[Federal Register: October 23, 2007 (Volume 72, Number 204)]
[Rules and Regulations]
[Page 60115-60145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23oc07-9]
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Part III
Department of Energy
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10 CFR Part 609
Loan Guarantees for Projects That Employ Innovative Technologies; Final
Rule
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DEPARTMENT OF ENERGY
10 CFR Part 609
RIN 1901-AB21
Loan Guarantees for Projects That Employ Innovative Technologies
AGENCY: Office of the Chief Financial Officer, Department of Energy.
ACTION: Final rule.
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SUMMARY: On May 16, 2007, the Department of Energy (DOE or the
Department) published a Notice of Proposed Rulemaking and opportunity
for comment (NOPR) to establish regulations for the loan guarantee
program authorized by Title XVII of the Energy Policy Act of 2005
(Title XVII or the Act). Title XVII authorizes the Secretary of Energy
(Secretary) to make loan guarantees for projects that ``avoid, reduce,
or sequester air pollutants or anthropogenic emissions of greenhouse
gases; and employ new or significantly improved technologies as
compared to commercial technologies in service in the United States at
the time the guarantee is issued.'' Title XVII also identifies ten
categories of technologies and projects that are potentially eligible
for loan guarantees. The two principal goals of Title XVII are to
encourage commercial use in the United States of new or significantly
improved energy-related technologies and to achieve substantial
environmental benefits. DOE believes that commercial use of these
technologies will help sustain and promote economic growth, produce a
more stable and secure energy supply and economy for the United States,
and improve the environment. Having considered all of the comments
submitted to DOE in response to the NOPR, the Department today is
issuing this final rule.
DATES: Effective Date: This rule is effective upon October 23, 2007.
FOR FURTHER INFORMATION CONTACT: David G. Frantz, Director, Loan
Guarantee Program Office, Office of the Chief Financial Officer, 1000
Independence Avenue, SW., Washington, DC 20585-0121, (202) 586-8336, e-
mail: lgprogram@hq.doe.gov; or Warren Belmar, Deputy General Counsel
for Energy Policy, Office of the General Counsel, 1000 Independence
Avenue, SW., Washington, DC 20585-0121, (202) 586-6758, e-mail:
warren.belmar@hq.doe.gov; or Lawrence R. Oliver, Assistant General
Counsel for Fossil Energy and Energy Efficiency, Office of the General
Counsel, 1000 Independence Avenue, SW., Washington, DC 20585-0121,
(202) 586-9521, e-mail: lawrence.oliver@hq.doe.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction and Background
II. Public Comments on the Notice of Proposed Rulemaking and DOE's
Responses
A. Technologies
1. Definition of New or Significantly Improved Technologies
2. Definition of Technologies in General Use
3. Nuclear Generation Projects
B. Financial Structure Issues
1. Lender Risk, Stripping and Pari Passu
2. Equity Requirements for Project Sponsors
3. Other Governmental Assistance
4. Credit Assessment and Rating Requirements
C. Project Costs
D. Solicitation
E. Payment of the Credit Subsidy Cost
F. Assessment of Fees
G. Eligible Lenders and Servicing Requirements
H. Federal Credit Reform Act of 1990 (FCRA)
I. Default and Audit Provisions
J. Tax Exempt Debt
K. Full Faith and Credit
L. Responses to August 2006 Solicitation
M. Other Issues Raised in the Public Comments
III. Regulatory Review
A. Executive Order 12866
B. National Environmental Policy Act of 1969
C. The Regulatory Flexibility Act
D. Paperwork Reduction Act
E. Unfunded Mandates Reform Act of 1995
F. Treasury and General Government Appropriations Act, 1999
G. Executive Order 13132
H. Executive Order 12988
I. Treasury and General Government Appropriations Act, 2001
J. Executive Order 13211
K. Congressional Notification
L. Approval by the Office of the Secretary of Energy
I. Introduction and Background
Today's final rule establishes policies, procedures and
requirements for the loan guarantee program authorized by Title XVII of
the Energy Policy Act of 2005 (42 U.S.C. 16511-16514). Title XVII
authorizes the Secretary of Energy, after consultation with the
Secretary of the Treasury, to make loan guarantees for projects that
``(1) avoid, reduce, or sequester air pollutants or anthropogenic
emissions of greenhouse gases; and (2) employ new or significantly
improved technologies as compared to commercial technologies in service
in the United States at the time the guarantee is issued.'' (42 U.S.C.
16513(a))
On May 16, 2007, the Department published a Notice of Proposed
Rulemaking and Opportunity for Comment (NOPR, 72 FR 27471) to establish
regulations for the Title XVII loan guarantee program. DOE held a
public meeting on the NOPR in Washington, DC on June 15, 2007.
Section 20320(a) of Public Law 110-5, the Revised Continuing
Appropriations Resolution, 2007 (Pub. L. 110-5) authorized DOE to issue
guarantees under the Title XVII program for loans in the ``total
principal amount, any part of which is to be guaranteed, of
$4,000,000,000.'' Section 20320(b) of Public Law 110-5 further provides
that no loan guarantees may be issued under the Title XVII program
until DOE promulgates final regulations that include ``(1)
programmatic, technical, and financial factors the Secretary will use
to select projects for loan guarantees; (2) policies and procedures for
selecting and monitoring lenders and loan performance; and (3) any
other policies, procedures, or information necessary to implement Title
XVII of the Energy Policy Act of 2005.'' The regulations being
finalized today fulfill that requirement.
Section 1702 of the Act outlines general terms and conditions for
Loan Guarantee Agreements and directs the Secretary to include in Loan
Guarantee Agreements ``such detailed terms and conditions as the
Secretary determines appropriate to ``(i) protect the interests of the
United States in case of a default [as defined in regulations issued by
the Secretary]; and (ii) have available all the patents and technology
necessary for any person selected, including the Secretary, to complete
and operate the project.'' (42 U.S.C. 16512(g)(2)(c)) Section 1702(i)
requires the Secretary to prescribe regulations outlining record-
keeping and audit requirements. This final rule sets forth application
procedures, outlines terms and conditions for Loan Guarantee
Agreements, and lists records and documents that project participants
must keep and make available upon request.
II. Public Comments on the NOPR and DOE's Responses
DOE received comments on the NOPR from 47 interested parties.
Twenty interested parties presented oral comments and/or submitted
written comments for the record at the public meeting. DOE summarizes
below the major areas of the NOPR on which it received public comment,
and discusses the Department's responses to those comments. Only major
areas of the NOPR are discussed here, although DOE carefully reviewed
all comments it received on the NOPR, and in some cases made
adjustments to the rule text
[[Page 60117]]
that are not discussed at length in this preamble.
A. Technologies
A principal purpose of the Title XVII loan guarantee program is to
support ``innovative technology'' projects in the United States that
``employ new or significantly improved technologies as compared to
commercial technologies in service in the United States at the time the
guarantee is issued.'' (42 U.S.C. 16513(a)(2)) Section 1701(1) (A) of
the Act defines ``commercial technology'' as ``a technology in general
use in the commercial marketplace.'' (42 U.S.C. 16511(1)(A))
Title XVII does not require, but on the other hand does not
prohibit, different treatment for different eligible technologies or
projects in the Title XVII program. Furthermore, the Act does not
explain or define the phrase ``new or significantly improved'' in
section 1703(a)(2), nor does it explain or define the terms ``general
use'' or ``commercial marketplace.'' In the NOPR, DOE proposed to
define the term ``new or significantly improved technology'' to mean
``a technology concerned with the production, consumption, or
transportation of energy, and that has either only recently been
discovered or learned, or that involves or constitutes one or more
meaningful and important improvements in the productivity or value of
the technology.'' (72 FR 27480)
Because Title XVII focuses on encouraging and incentivizing
innovative technologies not already in ``general use'' in the U.S.
commercial marketplace, DOE stated in the NOPR that the Title XVII loan
guarantee program should only be open to projects that employ a
technology that has been used in a very limited number of U.S.
commercial projects or used in a commercial project for only a limited
period of time. Therefore, DOE proposed two possible ways of
interpreting ``general use'': it could mean ``ordered for, installed
in, or used in five or more commercial projects in the United States,''
or ``in operation in a commercial project in the United States for a
period of five years, as measured beginning on the date the technology
was commissioned on a project.'' (72 FR 27480) DOE requested comment on
these alternatives, and also on whether the same definition should
apply to all types of projects and technologies eligible for loan
guarantees. (72 FR 27474) As DOE stated in the NOPR, a project may be
eligible for a Title XVII loan guarantee if it uses technology that has
been used in any number of projects and for any period of time outside
the United States, so long as the technology is not in ``general use''
in the United States.
