenhouse gas emissions.

The average nuclear plant avoids seven million metric tons of carbon dioxide (CO2)

each year. The 682 million metric tons prevented by America’s 103 nuclear power

plants in 2005 is equal to the annual emissions from 96 percent of the country’s passenger cars. In addition, nuclear power plants also avoid emissions of criteria pollutants like sulfur dioxide, nitrogen oxides and mercury, thereby reducing the clean air

compliance burden and costs that would otherwise fall on power plants and industries burning fossil fuels. Nuclear power plants can reduce pressure on natural gas

supply, thereby helping to mitigate the volatility in natural gas prices. Compared

to an equivalent-size gas-fired power plant, a 1,000-megawatt nuclear plant saves

approximately 54 billion cubic feet of natural gas per year, enough natural gas to

serve over 600,000 residential customers.

Construction and operation of a new nuclear power plant will provide substantial

employment—1,400–1,800 jobs during construction on average (with peak employment as high as 2,400 jobs at certain times), and 400–700 permanent jobs when the

plant is operating. These permanent jobs pay 36 percent more than average salaries

in the local area. The 400–700 permanent jobs at the nuclear plant create an equivalent number of additional jobs in the local area to provide the goods and services

necessary to support the nuclear plant workforce.

My Statement for the Record covers four major areas:

• The purpose and value of loan guarantees in supporting private sector investment, and the unique features of the energy loan guarantees provided by title XVII

of the Energy Policy Act;

• The critical importance of loan guarantees in supporting the financing of new

nuclear generating capacity in the United States;

• The nuclear energy industry’s perspective on the minimum conditions necessary

for a successful energy loan guarantee program, and

• The nuclear industry’s concerns about implementation of this program by the

Executive Branch in the 20 months since enactment of the Energy Policy Act of

2005.

THE PURPOSE AND VALUE OF LOAN GUARANTEES

Federal loan guarantees are widely used by the Federal Government to support

financing of projects that (1) have substantial public value, and (2) would not otherwise be able to secure financing on reasonable terms. Federal loan guarantees are

used for ongoing programs—to support rural electrification, development of transportation infrastructure, shipbuilding, low-income housing and, through agencies

like the Export-Import Bank and the Overseas Private Investment Corporation, to

support U.S. companies developing projects overseas. Federal loan guarantees are

also periodically used in specific emergency situations—as they were after the September 11, 2001, terrorist attacks to support the U.S. airline industry. Title XVII

of the 2005 Energy Policy Act authorizes the Secretary to provide guarantees for

up to 80 percent of project cost for projects that (i) avoid, reduce or sequester air

pollutants or greenhouse gases, and (ii) employ new or significantly improved technologies.

At the end of the 2006 fiscal year, $1.12 trillion in Federal loan guarantees were

outstanding, and the President’s fiscal year 2008 budget projects $290 billion in new

loan guarantee commitments. The President’s fiscal year 2008 budget proposes $9

billion for the DOE title XVII Loan Guarantee Program, which represents 3 percent

of new government-wide loan guarantee commitments projected in fiscal year 2008,

and less than 1 percent of the current portfolio of outstanding Federal loan guarantees.

Under the Federal Credit Reform Act (FCRA) of 1990, loan guarantees are scored

in the Federal budget on a risk-adjusted basis, based on the budget subsidy cost

methodology specified in FCRA. The actual amount of new Budget Authority to

cover new loan guarantee commitments in fiscal year 2008 is $2.7 billion (or less

than 1 percent of the face value of the new loan guarantee commitments). The budget subsidy cost represents the net present value of the risk-adjusted cost to the government of the loan guarantee at the time it is issued—e.g., the net present value

of the loan payoff in the event of a default, less any fees paid by the project to the

government and any recoveries (from pledged collateral) made by the government
49

in the event of a default. In this calculation, both the loan payoff amount and any

recoveries are estimated on a risk-adjusted basis—i.e., the face amounts are adjusted by the probability of a default.