1. Definition of New or Significantly Improved Technology
Public Comments: Section 609.2 of the proposed regulations defined
``new or significantly improved technology'' to mean ``a technology
concerned with the production, consumption or transportation of energy,
and that has either only recently been discovered or learned, or that
involves or constitutes one or more meaningful and important
improvements in the productivity or value of the technology.'' Several
commenters expressed the view that this definition is too narrow
because it does not include improvements in ``new systems or system
integration.'' Other commenters stated that the definition should
reference or include the term ``commercial use.'' Some commenters
stated that the definition was appropriate.
Parson & Whittemore Incorporated (P&W) and Forest Energy System,
LLC (FES), for example, assert that the proposed definition of new or
significantly improved fails to capture the potential value of
``systems'' rather than individual technologies. They recommend
expanding the definition to include improvements from new systems or
systems integration. (P&W at 1; FES at 1).
The Nuclear Energy Institute (NEI) and Bechtel Corporation
(Bechtel) challenged the NOPR's proposal to require that the technology
be both new or significantly improved and not in general use in the
commercial marketplace in the United States. They maintain that Title
XVII only requires that a technology be new or significantly improved
``as compared to'' commercial technologies in service in the U.S. at
the time the guarantee is issued. (NEI at 25; Bechtel at 5).
The Verenium Corporation (Verenium) stated that it is possible that
a technology has been in existence for some time but has never been
commercially applied for some reason, such as a technology that was not
viable when competing with oil at $20 a barrel but is competitive with
oil at $60 a barrel. Verenium stated that DOE should focus on
technologies ``not yet in'' use and therefore should make the
definition of New or Significantly Improved Technology refer to the
defined term ``Commercial Technology.'' (Verenium at 10).
The Union of Concerned Scientists (UCS), however, stated that ``DOE
needs to develop objective criteria to demarcate `new' or
`significantly improved' technologies from the sprucing up and
recycling of current technologies,'' and asserted that the approach of
the NOPR relied upon ``subjective judgments concerning the definition
rather than employing more objective, quantitative measures of novelty
and significant improvement.'' (UCS at 1). UCS did not, however, offer
any suggestions as to what sort of ``objective, quantitative measures
of novelty and significant improvement'' would be appropriate for
adoption in the rule. TXU Generation Development Company LLC (TXU)
argued that the rule should adopt a ``flexible definition'' with DOE
and expert consultants making decisions on particular technologies at
the preliminary application stage. (TXU at 7).
Eastman Chemical Company (Eastman) supported the NOPR's proposed
disqualification of projects solely in the research, development, or
demonstration phase as long as the criteria is applied ``to the overall
project and does not make a project ineligible just because one
subsection of technology is new.'' Eastman adds: ``Arguably, a use of
proven or commercial technologies in a new or novel configuration,
combination, or implementation method, such as polygeneration should
qualify as a `new or significantly improved technology.' '' (Eastman at
3).
Beacon Power Corporation (Beacon) recommends broadening the
definition by adding the following italicized phrase so that the
definition would read: ``technologies concerned with the * * *
productivity or value of the technology or an improvement over an
existing technology that will perform the same function.'' (Beacon at
3). Ameren Services Company (Ameren) supported the proposed definition
of new or significantly improved technologies, subject to the addition
of the following phrase: ``in service in the United States at the time
the guarantee is issued,'' which is part of the statutory definition in
Sec. 1703(a)(2) of the Act. (Ameren at 2).
DOE Response: There is no one universally accepted or agreed upon
definition of the term ``technology.'' Generally, technology is thought
to be the practical application of science to industrial or commercial
objectives. Technology may also include electronic or digital products
and systems considered as a group. DOE believes that the term
``technology'' in Title XVII was intended to have a very broad meaning,
given the purposes of Title XVII, and therefore does not believe it is
advisable to set down by rule a narrow definition of what will be
considered a ``technology'' for purposes of this program.
[[Page 60118]]
However, the Department believes it is important to establish what
may enable a particular technology to be considered ``new or
significantly improved''. By its explicit terms, the Title XVII loan
guarantee program is not open to all technologies and projects, but
only those that are new or significantly improved in comparison to
commercial technologies in use in the United States.
Several commenters asserted that the proposed definition of ``new
and significantly improved technology'' in the NOPR mistakenly requires
that in order to be eligible for a loan guarantee, a project must
employ a technology that is both new and improved and is not in
commercial use in the United States. They argue that the regulatory
definition should be clarified to make clear that the test is new or
significantly improved as compared to commercial technologies in
service in the United States. They correctly quote Title XVII, but are
mistaken as to the import of that language and the language in the
NOPR. Either a technology is in general use in the U.S. commercial
marketplace or it is not. If it is in general use, then the same
technology could not possibly be ``new or significantly improved'' in
comparison to technology in general use in the U.S. commercial
marketplace, and it is ineligible for a Title XVII loan guarantee. Yet
a technology does not automatically become eligible for a Title XVII
loan guarantee merely because it is not a U.S. commercial technology;
rather, it must be ``new or significantly improved'' in comparison to
such commercial technology. If the statute required only that it be
``new'' or ``different'' in comparison to commercial technologies, then
it might well be that in order to become eligible for a Title XVII
guarantee, all a project sponsor would need to show is that it was
using a technology currently not in commercial use in the United
States. But such an interpretation of Title XVII would render as
surplusage the words ``or significantly improved'' in section
1703(a)(2) of the Act. As a result, the term ``new or significantly
improved'' cannot simply mean not currently in commercial use in the
United States; it must mean that the technology itself is either newly
developed, or it must constitute a significant improvement over
technologies currently in U.S. commercial use. Notably, in order to be
eligible for a loan guarantee a technology need not be both new and
significantly improved, but must only be one or the other.
DOE does believe it is useful to clarify that while a ``new''
technology must be newly developed, discovered or learned, a
``significantly improved'' technology may in fact be ``old'' but a
significant improvement over technologies currently in commercial use
in the United States. Thus, and as noted in the NOPR, DOE agrees with
the assertions by some commenters that a technology could be eligible
for a loan guarantee even if it was developed long ago and even if it
is used in the same commercial application outside the United States,
as long as that technology is not in general commercial use for that
application in the United States at the time the loan guarantee is
issued. Consistent with DOE's interpretation of section 1703(a)(2) of
the Act, section 609.2 of the final rule provides, in part, as follows:
New or significantly improved technology means a technology
concerned with the production, consumption or transportation of
energy that is not a Commercial Technology, and that has either: (i)
Only recently been developed, discovered or learned; or (ii)
involves or constitutes one or more meaningful and important
improvements in productivity or value, in comparison to Commercial
Technologies in use in the United States at the time the Term Sheet
is issued.
2. Definition of Technologies in General Use
Public Comments: Under section 1703(a)(2) of the Act, projects are
eligible for Title XVII loan guarantees only if they employ new or
significantly improved technologies as compared to ``commercial
technologies'' that are ``in service in the United States'' when
guarantees are issued. Section 1701(1)(A) defines ``commercial
technology'' to mean ``a technology in general use in the commercial
marketplace.'' The NOPR proposed two alternative definitions of
``general use'': A technology would be considered to be in ``general
use'' if it had been ``ordered for, installed in, or used in five or
more [commercial] projects in the United States''; or alternatively, if
it had been ``in operation in a commercial project in the United States
for a period of five or more years as measured beginning on the date
the technology was commission[ed] on a project.'' This definition is
important because, as noted above, a proposed technology cannot qualify
a project for a Title XVII loan guarantee if it is in ``general use''
in the U.S. commercial marketplace.\1\
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\1\ Notably, the existence of technology in a project that is in
general commercial use in the United States does not in itself
disqualify a project from eligibility for a Title XVII loan
guarantee. Most if not all projects that are eligible for loan
guarantees will employ some technologies that are in such general
use.