The title XVII loan guarantee program is unique among Federal loan guarantee

programs in that project developers are expected to pay the budget subsidy cost of

the loan guarantee. This ‘‘self-pay’’ or ‘‘user-financing’’ feature offsets the risk-adjusted cost to the government of providing the guarantee. The self-pay amount is

retained by the government regardless of whether the project defaults or not. If

there is no default, the self-pay amount represents a financial return to the Treasury for agreeing to assume the risk during the period that the guarantee was in

effect. Given a rational approach to implementation, in which projects are selected

based on a high likelihood of commercial success with the loan guarantees, there

will be minimal risk of default and therefore minimal risk to the taxpayer.

The title XVII loan guarantee program is a financing tool, which should be modeled on the successful financing practices already employed by the Federal Government (through such agencies as the Export-Import Bank and the Overseas Private

Investment Corp.). By allowing projects to overcome the barriers that preclude private financing, the loan guarantee program is designed to stimulate investment in

high-capital-cost projects that are in the nation’s best interest because they improve

U.S. energy security, meet growing electricity demand, reduce emissions, accelerate

the commercialization of advanced technologies, and ensure the reliable operation

of the electricity system.

In addition, loan guarantees provide substantial consumer benefits. The cost of

electricity to all consumers—residential, commercial and industrial—will increase

significantly in the years ahead, due to sustained upward pressure on natural gas

prices, and heavy capital investment in new transmission facilities, environmental

control technologies, and new generating capacity. A sustained period of upward

pressure on electricity prices has negative implications for U.S. economic growth

and the competitiveness of American industry in a global marketplace. An effective

loan guarantee program can reduce electricity costs significantly, providing substantial benefits to electricity consumers. For example, according to financial modeling

performed by the Nuclear Energy Institute:

(1)A new nuclear plant with an overnight capital cost of just over $2,800 per kilo- watt will produce electricity for approximately $84.00 per megawatt-hour in its first

year of operation, if the plant is financed with equal amounts of debt and equity

(assuming debt financing was available for such a project, which is unlikely).

(2) The same plant, with a Federal loan guarantee for 80 percent of project cost, will produce electricity in its first year for approximately $59 per megawatt-hour,

because of the higher leverage and the fact that debt is less costly than equity.

(3) The plant financed with a loan guarantee thus delivers a consumer benefit of $25 per megawatt-hour, or approximately $275 million per year for the average new

nuclear plant.

THE CRITICAL IMPORTANCE OF LOAN GUARANTEES IN SUPPORTING THE FINANCING OF

NEW NUCLEAR GENERATING CAPACITY

It will be a formidable challenge to finance the advanced electric generating technologies needed to (1) meet growing U.S. demand for baseload electricity over the

next 15 to 20 years, (2) increase energy independence, and (3) meet more stringent

environmental standards.

The new nuclear plants now in the early stages of development are capital-intensive projects and will require a level of capital investment that will strain the financing capability of the U.S. electric sector, particularly since that investment in

new generating capacity coincides with a period of heavy capital investment by the

electric sector in transmission, distribution and environmental control technologies.

Consensus estimates suggest that the industry, over the next 15 years, must invest

between $750 billion and $1 trillion in new generating capacity, new transmission

and distribution infrastructure and environmental controls. This new capital spending represents a major challenge to the electric power industry.

All of these investments are necessary to ensure the continued safe and reliable

operation of the United States electricity system.

Addressing this challenge successfully will require innovative approaches to financing, combining all the financing capabilities and tools available to the private

sector, the Federal Government and State governments.

The loan guarantee program authorized by title XVII of the Energy Policy Act of

2005 is one of those tools and is essential to support the financing of new nuclear

plants. The loan guarantee program will allow companies to employ project financing on a non-recourse basis. The ability to use non-recourse project finance struc-
50

tures offsets the most significant financing challenge facing new baseload power

plant construction—the cost of baseload projects relative to the size, market value

and financing capability of companies that will build them. New nuclear projects are

$4–5 billion undertakings at least. Although $4–5 billion projects are not unique in

the energy business, such projects are typically built by much larger companies with

market values 10–15 times higher than the largest electric companies. All the companies that have announced plans for new nuclear power plants have a combined

market value only slightly more than one-half the market value of ExxonMobil.

Even Exelon, my company, with a market value of approximately $40 billion, is not

large enough to finance a single nuclear plant without the Federal loan guarantees.

Project financing, supported by loan guarantees, also allows a more efficient, leveraged capital structure to reduce project cost by lowering the weighted average

cost of capital, and thus provides a substantial consumer benefit in the form of

lower electricity prices. Loan guarantees also mitigate the impact on the balance

sheet of these large capital projects which would otherwise place stress on credit

quality and bond ratings.

Loan guarantees are equally important to unregulated companies, operating in

states that have restructured their electric power industries, and to regulated companies subject to cost-of-service regulation. Unregulated companies will be hardpressed to build nuclear power plants and other large capital-intensive baseload

projects except on a project finance basis with the debt financing secured by the

Federal Government. Unregulated companies do not have the capacity to finance

these projects on balance sheet without access to project finance structures. Some

regulated companies, especially those pursuing multiple generating and transmission projects at the same time, may also be limited in their ability to finance

projects without project finance capability because of substantial pressure on credit

quality and debt ratings.

In addition, the capital markets that will provide the debt financing for new nuclear projects regard loan guarantees as essential to protect investors against potential licensing, regulatory and political risks associated with new nuclear plant construction.

The 2005 Energy Policy Act included several incentives designed to stimulate investment in new nuclear power plants. These incentives were provided as a package

to address different risks associated with new nuclear power plants. Our analysis

of new nuclear plant financing, and our discussions with the banking community

since the passage of the 2005 energy legislation, suggests that the loan guarantee

program is clearly the most important of all the incentives in the Energy Policy Act.

The Act provided a production tax credit for nuclear plants that file applications

for construction/operating licenses before the end of 2008 and start construction by

the beginning of 2014. These credits will improve the financial attractiveness of a

nuclear project when it is in commercial operation, and help offset the economic risk

associated with the first projects. Our major challenge is construction financing,

however, and the construction period is when a new nuclear project most needs investment support. The production tax credit does not help address the construction

risks and financing challenge during construction.

The Energy Policy Act also provides a form of insurance—called standby support—to protect project developers against delays caused by licensing or litigation

over which they have no control. But this insurance protection is severely limited.

The insurance covers debt service up to certain limits for a limited period of time,

but would not cover other substantial costs borne by a nuclear plant subject to a

delay in commercial operation. Although standby support addresses a limited portion of the risk associated with potential delays experienced by the first six plants,

I do not believe the standby support will be a critical factor in any board of directors’ decision to authorize construction of a nuclear power plant.

The loan guarantee program is, therefore, the single most important instrument

provided by the Energy Policy act to support financing of new nuclear generating

capacity. Yet we are almost two years past passage of the Energy Policy Act, and

we still do not have final regulations to implement the loan guarantee program, the

Department of Energy does not have staff to evaluate projects, neither the Congress

or the White House have provided sufficient loan authorization to support even one

new nuclear plant, and we have no idea what a loan guarantee will cost.

NUCLEAR ENERGY INDUSTRY PERSPECTIVE ON THE MINIMUM CONDITIONS NECESSARY

FOR A SUCCESSFUL ENERGY LOAN GUARANTEE PROGRAM

The loan guarantee must cover 100 percent of project debt. The Energy Policy Act

authorizes the Secretary of Energy to guarantee up to 80 percent of total project

cost. In its August 2006 Guidelines for the energy loan guarantee program, the De-
51

partment of Energy determined that the guarantee would cover only 80 percent of

the project debt, not 80 percent of the project cost. This approach would reduce the

guarantee to ‘‘80 percent of 80 percent’’—e.g., only 64 percent of the total project

cost would be covered by the guarantee. The investment banks that will provide the

debt financing for new nuclear projects have indicated that it will not be possible

to fund the remaining ‘‘20 percent of 80 percent’’ in the un-guaranteed debt markets

on commercially reasonable terms.

In addition, there is no basis in law or administrative practice for restricting the

guarantee to 80 percent of project debt. The policy limiting coverage under Federal

loan guarantees to 80 percent of the loan amount is an administrative guideline in

OMB Circular No. A–129. It is not a statutory requirement, and the Federal Credit

Reform Act of 1990 does not address the issue of percentage loan coverage for Federal loan guarantees.