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Several commenters stated that the first of the alternatives set
forth in the NOPR was acceptable, but the second alternative definition
should not be an option or should be revised. On the other hand,
several commenters stated that the second alternative definition would
be appropriate for nuclear projects because the early operational phase
is more useful in determining whether a technology is workable and
acceptable. Other commenters stated that the second alternative should
not be adopted because it likely would lead to a very large number of
nuclear projects being eligible for loan guarantees since there is a
long period of time between initiation of work on a nuclear generation
facility and the completion of five years of operation, and during this
time a large number of projects using the same technology could apply
for and be granted loan guarantees. Still other commenters were of the
view that it is impossible to adequately define ``general use'' and
asserted that DOE therefore should approve or disapprove loan guarantee
proposals to use technologies on a case-by-case basis. Commenters also
expressed the view that the two alternative definitions for ``general
use'' should be combined into one definition.
More specifically, in their joint comments Constellation Nuclear
Utilities, Inc., Entergy Corporation, Exelon Corporation, and NRG
Energy, Inc. (Nuclear Utilities) asserted that for nuclear technologies
the definition of a technology that is in ``general use'' should be
based upon five or more years of operation of any given new design
(e.g., an advanced reactor design that is separately certified by the
Nuclear Regulatory Commission (NRC)). They argued that if DOE were to
use the ``five or more projects'' alternative for defining what
constituted ``general use,'' it would be essential that the phrase
``order for, installed in, or used in'' should be changed to ``ordered
for, installed in, and used in,'' since for nuclear plants, ordering
would take place many years before use. (Nuclear Utilities at 19-20).
NEI, Dominion Resources Services, Inc. (Dominion) and Excelsior Energy,
Inc. (Excelsior) submitted similar comments. (NEI at 24, Dominion at
12, Excelsior at 2-3).
Southern Company Services, Inc., (Southern) stated that technology
should be considered in ``general use'' when financing has been
established for five or more projects in the United States. Southern
stated that its proposed interpretation of ``general use'' would assist
DOE's effort in having a broad portfolio of large and small projects
with a wide variety of technologies
[[Page 60119]]
supported by the Title XVII program, because it would limit the number
of project participants that employ the same technology. Southern also
asserted that the successful implementation of five projects employing
a particular technology should greatly reduce the concerns of the
credit markets, and stated that not considering a technology to be in
``general use'' until it has been in operation in a commercial project
in the United States for five years could result in an unlimited number
of projects utilizing the same technology. (Southern at 1).
Verenium stated that if over a five-year period a technology has
been used in fewer than five projects, the technology is probably not
in general use because it would indicate there is some barrier to
competitiveness. The restriction to five projects, according to
Verenium, should be stated as only a ``presumption,'' so that DOE could
deviate from it in appropriate circumstances. Verenium further argued
that the term ``ordered for'' may be ambiguous, and thus suggested the
use of ``in the process of being installed'' if DOE adopts an
alternative employing this concept, and thus suggested the following
language for the definition of Commercial Technology:
``Commercial Technology means a technology in general use in the
commercial marketplace in the United States, but does not include a
technology solely by use of such technology in a demonstration
project funded by DOE. A technology is presumed to be in general use
if it has been installed or used or is in the process of being
installed in five commercial projects in the United States.''
(Verenium at 12-13).
Standard & Poor's (S&P) stated that projects involving integrated
gasification combined cycle (IGCC) and coal-to-liquids (CTL)
technologies currently lack a commercial track record and therefore
would be assigned a risk premium by that rating agency. However, S&P
said that if there are at least five operational projects using a
particular technology, and as long as there was a material track record
of operations, the perceived risk and thus the risk premium associated
with the technology would be substantially reduced. (S&P at 2). The
Iogen Corporation (Iogen), believes that the definition proposed in the
NOPR is too restrictive and notes that the financial community has
displayed great reticence to providing debt financing at reasonable
commercial rates for new technologies that have not been widely
demonstrated. Iogen would prefer that DOE not adopt a single ``bright
line'' test and that the Department instead rely on market forces to
determine the need for a guarantee. However, if the Department is going
to develop a test, Iogen proposes to combine the two alternatives into
one modified definition, so that a particular technology would be
considered to be in general use if it had been installed or used in
five or more projects in the United States for a period of five years.
(Iogen at 2-3).
The Coal Utilization Research Council (CURC) stated that the
``proposed definition of general use is not suitable as it relates to
projects that will use technologies that have been in commercial use
for other applications,'' and that ``size, process configurations, and
technology modifications are among the several general characteristics
of projects that need to be considered when applying the general use
definition.'' (CURC at 5). Baard Energy L.L.C. (Baard) proposed that,
with respect to CTL projects, ``general use'' should be defined by the
first alternative set forth in the NOPR, i.e., technologies that have
been installed and used in five or more commercial projects in the
United States. Baard asserts that the second alternative, five years,
is too short. In order to accommodate construction schedules for CTL
plants and to allow for innovations and improvements, Baard maintains
that the second alternative should be extended to ten years. (Baard at
3).
Bechtel Power Corporation (Bechtel) recommends combining the two
alternatives for determining ``general use'' proposed in the NOPR, as
follows:
The technology or combination of technologies have been ordered
for, installed in, and used in five or more projects in the U.S.,
each for a period of five years, measured from date of
commissioning.
Bechtel's other comments regarding ``general use'' are focused on new
nuclear technologies that have never been built in the United States.
According to Bechtel, the technologies in question (``Gen III'' and
``Gen III+'' nuclear designs) should be judged individually for
purposes of determining whether either of the alternative meanings of
``general use'' proposed in the NOPR apply to them. Bechtel states that
the ``general use'' language in the rule must clearly distinguish new
generations or new applications of a technology such as Gen III or Gen
III+ in order to assure that they are not excluded from loan guarantee
eligibility by the fact that over 100 nuclear plants have been built in
the United States, when those plants used different designs and were
constructed in a much different industry and regulatory environment.
(Bechtel at 4).
CPS supports the second alternative definition set forth in the
NOPR, and submits that the five to seven year construction period for a
nuclear project means that starting the ``clock'' from the time the
technology is commissioned on a project, may mean that the project is
disqualified at or prior to the technology's in-service date. CPS
asserts that guarantees should be available, to the extent of
appropriations, until each distinct technology is in full commercial
operation. (CPS at 7). Abengoa Bioenergy New Technologies (ABNT)
recommends that DOE select the definition which utilizes time from
first commercialization as the basis for defining ``general use.'' ABNT
argues that if the other alternative is selected, DOE will be
discouraging competition and applications from a number of projects
which are eligible under a given solicitation or invitation, and that
by determining eligibility on the basis of ``a fixed window of time,''
DOE will provide certainty that a project will remain eligible for a
loan guarantee at some future time regardless of intervening events
with other projects or technologies. ABNT does not dispute the NOPR's
proposal of a five-year time frame, but suggests that a superior
approach may be to establish a time frame according to the commercial
technology defined in each solicitation or invitation. (ABNT at 1).
DOE Response: DOE agrees with concerns expressed by many commenters
about the ``five project'' alternative proposed in the NOPR. These
commenters were concerned that a definition that did not include an
operational component, which lenders need to develop confidence that a
technology is proven and is viable in actual commercial operation, may
not be workable for this program, and may not result in effective
reduction of commercial risk and effective increased commercial
marketplace acceptance prior to the closing of loan guarantee program
eligibility. DOE believes that other entities considering incorporation
of a particular technology into their planning want to see technologies
proven in actual practice before investing substantial sums on that
technology and incorporating it into large-scale capital expenditure
plans. Furthermore, operational experience reduces risk from the
standpoint of the credit and debt markets, and can lead to increased
access to capital markets at lower rates. We particularly note and find
persuasive S&P's comment that if there were at least five operational
projects in a particular technology
[[Page 60120]]
within the United States, the perceived risk premium associated with
the technology should be substantially reduced. We also note that
adoption of the ``five projects'' proposal in the NOPR but without
including an operational period could result in technologies or
projects involving very long development and construction times being
disqualified from receiving additional loan guarantees before even one
project had commenced commercial operations, or in extreme cases,
before any projects employing the technology had even commenced
construction.
After review and evaluation of the comments, DOE accordingly has
revised section 609.2 of the NOPR as follows:
Commercial Technology means a technology in general use in the
commercial marketplace in the United States at the time the Term
Sheet is issued by DOE. A technology is in general use if it has
been installed in and is being used in three or more commercial
projects in the United States, in the same general application as in
the proposed project, and has been in operation in each such
commercial project for a period of at least five years. The five
year period shall be measured, for each project, starting on the in
service date of the project or facility employing that particular
technology. For purposes of this section, commercial projects
include projects that have been the recipients of loan guarantees
from DOE under this part.