OMB Circular A–129 )part II, section 3a) states that ‘‘[p]rivate lenders who extend

credit that is guaranteed by the Government should bear at least 20 percent of the

loss from a default’’ (emphasis added). Thus, the policy is not mandatory but suggestive in nature. Circular A–129 also provides flexibility in the application of the

guideline on 80 percent loan coverage. It states: ‘‘The policies and standards of this

Circular do not apply when they are statutorily prohibited or are inconsistent with

statutory requirements’’ (emphasis added). The guideline for 80 percent coverage of

debt is inconsistent with the requirement in EPAct section 1702 (c), which authorizes that ‘‘a guarantee by the Secretary shall not exceed an amount equal to 80 percent of the project cost.’’ The application of Circular No. A–129 would prevent the

Secretary from ever reaching the statutory cap. Administrative practice in other

Federal loan guarantee programs also allows for flexibility in setting loan guarantee

limits up to statutory caps.

The fiscal year 2007 budget included $238 billion in new loan guarantee commitments; $177.2 billion of that provided 100 percent loan coverage. The fiscal year

2008 budget proposal included $289 billion in new loan guarantee commitments;

$217 billion of that provided 100 percent loan coverage. Clearly, 100 percent coverage of the debt portion of the financing is the rule in Federal loan guarantee programs, and the approach taken by DOE in its August 2006 Guidelines is an egregious exception to that rule.

The Program Must Have Rigorous Project Evaluation Criteria. The process of

evaluating projects and selecting those that qualify for loan guarantees must be rigorous and disciplined, employing transparent project finance risk evaluation criteria

of the kind used by commercial banks, rating agencies, and other government agencies (like the Export-Import Bank) that operate successful loan guarantee programs.

We believe the Department of Energy should focus the loan guarantee program

design on credit analysis and underwriting of the kind any bank would employ to

lend money. We believe the pending rulemaking should establish a set of risk-based

evaluation criteria to ensure that credit risks are rigorously analyzed, quantified,

scored and appropriately priced or mitigated. The Department then should have the

flexibility, as provided in the statute, to structure loan guarantees that will enhance

the statutory objective of commercializing innovative technologies, with projects that

are financially sound and have the financial capacity to repay the underlying loan

obligation guaranteed by the U.S. government. This process would be supplemented

by third-party consultants and reports that are standard for project financings, such

as independent engineers, fuel consultants, insurance advisors and market studies.

This approach, using rigorous credit analysis and risk assessment, will minimize

taxpayer risk.

Flexibility is essential. The implementing regulations should provide a high degree of flexibility—e.g., on the term of the loan of the guarantee, and the percentage

of debt in the project. This will allow project sponsors to structure projects as best

suits their needs. Different technologies and different companies will wish to employ

different levels of debt in their project capital structure. Different technologies and

companies may choose different durations for the loan guarantee—in some cases,

projects may need a guarantee for the full 30-year term authorized by the Energy

Policy Act, while others will need a shorter duration. Such differences in project capital structure, percentage of debt being guaranteed and duration of the guarantee

should be reflected in the credit subsidy costs paid by the project sponsor.

Subsidy cost and calculation. The implementing regulations should include a

transparent methodology to calculate the credit subsidy cost that will be paid by the

project as a loan guarantee fee, and that subsidy cost should be reasonable and commercially viable, in line with those of other Federal loan guarantee programs.

Project sponsors should be allowed to include the credit subsidy cost as part of the

total project cost, and finance it over the term of the guarantee. This is standard
52

practice in other Federal loan guarantee programs, including the Export-Import

Bank.

The Loan Volume Limitation Must Recognize the High Cost of Major Energy Projects. The President’s fiscal year 2008 budget proposes a $9-billion loan volume

limitation, with only $4 billion of the $9 billion allocated to large power projects like

nuclear power plants. Given the cost of new energy infrastructure projects (including new nuclear plants, coal gasification plants and coal-to-liquids projects), a robust

and viable loan guarantee program will require significantly larger annual loan volumes in future fiscal years.

NUCLEAR INDUSTRY CONCERNS ABOUT IMPLEMENTATION OF THE LOAN GUARANTEE

PROGRAM TO DATE

On August 8, 2006, the Department of Energy published initial guidelines (DOE

Guidelines) under which it will implement the loan guarantee program, accompanied by an initial solicitation for projects. Nuclear projects were not included in

the initial solicitation. The Department indicated that nuclear projects will be covered by formal regulations to be developed over the next year.

In terms of supporting financing of new nuclear and advanced coal-based baseload

power plants, the DOE Guidelines significantly erode the value of the loan guarantee program authorized by title XVII. The procedures outlined in the guidelines are

so restrictive that they would not support construction and financing of new baseload power plants. If the regulations now being developed mirror the guidelines published in August 2006, the loan guarantee program would not support new advanced

nuclear power plants, and will thus fail to fulfill part of the statutory intent to spur

construction of new, cleaner baseload capacity.

The industry’s major sources of concern with the August 2006 DOE Guidelines are

discussed below.

EPAct title XVII authorizes loan guarantees up to 80 percent of total project cost.

The DOE Guidelines limit coverage to 80 percent of the loan amount (80 percent

of 80 percent), with flexibility to guarantee above 80 percent, but never 100 percent.

Industry Position. There is no basis in law or administrative practice for restricting the guarantee to 80 percent of project debt. If incorporated into the implementing regulations, this restriction would reduce the value of the loan guarantees by

approximately one-half, increase the project’s capital costs and thereby compromise

project economics.

As discussed above, the policy limiting coverage under Federal loan guarantees

to 80 percent of the loan amount is an administrative guideline, not a statutory requirement. Administrative practice in other Federal loan guarantee programs also

allows for flexibility in setting loan guarantee limits up to statutory caps.

Any commercial debt brought into a project must be subordinate to the government-guaranteed debt. Pari passu financing structures would be prohibited under

the DOE Guidelines.

Industry Position. It is not uncommon in Federal Government loan guarantee programs to have a second tranche of non-guaranteed commercial debt in a project. Any

such commercial debt is, however, typically pari passu with the guaranteed debt.

The requirement in the DOE Guidelines that any commercial debt must be subordinate to the guaranteed debt will significantly restrict the interest of commercial

lenders and the availability of financing for the program, especially in view of the

size of the projects. By making this program less attractive to top-tier lenders and

effectively requiring more expensive sub-debt financing structures, the financeability

of a project is significantly compromised. Furthermore, the guidelines appear to prohibit the substitution of equity for the unguaranteed portion of debt. As a result,

this restriction could actually erode a project’s creditworthiness, rather than enhancing the credit structure.

The DOE Guidelines should clarify that the guaranteed debt is non-recourse beyond the project.

Industry Position. The statute makes clear (section 1702(g)(4)(B)) that, in the

event of default, the loan guarantee is non-recourse beyond the project: ‘‘If the borrower defaults on an obligation, the Secretary shall notify the Attorney General of

the default ’’. On notification, the Attorney General shall take such action as is appropriate to recover the unpaid principal and interest due from—(i) such assets of

the defaulting borrower as are associated with the obligation; or (ii) any other security pledged to secure the obligation.’’

This non-recourse provision is essential for successful project finance structures.

If the guaranteed loan is recourse beyond the project—e.g., to the balance sheet of

a project sponsor—the rating agencies will impute that debt to that project sponsor’s

balance sheet, and require the company to increase the amount of equity in its cap-
53

ital structure in order to maintain its overall debt rating. This would offset much

of the economic benefit of the guarantee.

The DOE Guidelines, however, are equivocal on the issue of recourse, at best. The

Guidelines require the Secretary of Energy, before finalizing a loan guarantee agreement, to ensure that ‘‘the prospective borrower has pledged project assets and other

collateral or surety, including non-project-related assets, as determined by the Secretary to be necessary as assurance for the repayment of the loan.’’ The implementing regulations should clarify that guaranteed loans will require security in only the

project assets, contracts and agreements.

A project sponsor should, at its discretion, have the flexibility to pledge additional

assets or other forms of security as collateral (e.g., to reduce the credit subsidy cost

of the loan guarantee), and the implementing regulations should provide this flexibility.

The DOE Guidelines require a project sponsor to obtain a credit assessment of

the project in the absence of the loan guarantee from a nationally recognized debtrating firm.