DOE believes this definition reasonably addresses the concerns that DOE
considers persuasive. By referring to the ``same general application''
as the proposed project, the definition provides that a technology is
not necessarily considered in ``general use'' if it has been used for
completely different projects or applications than in the proposed
project. For example, the fact that fuel cells have been used in some
small-scale applications for flashlights would not disqualify an
application for a project that proposed to use fuel cells to power a
motor vehicle. The definition also makes clear that it is only use of a
technology in a project in the United States that can potentially
render it in ``general use'' for the purposes of this program. The
definition provides that each of three projects using a particular
technology must be in service for five years before the technology is
considered to be in general use. Thus, this definition deals with the
concern expressed by some commenters that technologies should be barred
from program eligibility only if there has been substantial actual
operational experience with them. Finally, the definition clarifies
that projects that have received loan guarantees will be counted when
determining whether technologies have been used in a sufficient number
of projects to render them no longer eligible for the program. DOE
believes this is consistent with the overall purpose of the program in
encouraging the introduction of new and improved technologies into the
commercial marketplace, but ensuring that technologies do not remain
forever dependent on loan guarantee support in order to be commercially
viable. The Title XVII program should help introduce technologies to
the commercial marketplace, but it should be up to those technologies
and to the commercial marketplace as to whether the technologies
continue to be economically and technologically viable, or not.
DOE notes that even though the definition of ``commercial
technology'' it is adopting in this rule may permit multiple projects
using the same technology to be eligible for a Title XVII guarantee,
DOE is under no obligation to seek authority for, or to issue
solicitations for, all or any particular technology that may fall
within the outer limits of eligibility for a loan guarantee, as that
eligibility is prescribed by Title XVII and this rule. Indeed, it is
perfectly possible that DOE may decide not to issue a solicitation
covering a certain technology, even though projects using that
technology would be eligible under this rule for a loan guarantee.
Furthermore, this definition of ``commercial technology'' in no way
limits DOE's ability to include within a solicitation a selection
criterion, and assign a weighting for that criterion, based on the
number of projects already in service using that technology.
3. Nuclear Generation Projects
Public Comments: Comments from the nuclear industry asserted that
regulations proposed in the NOPR were not appropriate or workable for
commercial nuclear power projects because of the size and unique
regulatory and litigation-related risks surrounding these projects. The
industry's stated primary concern is the ability of industry
participants to access the capital markets at what they view as
reasonable rates, terms and conditions.
CPS Energy (CPS), on behalf of itself and the Large Public Power
Conference, a group of utility companies with nuclear power facilities,
recommended that new nuclear technology should be defined separately
and differently from other technologies eligible for Title XVII loan
guarantees. CPS cited two principal factors supporting this
recommendation: (1) The capital intensive nature of new nuclear
development; and (2) the different technologies proposed represent
vastly different scales of new technology, as compared with other types
of eligible projects. CPS stated that the cost of new nuclear
generating capability is in the neighborhood of $2,000 per kilowatt and
the capacity of the plants is in excess of 1,300 megawatts, that five
different reactor technologies are being proposed, and that none of the
technologies currently are in operation in the United States.
Therefore, CPS asserted that each of the five technologies should be
treated as a distinct new technology eligible for loan guarantees. (CPS
at 7).
Iogen, however, strongly opposed DOE making the loan guarantee
program more favorable for larger projects involving electricity
generation from nuclear power or coal combustion/gasification than for
other types of projects, such as those that would advance the
President's ``20 in Ten'' initiative, which Iogen said depends on the
widespread deployment of advanced biofuels refineries. (Iogen at 1).
The American Council on Global Nuclear Competitiveness (ACGNC) stated
that DOE should look beyond nuclear power plants when defining the term
``advanced nuclear energy facilities'' that appear in section 1703 of
the Act. ACGNC stated that this language is broad enough to allow DOE
to issue loan guarantees to projects that will restore the domestic
nuclear energy design, manufacturing, service and supply industry, such
as uranium mining and milling operations; uranium conversion and
enrichment facilities; reactor component fabrication facilities; and
used fuel recycling plants. (ACGNC at 2-3). Goldman and Sachs & Co.
(Goldman Sachs) recommended that the final rule expressly include
nuclear power generating stations and advanced technology low enriched
uranium (LEU) production facilities in the definition of what could
constitute an eligible project. Goldman Sachs emphasized that the
described facilities are essential to fostering the domestic
development of emissions-free, affordable base-load nuclear power
generation, and that advanced nuclear energy facilities are one of the
ten categories of projects specifically addressed in the Act. (Goldman
Sachs at 5).
DOE Response: Nuclear projects were the only type of projects for
which some commenters asserted the final rule should accord different
treatment than other technologies. However, most if not all of those
comments argued that different treatment was appropriate because of the
very large cost and long construction and permitting/licensing time for
such projects. And yet, similar
[[Page 60121]]
arguments could be made in support of some other types of potentially
eligible projects, such as refineries, IGCC facilities, or CTL
projects. No commenters argued that nuclear technology per se makes
nuclear projects deserving of different and more favorable treatment
than the final rule affords to other projects that have large capital
requirements and difficult regulatory environments. Moreover, DOE
believes it has dealt appropriately with many if not most of the
concerns expressed by nuclear industry participants regarding the
issues of ``general use'' and other matters discussed elsewhere in this
preamble and in the final rule text. Therefore, the final rule does not
differentiate between nuclear power generation projects and all other
projects.
B. Financial Structure Issues
The Act imposes certain limitations on the financial structure of
proposed projects, including that a loan guarantee ``shall not exceed
an amount equal to 80 percent of the project cost of the facility that
is the subject of the guarantee as estimated at the time at which the
guarantee is issued.'' (42 U.S.C. 16512(c)) Section 1702(g)(2)(B) of
the Act further requires that ``with respect to any property acquired
pursuant to a guarantee or related agreements, [DOE's rights] shall be
superior to the rights of any other person with respect to the
property.'' In the NOPR, the Department interpreted this statutory
provision to require that DOE possess a first lien priority in the
assets of the project and other assets pledged as security, and stated
that because DOE believed it is not permitted by Title XVII to adopt a
pari passu security structure, Holders of the non-guaranteed portion of
a loan or debt instrument supported by a Title XVII guarantee would
have a subordinate claim to DOE in the event of default.
DOE proposed in the NOPR that it only would issue a guarantee for
up to 90 percent of a particular debt instrument or loan obligation for
an Eligible Project. This limitation was subject to the overriding
statutory requirement that DOE's guarantees for a particular project
could not exceed 80 percent of Project Costs. Furthermore, in
connection with any loan guaranteed by DOE that may be participated,
syndicated, traded, or otherwise sold on the secondary market, DOE
proposed to require that the guaranteed portion and the non-guaranteed
portion of the debt instrument or loan be sold on a pro-rata basis. In
the NOPR, DOE proposed not to allow the guaranteed portion of the debt
to be ``stripped'' from the non-guaranteed portion, i.e., sold
separately as an instrument fully guaranteed by the Federal government.
The Act does not mandate a specific equity contribution to a
project that receives a Title XVII loan guarantee, but DOE proposed in
the NOPR that in order to receive a loan guarantee, Project Sponsors
must have a significant equity stake in the proposed project. DOE
solicited comments on the merits of adopting a minimum equity
percentage requirement for projects, and stated that in evaluating loan
guarantee applications, the Department would consider whether and to
what extent a Project Sponsor will rely upon other government
assistance (e.g., grants, tax credits, other loan guarantees, etc.) to
support financing, construction or operation of a project.
Finally, DOE proposed to require with submission of an application
for a loan guarantee a ``credit assessment'' for the project without a
loan guarantee from a nationally recognized rating agency, where the
size and estimated cost of the project justify such an assessment.
Additionally, DOE proposed to require that not later than 30 days prior
to closing, Applicants must provide a ``credit rating'' from a
nationally recognized rating agency reflecting the Final Term Sheet for
the project without a Federal guarantee. The Department requested
comments as to whether it should establish a project size (dollar)
threshold below which DOE could waive the credit assessment and rating
requirements.
Public Comments:
1. Lender Risk, Stripping and Pari Passu
Commenters that addressed the 90 percent, no stripping, and pari
passu provisions in the NOPR were generally opposed to these
restrictions. S&P commented on the 90 percent guarantee limitation in
combination with the stripping prohibition stating that ``[t]his is the
provision [sic] that has the greatest credit consequence. The rating
associated with a partially guaranteed obligation will be substantially
lower than the `AAA' rating of a fully guaranteed instrument . . .
[and] will result in a significantly higher cost of debt for the
project than if it was fully guaranteed.'' (S&P at 5). S&P also stated
that ``[t]he disadvantage created by the partial guarantee can be
overcome if the loan can be `stripped', effectively creating two
tranches of debt, one with a `AAA' rating and the second rated much
lower.'' (S&P at 5).
NEI asserted that allowing 90 percent guaranteed loans, instead of
placing the limit at 80 percent as did the August 2006 Guidelines, did
not improve what NEI viewed as a limitation adversely affecting the
overall viability of the Title XVII program for nuclear projects. NEI
stated that the NOPR would create a financing structure that is not
workable. It would create, according to NEI, a hybrid loan facility for
which there is no market, a debt instrument with a guaranteed portion
and a non-guaranteed potion which cannot be stripped, and would render
the unsecured, non-guaranteed portion of the debt ``quasi-equity.'' The
impact, according to NEI, would be to compromise project economics,
increase debt service requirements, and increase costs to electricity
consumers.
NEI further said if DOE's proposal were adopted, the Title XVII
loan guarantee program would not operate like other successful Federal
loan guarantee programs. NEI stated that those other programs generally
provide for 100 percent Federal guarantee coverage of the loan amount;
allow pari passu treatment of non-guaranteed commercial debt; and
permit stripping of guaranteed debt from non-guaranteed debt and follow
standard practice in determining eligible project costs. NEI said that
DOE's NOPR was deficient on all four of these issues. (NEI at 2-3).
In a set of joint comments, Citigroup, Credit Suisse, Goldman
Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch (Investment
Bankers) stated that investors or lenders in the fixed income markets
will be acutely concerned about a number of political, regulatory and
litigation-related risks surrounding nuclear power, including the
possibility of delays in commercial operation of a completed plant. The
Investment Bankers also stated that these risks, combined with the
higher capital costs and longer construction schedules of nuclear
plants, as compared to other electric generation facilities, may make
lenders unwilling to make long-term loans to such projects on
commercially viable terms. (Investment Bankers at 1).
The Nuclear Utilities also stated that the Title XVII loan
guarantee program must guarantee debt through workable financing
instruments. They asserted that limiting guarantee coverage to 90
percent, prohibiting pari passu security structures, and prohibiting
``stripping,'' would result in a program that would not support the
financing of new nuclear plants in the United States. The Nuclear
Utilities said that their primary concern relates to the percentage of
a project's debt the loan guarantee will cover. They believe that DOE
would be fully justified in guaranteeing 100 percent of a Guaranteed
Obligation, up to 80 percent of project cost. Moreover, the Nuclear
Utilities stated that
[[Page 60122]]
providing 100 percent guarantee coverage of a debt instrument is not
only necessary because commercially viable financing is not available
on an non-guaranteed basis, but also because a 100 percent U.S.
government guarantee will enable lenders and borrowers to maximize the
efficiency of the existing, well-established marketplace for government
guaranteed debt. The Nuclear Utilities also believe that the ``no
stripping'' requirement combined with the prohibition on pari passu
security structures, creates a form of ``hybrid'' debt for which there
is no natural, existing market. According to the nuclear industry, the
market participants would incur a significantly higher average cost of
financing, as well as unnecessary transaction costs to achieve project
structures that would enable the project's debt to be placed with its
appropriate constituents in the existing marketplace. The Nuclear
Utilities stated that such structures could lead to a form of
``synthetic'' stripping that undercuts the purpose of the no stripping
requirement. (Nuclear Utilities at 5-8). They recommended that any
concern about lender due diligence should be addressed by DOE retaining
outside legal, technical, and financial experts to supplement its
internal expertise in performing the necessary project due diligence
and assessing project risks, and that the reasonable costs and expenses
of these experts should normally be borne by the sponsors and
constitute part of project costs. (Nuclear Utilities at 10-11).
The Investment Bankers expressed views that are generally
consistent with those of the Nuclear Utilities. They also noted that in
some cases, investors in the AAA government-guaranteed market are
restricted, legally or otherwise, from investing in the sub-debt
market. They said that requiring investors to own interests through a
mandated hybrid instrument in both AAA paper and deeply subordinated
``quasi-equity'' paper removes both of these financing instruments from
their natural market. (Investment Bankers at 1). The Investment Bankers
stated that ``[t]here is a deep and highly efficient market for `AAA'
government guaranteed paper. Investors in that market are distinctly
different from those investors who participate in the sub-debt market.
Requiring investors to own interests through a mandated hybrid
instrument in both AAA paper and deeply subordinated `quasi-equity'
paper removes both of these financing instruments from their natural
markets.'' (Investment Bankers at 1). The 100 percent Government
guaranteed debt instruments are purchased by investors who are more
risk averse. Investors in non-guaranteed debt instruments are willing
to take more risk for the prospect of greater returns on their
investments. Verenium also expressed concern about the 90 percent
guarantee limitation and the prohibition on ``stripping'' that are
similar to the concerns expressed by the Investment Bankers and the
Nuclear Utilities. (Verenium at 4). Verenium suggested that one
alternative to 100 percent guarantees would be to allow the non-
guaranteed loan to be repaid on a shorter amortization schedule than
the guaranteed loan. (Verenium at 6).
According to JP Morgan Securities, Inc. (JP Morgan) it is unclear
how lenders would fund the non-guaranteed portions of a partially
guaranteed loan on which stripping was prohibited since banks rarely
lend for tenures beyond eight to ten years, particularly when the debt
is subordinated. JP Morgan further stated that an expectation that
lenders would maintain the non-guaranteed portions for the life of such
loans is unrealistic, and that by taking a second lien interest, a
lender's participation is tantamount to an equity investment. (JP
Morgan at 1).
Bechtel contended that a commercially viable market does not exist
for a hybrid instrument for which stripping is barred. Eliminating
stripping, according to Bechtel, is not in line with other Federal loan
guarantee programs and would increase the cost of project debt by
eliminating a bank's ability to utilize various securitization
vehicles, such as the Private Export Funding Corporation (PEFCO) or
Govco, Inc., the special purpose lending vehicle of Citigroup, which
provide efficient and cost effective vehicles to fund federally
guaranteed loans. Bechtel further agreed that the first lien
requirement in the NOPR is inconsistent with established norms in
project lending and that the Export Import Bank of the United States,
the Overseas Private Investment Corporation, and the Transportation
Infrastructure Finance and Innovation Act of 1998 (TIFIA) program at
the Department of Transportation treat any non-guaranteed debt as pari
passu in terms of both payment and security. (Bechtel at 2).
Power Holdings of Illinois LLC (Illinois), however, supported the
90 percent loan guarantee limitation in the NOPR, and the proposed
prohibition on stripping. (Illinois at 1). Baard also agreed with the
90 percent limitation. Baard said that this limit was an improvement
over the 80 percent of debt instrument guarantee limit set forth in the
August 2006 Guidelines, and that it would be an effective mechanism for
ensuring that investors/lenders perform rigorous due diligence prior to
committing their money for a project. (Baard at 5).
2. Equity Requirements for Project Sponsors
Almost all parties that submitted comments on this issue were
opposed to a fixed numeric minimum equity requirement. Illinois agreed
with the concept that Project Sponsors should be required to have a
significant equity stake in a project, but said DOE should not adopt a
fixed, numeric minimum equity percentage, threshold, or requirement.
Illinois asserted that equity structure in a given project can vary
with a number of factors, including technology used and the market for
the project's products, and that imposing a fixed, numeric minimum
equity percentage threshold or requirement for projects that might for
good reason fall below such a threshold could result in the exclusion
of otherwise worthy projects. (Illinois at 2). NEI also stated that DOE
should not mandate a specific minimum equity percentage for eligible
projects. The appropriate debt/equity ratio, according to NEI, will
vary across technologies and sectors and among projects, and should be
determined by project economics. (NEI at 23). Bechtel offered similar
comments. (Bechtel at 2).