Industry Position. Because the loan guarantee will be a critical factor affecting the

project’s economics—e.g., interest costs and leverage factor—and since the industry

believes it would be impossible to obtain financing for an advanced nuclear project

with 80percent leverage absent the Federal loan guarantee, obtaining a credit assessment for the project without the guarantee is not likely to be useful. Such an

assessment would likely demonstrate why these innovative technologies require loan

guarantees to obtain financing. It would be more appropriate to evaluate the creditworthiness of the project taking into account the loan guarantee. An independent

analysis of the project by consulting engineer or other reputable firm would provide

more relevant information for assessing project viability and risk. In fact, such an

analysis would be required by the lenders in order to evaluate the project.

The rating agency requirement represents an unnecessary expenditure of time

and funds. To the extent that DOE requires a third-party credit assessment of the

project as part of its credit analysis, or in the determination of Subsidy Cost, project

sponsors should not be limited to utilizing one of the rating agencies and should

have the ability to obtain the credit assessment from other acceptable independent

firms.

The DOE Guidelines exclude the subsidy cost as well as fees paid for administrative costs from project cost.

Industry Position. The DOE Guidelines exclude the subsidy cost and the fees paid

for administrative costs of issuing a loan guarantee from the definition of project

cost. These costs are financing costs incurred and expended by the sponsors and

should be included in project cost. These exclusions are inconsistent with the treatment of similar costs in commercial project financing and in other Federal programs. For example, the exposure fee charged by Ex-Im Bank is not only counted

as a project cost, but borrowers can elect to have that cost financed under the ExIm Bank loan or loan guarantee.

CONCLUSION

The U.S. electric power industry faces a major challenge in financing and building

the generation, transmission and distribution infrastructure necessary to support

U.S. economic growth and maintain reliability. Simply maintaining nuclear power

at its current position—approximately 20 percent of U.S. electricity supply— will require construction of 50,000 megawatts of new nuclear generating capacity (approximately 35 large plants) by 2030. The U.S. nuclear industry is positioning itself to

meet this challenge: 16 companies or groups of companies are now preparing license

applications for as many as 30 new nuclear plants.

An effective loan guarantee program is essential to maintain this momentum.

Given the cost of new nuclear power plants relative to the size of the companies

that will build them, and given lenders’ unwillingness to provide debt financing to

new nuclear plants in the fact of unknown licensing and regulatory risks, the energy

loan guarantee program is essential to support financing of a limited number of new

nuclear plants. When investors gain confidence that these projects can proceed

through construction and into commercial operation without regulatory or political

interference, it is likely that the private capital markets will be prepared to undertake nuclear plant financing without the Federal credit support authorized by title

XVII of the Energy Policy Act.

Mr. BOUCHER. Thank you very much, Mr. Crane, and thanks to

all of our witnesses for their testimony here this afternoon. The
54

subcommittee very shortly, within approximately the next 6 weeks,

will begin constructing legislation that is designed to enhance

American energy self-sufficiency. Key among our objectives will be

to promote domestic alternatives to petroleum for transportation

fuels and we have heard from a number of cellulosic ethanol producers and we heard from yet another here today about the importance of the Federal loan guarantee program to that objective. But

it is important for a broad range of energy companies, including

those represented here at the table and others.

As you have heard in our questions to Mr. Spurgeon, there is

general dissatisfaction on this subcommittee with the pace at

which the loan guarantee program has been implemented by DOE

to date and we would like to take appropriate steps in order to address those concerns. So in anticipation of the legislation we will

soon be writing in this committee and taking to the House floor,

there will be an opportunity for correction to the loan guarantee

program.

Today I would like to solicit your recommendations, if you have

any, for steps that we could take legislatively that would accelerate

the award of loan guarantees, improve on the program as you have

heard it described by Mr. Spurgeon and your recommendations

with regard to steps we could take would be very welcome. So if

you have some suggestions, we would like to hear those. Any takers? Yes, Ms. Jorgensen.