3. Other Governmental Assistance
Most parties commenting on this issue stated that other
governmental assistance to a project should be considered beneficial to
the project and to DOE, and should not be used to exclude projects from
consideration for the Title XVII program or regarded as a negative
factor when evaluating the merits of particular projects. With respect
to DOE's consideration of the ``extent the Applicant will rely on other
federal and non-federal governmental assistance'' (section 609.7(b)(9)
of the proposed regulations), Iogen agreed that this factor should be
considered, but a primary consideration should be whether there was
significant private equity involvement in a proposed project. Iogen
stated that under no circumstances should Federal government assistance
be counted toward any equity contribution requirement. Iogen agreed
that DOE should include Federal government assistance only as an
evaluation factor, and not as one of the six disqualifying conditions
listed at section 609.7(a) of the proposed regulations because, among
other things, government assistance reduces total project costs, thus
reducing the size of any loan
[[Page 60123]]
guarantee, increases the likelihood of debt repayment, allows DOE to
better leverage its participation in a variety of projects, and is an
indicator of strong political and community support. Iogen also stated
that presence of Federal government assistance does not, in itself,
limit the level of private commitment. For example, Iogen stated that a
project with 20% federal assistance, a 50% loan guarantee, and 30%
equity, could reasonably be preferred over a project with an 80% loan
guarantee and 20% equity. (Iogen at 4-5).
Bechtel stated that multiple forms of governmental assistance
should not be a negative factor because tax and other incentives are
intended to be complementary, not exclusive, and multiple forms of
governmental assistance could enhance a project's economics and
creditworthiness. Therefore, Bechtel asserted that subsidy costs should
be adjusted to reflect the reduced risk of default where there are
multiple forms of governmental assistance. (Bechtel at 6). The Nuclear
Utilities also expressed the view that other forms of governmental
assistance should be viewed positively. (Nuclear Utilities at 20-23).
CURC stated that if a project obtains other forms of governmental
assistance, the cost of the loan guarantee should be adjusted to
reflect the reduced risk of default on the underlying debt obligation
as a result of the other support. CURC said that DOE should not limit a
project's ability to receive more than one form of federal assistance.
(CURC at 5).
4. Credit Assessment and Rating Requirements
The NOPR proposed that a project sponsor must obtain a preliminary
credit assessment and subsequent credit rating for a project without a
loan guarantee from a recognized credit rating agency. (609.6(b)(21)
and 609.9(f)). Most commenters that expressed a view on this issue
stated that a credit assessment or rating was not very useful, and too
expensive and that a better value could be obtained from entities other
than established rating agencies.
USEC Inc. (USEC) stated that it does not understand the purpose of
proposed Sec. 609.9(f) which required that applicants obtain a credit
rating from a nationally recognized rating agency reflecting the final
term sheet without a Federal guarantee. USEC said that such a
requirement would add to the cost of the application process with
little benefit since the credit rating agencies are ill-equipped to
evaluate the technical risks associated with new or emerging
technologies. USEC stated that credit rating agencies look to
historical data--not clearly relevant to new or emerging technologies.
On the other hand, USEC said that DOE is positioned to conduct such an
evaluation on its own with the other information provided in the
application. (USEC at 5).
S&P stated that the credit assessments provided at the time of
application will likely have to be limited to a rating category (with
the `+' and `-' signs that normally accompany S&P ratings), because
project documentation will likely be in a very preliminary state at
this point. (S&P at 8). Goldman Sachs recommended that the requirement
for a credit assessment as part of the application submission be
eliminated from the final rule although sponsors should be able to
elect to obtain a credit assessment as part of their application
submission if they wish to do so. Goldman Sachs stated that obtaining a
credit assessment is a long process that ``frequently consumes valuable
time and resources during the most critical stages of negotiation.''
Also, Goldman Sachs asserted that ``the primary rating agencies often
do not provide a final rating until all documents have been negotiated
and closing is imminent'' and that the rating will ``be highly
dependent on the existence of the loan guarantee, and thus a rating
without the guarantee will be of little substantive value.'' (Goldman
Sachs at 9).
FES and P&W proposed that DOE set a project cost threshold of $25
million for waiving the credit rating requirement. (FES at 3, P&W at
2). Illinois also stated that DOE generally should have authority to
waive any credit rating requirement. However, according to Illinois, a
simple project size threshold for waiving the requirement would
oversimplify the circumstances under which DOE would consider such
waivers. Illinois stated that rather than a simple project size
threshold, DOE should set forth other criteria, such as a ratio of
project debt to sponsor equity, the duration of the loan guarantee or
the credit subsidy cost, in addition to the project size. (Illinois at
2).
DOE Response:
1. Lender Risk, Stripping and Pari Passu
The primary goals of the Title XVII loan guarantee program are to
encourage and incentivize the commercial use in the United States of
new or significantly improved energy-related technologies and to
achieve substantial environmental benefits.
Sections 609.10(d)(3), (4) and (13) of the NOPR provided, in sum,
that (1) DOE could guarantee no more than 90 percent of any debt
instrument for an eligible project, (2) the guaranteed portion of any
debt instrument could not be stripped from the non-guaranteed portion,
and (3) DOE must have a first lien on all project assets pledged as
collateral for a guaranteed loan. The vast majority of comments DOE
received were in opposition to those provisions.
DOE is persuaded by the comments it received that identified a
number of problems and difficulties with proposed sections 609.10(d)(3)
and (4), and therefore is revising those sections in the final rule.
Because the program focuses on innovative technologies, for which there
often is not readily available private market financing at reasonable
terms, and thus there is not always a readily available commercial
market substitute for debt that does not receive a Title XVII
guarantee, DOE has determined that an alternative approach is more
appropriate.
Sections 609.10(d)(3) and (4) now provide that DOE may guarantee up
to 100 percent of the amount of a loan for a project that receives a
Title XVII loan guarantee, so long as all loan guarantees DOE issues
for a particular project do not exceed 80 percent of Project Costs,
which is a limitation imposed by Title XVII itself. As provided in the
NOPR, section 609.7, DOE will evaluate the extent to which the
requested amount of the loan guarantee, and the requested amount of
guaranteed obligations are reasonable, relative to the nature and scope
of the project.
In accordance with Federal credit policy, DOE will issue 100
percent loan guarantees only if the loan is issued and funded by the
Treasury Department's Federal Financing Bank. DOE also will issue loan
guarantees for loans from private lenders where the guarantee sought is
for less than 100 percent of the loan amount, and the final rule
provides that if DOE guarantees 90 percent or less of a Guaranteed
Obligation, the Eligible Lenders and other Holders will not be
prohibited from separating the guaranteed portion from the non-
guaranteed portion of the debt instrument. Thus, in cases where a
lender issues a loan and receives a guarantee for more than 90 percent
of the loan amount, the non-guaranteed portion cannot be stripped from
the guaranteed portion.
If a loan is not 100 percent guaranteed, it can be obtained from an
approved Eligible Lender. Moreover, if 90 percent or less of a loan is
guaranteed by DOE, the Department is allowing Eligible Lenders and
other Holders to strip the guaranteed portion of a Guaranteed
Obligation from the non-
[[Page 60124]]
guaranteed portion. DOE believes that in such circumstances, DOE still
will gain the benefit of private sector debt market underwriting, but
at the same time will ensure that Eligible Projects are able to obtain
necessary financing, and be able to do so on reasonable terms.
In the unique context of loan guarantees for innovative energy
projects, DOE believes that the changes made from the NOPR will assist
projects in obtaining financing on reasonable terms. DOE recognizes
that Federal credit policy generally encourages Federal credit programs
to require that guaranteed obligations have a non-guaranteed portion.
As noted above, the program focuses on innovative technologies for
which there is often not readily available private market financing at
reasonable terms, and thus there may not always be a readily available
commercial market substitute for debt that does not receive a Title
XVII guarantee. Therefore, the Department has concluded that these
terms are necessary and appropriate to carry out the purposes of this
program.
DOE has determined that it should allow stripping on some partially
guaranteed loans--i.e., only those on which DOE has guaranteed 90
percent or less of the Guaranteed Obligation. As noted above, the Title
XVII program presents a unique situation--one in which loan guarantees
will be issued for projects that otherwise might have little or no
access to financing on reasonable terms, primarily because of the
innovative nature of the eligible technologies and projects.