Ms. JORGENSEN. Thank you, Mr. Chairman. One recommendation we have with respect to our specific project is because of the

specific authorization language in EPAct and the set aside of the

budget authority, what we would like to see happen now that the

DOE has the program established is a concurrent development of

our guarantee alongside of the regulations, so we could be going

through the due diligence process, getting our scoring completed

and getting a loan guarantee structured.

It couldn’t be issued until the regulations are final, but we could

move alongside on a parallel path. That is one wish that would

really change our in-service date and change the date we can start

construction. As you develop a project, things kind of move around

in terms of what your longest lead time item is and as described

today, I would say this implementation of our loan guarantee has

now become our longest lead time item. Thank you.

Mr. BOUCHER. Thank you very much. So you are asking for what

amounts to early action on the part of DOE before the loan guarantees can actually be issued in order to begin the, perhaps, informal

process of reviewing and giving advice with regard to applications.

Does that summarize your request?

Ms. JORGENSEN. That is right, Mr. Chairman. In implementing

something as complicated as a loan guarantee program, I think the

devil is always in the details when you are doing financing and

when you actually delve into a project and structure a guarantee,

you are going to identify the issues that, in an abstract reg-making

process, you would never even stumble upon.

Mr. BOUCHER. All right. Well, that is a good suggestion and I appreciate your making that. Mr. Crane.

Mr. CRANE. We felt the initial Act was sufficient, but it seems

that clarification may be required on the volume limits. They seem
55

to be more restrictive than when it was interpreted. We have already talked about the 80 percent of the total loan being required.

If that may be helpful to bring the Department along further, those

would be the two major items. There has to be some understanding

that for the nuclear industry, we are not sure if it is five plants,

10 plants or 15 plants that is going to give the certainty to the

market to be able to bring in the market participation but there

will also have to be an understanding that it has be sustainable

construction successfully prior to this program being terminated.

Mr. BOUCHER. So you are asking for clarification that 80 percent

means 80 percent, not some lesser number?

Mr. CRANE. Definitely.

Mr. BOUCHER. All right, thank you. Mr. DeVos.

Mr. DEVOS. Thank you. Two items that I would take a look at

in the legislation are the fact that a first priority lien is required.

My background is, I spent 30 years in lending by requiring the first

lien for the guaranteed portion of the loan, you are putting the

lender in a subordinate position on the un-guaranteed portion of

the loan, that, I do not believe, would be acceptable for the lender.

The second one would be the subsidy required the future costs to

the Government in the case of default. I think it would be extremely difficult and be biased if I were to be requested to project

what you are going to lose. I would say I wouldn’t do this project

if I thought I was going to lose money.

Mr. BOUCHER. All right, thank you very much. My time has expired. I am pleased to recognize the gentleman from Illinois for 5

minutes.

Mr. HASTERT. Mr. Cosgrove, I was somewhat, again, perturbed

listening to your testimony. If I understood right, you said you

were going to have a very difficult time projecting what the losses

are because you really don’t know what the losses are going to be

and in fact, in this type of thing there never have been any losses,

but yet you have to do that, accumulate what the cost of those

losses may be so you can count them against the cost of those people who are borrowing the money. Is that correct?

Mr. COSGROVE. That is correct.

Mr. HASTERT. So if there have never been any losses and we

don’t have a history, isn’t there some type of actuarial thing that

you can go to if you don’t know? To me, it seems like you are a

Government agency. If you don’t know, you just make it so difficult

that people won’t do it.

Mr. COSGROVE. No, this is not an impossible task, it is just that

it is a difficult one and one that must be done carefully. These

loans, we think, are probably more difficult to estimate the subsidy

costs for because they are larger loans and therefore——

Mr. HASTERT. They are not really loans, they are loan guarantees, right?

Mr. COSGROVE. They are loan guarantees. What we were concerned with is that DOE had not started the process of putting in

place the mechanism for how they were going to do these, come up

with these estimates. Obviously, other agencies do make these

kinds of estimates. We have done, over the years, a number of reports on agencies like the Maritime Administration and their ef-
56

forts to estimate subsidy cost. Those are also for large loans, large

loan guarantees. It is not impossible; it is difficult to do and——

Mr. HASTERT. Well, if I might interrupt you and I understand

that it is difficult to do, but it was pretty obvious, from the Department of Energy, that they weren’t sure what they were going to do,

either. I am not sure if they understood what they have to do. But

the fact is, my question was isn’t there any kind of an experience?