Where DOE guarantees more than 90 percent of the amount of a
Guaranteed Obligation, the guaranteed portion cannot be stripped from
the non-guaranteed portion of the loan. In such situations, DOE is
concerned that there may not be a sufficient amount of non-guaranteed
debt to cause reasonable and appropriate debt market due diligence
being performed.
DOE notes that several of the commenters cited other Federal credit
programs as justification for removing taxpayer protections proposed in
the NOPR; in several cases Title XVII is significantly different from
the programs cited. For example, financing under the TIFIA program is
statutorily limited to 33 percent of eligible project costs, and
therefore there is significant equity and lender participation. The
Title XVII program is likely to be extremely large, with $4 billion of
loan volume already provided under the 2007 Continuing Resolution, and
$9 billion requested in the 2008 President's Budget. DOE already has
pre-applications from the first solicitation requesting in excess of
$25 billion in loan guarantees. The Title XVII program involves
advanced technologies, which by nature are riskier than technologies
already in commercial operation.
DOE believes its resolution of the issues addressed above will help
ensure that eligible projects of all sizes can gain access to credit on
reasonable terms. DOE is concerned about project access to capital
markets at reasonable interest rates and on reasonable terms and
conditions, and believes that the modifications it has made to the
regulations in this final rule address the commenters' concerns, while
reducing the chance that unnecessary risks and costs are placed on the
Federal taxpayers.
It is customary and common practice in project financing for
multiple lenders to enter into a pari passu structure with respect to
assets pledged as collateral to secure debt. If such a structure were
employed for the Title XVII program, DOE, pursuant to its Loan
Guarantee Agreement, and lenders that held non-guaranteed debt, could
share proportionately in the proceeds from the sale of project assets
pledged as collateral if there were a default and the collateral was
sold. In the NOPR, DOE interpreted Title XVII's requirement that DOE
have a superior right to project assets pledged as collateral to
prohibit pari passu structures, and as requiring all other lenders to
be subordinate to DOE.
In the final rule, DOE has modified its regulations to provide that
DOE and the Holders of the non-guaranteed portion of the Guaranteed
Obligations may share the proceeds received from the sale of project
assets. The Department interprets the Title XVII provision requiring
DOE to have a superior right to project assets pledged as collateral to
mean that DOE retains superior rights within the meaning of the statute
even if the Department shares the proceeds from the sale of project
assets with the Holders of the non-guaranteed debt as long as DOE
controls the disposition of all project assets. Under this
interpretation, it is solely within DOE's authority to determine
whether, and under what terms, the project assets will be sold at all.
For example, DOE retains--as a superior right--the ability, even over
the objections of other parties, to decide against the liquidation of
project assets and instead to complete construction of the project,
subject to appropriations, or to sell an incomplete project to an
entity that will complete the project.
The Department views this interpretation as being consistent with
section 1702(g)(2)(A) of the Act, which provides that if DOE makes a
payment on the guaranteed debt, the Department is subrogated to the
rights of the Holder, including the right to ``complete, maintain,
operate, lease, or otherwise dispose of any property acquired pursuant
to such guaranteed or related agreements, or permit the borrower * * *
to continue to pursue the purposes of the project.'' The Secretary
cannot do any of those things unless the Secretary owns or controls the
entire project. There is no provision, for example, for the Secretary
to purchase the interest of the non-guaranteed lenders or holders of
debt that is not supported by a Title XVII guarantee. Furthermore,
section 1702(g)(2)(B) provides that the rights of the Secretary, with
respect to any property acquired pursuant to a guarantee or related
agreements, shall be superior to the rights of any other person with
respect to the property, and this provision limits DOE's rights to the
collateral to ``property acquired pursuant to a guarantee.''
Insofar as it is applicable here, the Department reaffirms the view
it expressed in 1980 in connection with the loan guarantee program for
alternative fuels, that while DOE is required under section
1702(g)(2)(B) to have a first lien on all project assets, the
Department is not prohibited from negotiating and agreeing with parties
about how the proceeds from the sale of collateral will be shared.
Section 19 of the Federal Nonnuclear Energy Research and Development
Act of 1974, Loan Guarantees for Alternative Fuel Demonstration
Facilities, Pub. L. No. 93-577, as amended, (Alternative Fuels Act),
contained provisions similar to section 1702(g)(2)(B).\2\ Section
19(g)(2) of the Alternative Fuels Act provided, in part, that:
---------------------------------------------------------------------------
\2\ Section 19 appeared at 42 U.S.C. section 5919 and was
repealed by Pub. L. No. 109-58, the Energy Policy Act of 2005, at
section 1009(b)(12).
The rights of the Secretary with respect to any property
acquired pursuant to such guarantee or related agreements shall be
superior to the rights of any other person with respect to such
---------------------------------------------------------------------------
property.
In the preamble to the final rule implementing section 19(g)(2) of
the Alternative Fuels Act and in response to arguments by commenters
concerning the issue of pari passu sharing of the project collateral,
DOE stated as follows:
Subsection 796.11(a)(9) of the proposed regulation required that
the guaranteed loan not be subordinate to any other loan for the
project and that the guaranteed loan be in a first lien position
with respect to assets of the project and other collateral which are
pledged as security for repayment of the
[[Page 60125]]
guaranteed loan. DOE construes the Act to require this, and that
only with regard to assets not directly related to the project, but
which may be pledged as collateral, may a less than first lien
position be acceptable to DOE.
(45 FR 15468, 15471).
DOE today adopts the same interpretation of Title XVII as it
adopted in regard to nearly identical language in section 19(g)(2) of
the Alternative Fuels Act. Thus, DOE interprets the language in Title
XVII as requiring a first lien on all project assets, but as allowing
DOE to treat assets pledged to secure a project loan that are not
project assets the same as project assets. Consistent with the
regulations concerning the disposition of proceeds from the sale of
assets pursuant to the Alternative Fuels Act (section 796(f) and (k)),
section 609.15 of today's final rule also provides that where DOE only
guarantees a portion of a Guaranteed Obligation, the Secretary may
enter into inter-creditor or other arrangements to share the proceeds
from the sale of project collateral with lenders or other holders of
the non-guaranteed portion of the Guaranteed Obligation. DOE may, at
the discretion of the Secretary, share the proceeds from the sale of
collateral. DOE is limited, however, to no greater than a pro rata
share for the non-guaranteed Holder. However, in cases where DOE
guarantees 100 percent of a loan, the loan must be issued to and funded
by the Federal Financing Bank. In those circumstances, DOE will have a
first lien priority on project assets pledged as collateral and all
other debt for the project at issue must be subordinate to the
Guaranteed Obligation.
2. Equity Requirements for Project Sponsors
Title XVII does not itself impose any minimum equity contribution
requirement on projects that receive Title XVII loan guarantees.
Section 1702(c) provides that DOE can guarantee loans for no more than
80 percent of the cost of a project, but does not place any
requirements on where or how a Project Sponsor may obtain other funds
for an Eligible Project. Nonetheless, in the NOPR, the Department
explained that DOE believed it was prudent to require Project Sponsors
to have a substantial equity stake in a project before the project
could receive a Title XVII loan guarantee. Thus, DOE proposed (in
section 609.7(a)(6) of the proposed regulations) that applications
would be denied if ``[t]he applicant will not provide a significant
equity contribution.''
Most commenters agreed that the regulations should contain an
equity contribution requirement, and that the regulations should not
set a fixed numeric minimum equity percentage threshold or requirement.
Commenters said some projects might have good reasons for not meeting
some numeric threshold, and that a specific numeric threshold might
result in the rejection of otherwise meritorious projects. Some
commenters objected even to DOE requiring by rule that projects have a
``significant'' equity contribution.
A Title XVII loan guarantee will be offered only to projects where
the project sponsors make a significant equity contribution toward the
Project Cost. If private investors or project sponsors do not see fit
to make any significant equity investment in a capital project, it is
hard to see why DOE should back loans for the project with a Federal
guarantee. Such projects might well be appropriate for grant money or
research and development assistance, but in light of the overall
purposes of Title XVII and the statutory requirement that DOE can issue
loan guarantees for no more than 80 percent of project cost, the
Department believes it would not be prudent to eliminate any equity
requirement for the program. It is in the interest of the Federal
government to ensure that borrowers have a significant equity interest
in the assets to ensure the financial success of the project.
Eliminating the requirement might result in project sponsors financing
a project entirely through a combination of government-backed loans,
and other loans and government assistance. The Department does not
believe such an approach would be consistent with the establishment of
an overall sound Title XVII program.