You said there was, that you could go to an actuarial information

on past coal projects or past nuclear projects.

Mr. COSGROVE. I assume that there is. That was beyond the

scope of our work and so it is not something specifically that I have

to recommend to you today.

Mr. HASTERT. Let me ask you another question. Do you think

that the GAO finding issued Friday that the DOE violated the

Anti-Deficiency Act will delay the implementation of the program?

Mr. COSGROVE. That opinion came out of our General Counsel’s

office and I am not prepared to talk about the details of that. I do

have with me Susan Poling from our General Counsel’s office who

could answer questions. My understanding, however, is that that

opinion applied to the past. Going forward, DOE has what it needs,

both in terms of funds and authority to operate at least——

Mr. HASTERT. So you are not prepared to make a guess, I guess,

as the gentleman before said whether it was going the implementation of the program or not?

Ms. POLING. Mr. Hastert, I am Susan Poling. I am Associate

General Counsel at the GAO and was part of the team that issued

that opinion. And I would say definitely that it should not delay,

in any way, their going forward, because as of February 15, they

have the appropriation, they have the amount, $4 million, and they

also have the appropriation for their administrative costs.

Mr. HASTERT. Thank you. That is the most concise answer I have

had all day. Appreciate it. Mr. DeVos, is there a drop dead date

when you, if you don’t get a loan guarantee, your project can’t go

forward?

Mr. DEVOS. No, because we will pursue other alternatives, which

will probably cost us higher interest rates on and so forth.

Mr. HASTERT. So if you don’t have that Government guarantee

that we mandated in 2005 laws, you are going to have to go someplace else?

Mr. DEVOS. Yes.

Mr. HASTERT. Mr. Crane, I understand that the administration

believes that it is important for the private sector having a substantial financial interest in ensuring that the viability of these

projects exist. For a $5 billion nuclear project, the project sponsor

would have to have a billion dollar equity at risk, assuming a loan

guarantee of 80 percent of the project costs. Do you agree that a

billion dollars is sufficient to ensure the project sponsor’s commitment to succeed?

Mr. CRANE. It is more than sufficient to ensure it will succeed.

For our company, that is almost a year’s bottom line.

Mr. HASTERT. In the event of a default, the equity investors receive no protection under a DOE title XVII loan guarantee. Their

$1 billion investment is fully at risk. Doesn’t provide a strong in-
57

centive, as you said, to ensure that the risk associated with the

projects are fully evaluated and protected?

Mr. CRANE. We do. And the first recourse goes back to the equity

holder.

Mr. HASTERT. Thank you. I yield back.

Mr. BOUCHER. Thank you very much, Mr. Hastert. The gentleman from Illinois, Mr. Shimkus.

Mr. SHIMKUS. And I can be real quick. It is just a quick question

for Ms. Jorgensen. Did I hear you correctly in saying that your biggest obstacle right now is the fact that the Federal bureaucracy has

not given you certainty on a loan guarantee program?

Ms. JORGENSEN. Congressman, that is one of our issues that our

project faces. The hardest thing for us, when you get to this point

in the schedule, is that if you don’t know with certainty when the

loan guarantee will be issued, you can’t get to the final stage of

your engineering and procurement process, which is a 12-month

process, so until you can estimate when you are going to land,

when the loan guarantee could be issued, you can’t move to that

final financing.

Mr. SHIMKUS. So I take that as a yes?

Ms. JORGENSEN. Yes.

Mr. SHIMKUS. That’s your biggest obstacle is the loan guarantee

program. We are really excited about IGCC programs and I hope

we can move expeditiously to get this thing resolved. That is all,

Mr. Chairman. I yield back.

Mr. BOUCHER. Thank you very much, Mr. Shimkus. My thanks

to each of our witnesses. Your testimony has been extremely helpful to us today. There may be some follow-up questions that we will

propound to you by letter and if so, your expeditious response

would be appreciated. With the committee’s thanks to our witnesses, this hearing stands adjourned.

[Whereupon, at 4:50 p.m., the subcommittee was adjourned.]

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