Furthermore, DOE will consider the type and degree of equity
contribution proposed for an eligible project for a Title XVII loan
guarantee to determine whether such contribution is significant and
meets the eligibility requirements for a loan guarantee agreement. In
evaluating whether a borrower or project sponsor is contributing
significant equity to a project, the Department will consider
``equity'' to be cash contributed by the Borrowers or other principals.
Equity does not include proceeds from the non-guaranteed portion of any
debt supported by a Title XVII loan guarantee or from any other non-
guaranteed debt. The value of other forms of government financial
assistance or support also does not constitute ``equity.'' The
Department has set forth this definition of ``equity'' in section 609.2
of the final rule.
At the same time, DOE agrees with commenters that the Department
should not by regulation establish a specified numerical minimum on the
equity contribution to an Eligible Project. There likely will be a
myriad of financing arrangements and differing circumstances for the
disparate types of technologies and projects potentially eligible for
Title XVII loan guarantees. The Department believes, based on the
record before it, that it should not set at this time a numerical
minimum for the equity contribution to an eligible project.
The determination of the significance of the equity contribution
cannot practicably be made at the time that the loan application is
filed. Thus, DOE has revised section 609.7(a)(6) of the NOPR which
stated that an Application will be disqualified if ``[t]he applicant
will not provide a significant equity contribution'' by deleting the
words ``a significant'' and inserting the word ``an.'' DOE has retained
section 609.7(b)(7) which provides that DOE will consider ``[t]he
amount of equity commitment to the project by the Applicant and other
principals involved in the project'' when evaluating Applications for
Title XVII loan guarantees. DOE will evaluate the amount of equity that
will be contributed to a project when evaluating a project against
other projects. Section 609.10(d)(5) of today's final rule, however,
provides that the Project Sponsors must, at a minimum, have a
significant equity investment in a project.
3. Other Governmental Assistance
Section 609.7(b)(9) of the NOPR provided that DOE will consider
``whether and to what extent the Applicant will rely on other
governmental assistance'' when evaluating Applications for Title XVII
loan guarantees. In the NOPR preamble, the Department noted that the
receipt of other government assistance generally would be viewed
negatively. (72 FR 27476).
Several commenters stated that DOE should consider other
governmental assistance as a positive and not a negative evaluation
factor. As noted above, those commenters asserted that the receipt of
other assistance from Federal, state or local governments should be
viewed as indicating support for a project and thus adding to its
commercial viability, rather than reflecting financial and commercial
weakness. Most commenters that expressed a view did believe that it
would be appropriate for DOE to at least consider the receipt of other
government
[[Page 60126]]
assistance in evaluating Applications. See e.g. Bechtel at 6, Eastman
at 3; and Goldman Sachs at 9.
DOE has retained section 609.7(b)(9) in the final rule as it was
proposed in the NOPR. As DOE stated in the NOPR, we recognize that in
certain circumstances, multiple forms of Federal assistance to the same
project could enhance important national energy policy priorities. We
believe the current language in section 609.7(b)(9) is sufficient to
address these circumstances.
4. Credit Assessment and Rating Requirements
Section 609.6(b)(21) of the NOPR required the Applicant to submit
with its Application a credit assessment for the project without a loan
guarantee ``where the size and estimated cost of the project justify
such an assessment.'' Section 609.9(f) of the NOPR proposed to require
that not ``later than 30 days prior to closing, the applicant must
provide a credit rating from a nationally recognized rating agency
reflecting the Final Term Sheet for the project without a Federal
guarantee.''
Most commenters complained that the rating agency requirements
proposed in the NOPR would impose unnecessary costs and burdens on
project sponsors, with little corresponding benefit to the Department.
(Bechtel, at p. 2-3) Other commenters suggested that the requirement
for a credit assessment be eliminated from the final rule. (e.g.
Goldman Sachs at p. 9) Two commenters proposed a threshold of $25
million for waiving the credit rating requirement. Another expressed
the view that DOE should be able to waive the requirement where
appropriate. Two commenters thought that a waiver should not depend on
project size, but rather should depend on other factors as well such as
the ratio of project debt to sponsor equity.
DOE has retained the credit assessment and rating requirement
provisions, 609.6(b)(21) and 609.9(f). DOE believes that these
requirements will be beneficial in aiding the Department when it
determines the credit subsidy scores for particular projects, and when
it assesses and evaluates the risks and benefits of particular
projects.
DOE notes the distinction between the credit rating on the overall
project debt which lenders or project sponsors may wish to obtain for
pricing the debt; and the credit rating without considering the benefit
of the guarantee, which will inform DOE's evaluation of the project and
estimation of the Credit Subsidy Cost.
DOE agrees that in some circumstances, it may be desirable to waive
a credit rating requirement. For example, projects for which project
costs fall below a certain level may not warrant the cost of a credit
rating, should the cost prove large in comparison to the overall cost
of the project. Therefore, in the final rule DOE has added to section
609.9(f) the following language: ``where the total Project Cost for an
Eligible Project is projected to exceed $25 million.'' The Department
selected this number because it believes any project that costs below
that amount may find it uneconomic to obtain a credit rating and to
participate in the Title XVII program. By putting this threshold in
place, DOE seeks to support smaller projects.
C. Project Costs
Sections 609.2 and 609.12 of the proposed regulations defined
``Project Costs'' as those costs, including escalation and
contingencies, that are necessary, reasonable, customary, and directly
related to the design, engineering, financing, construction, startup,
commissioning and shake down of an Eligible Project. Conversely, costs
excluded from the definition of Project Costs included initial research
and development costs, the Credit Subsidy Costs, any administrative
fees paid by the Project Sponsors, and operating costs after the
facility has been placed in service.
Public Comments: As noted above, the Department intends to
implement Title XVII through the ``self-pay'' authority provided in the
Act. Thus, DOE has no current intention to seek appropriations to pay
for the Credit Subsidy Costs of any Title XVII loan guarantees, but
rather project sponsors will be required to pay those costs before DOE
enters into a loan guarantee agreement. Pursuant to FCRA, the Credit
Subsidy Cost reflects the net present value of the estimated payments
to or from the Government. It is impossible to tell at this point what
the Credit Subsidy Cost will be for any particular project.
Most commenters argued that Credit Subsidy Costs and Title XVII
administrative fees that are paid by a project sponsor should be
treated as Project Costs. These commenters maintain that the exclusion
of Credit Subsidy Costs and administrative fees from Project Cost is
inconsistent with the treatment of similar costs in commercial project
financing and in other Federal programs. These commenters also state
that there is no provision in either FCRA or in OMB Circular No. A-129
that prohibits the inclusion of these costs in a project's financing
package. They contend that the inclusion of such fees or costs in the
financing package neither increases project risk, nor diminishes the
reasonable prospect of repayment of the loan. (See e.g. NEI at pp. 18-
19; Nuclear Utilities, at p. 18; and FES at p. 2)
TXU similarly supported the inclusion of Credit Subsidy Costs and
administrative fees in total Project Costs and supported making them
eligible, at least in part, for the federal loan guarantee. TXU added
that total project costs should include 100 percent of the costs to
bring a plant into commercial operation, including all financing and
start-up costs. (TXU at 7).
S&P, however, took a different position from most commenters, and
asserted that DOE's proposed definition of the project's total costs is
consistent with general market practice, except that, if projects
obtain a guarantee from a monoline insurer, the premium paid for such a
wrap is generally included in the total cost of the project to be
financed. However, its exclusion here appears consistent with the
intent of [Title XVII], namely to prevent the subsidy fee itself from
potentially becoming a taxpayer liability in the event of default. (S&P
at 2).
USEC also asserted that Credit Subsidy Costs and administrative
fees should be counted as Project Costs. USEC's comments also
identified other costs that should be specifically considered to be
Project Costs. These include: general and administrative costs;
performance incentives paid to employees or officers working on the
project (because the project is benefiting from the increased
performance); research, development, and demonstration costs that are
directly related to the project; and expenses incurred after start-up.
USEC said that by excluding potentially large, post-start-up costs, DOE
would essentially be requiring an additional equity investment by the
project sponsor. USEC argued that DOE should allow these costs as part
of Project Costs and evaluate them on a case by case basis when
reviewing the economics of a project. (USEC at 6-7).
Beacon recommended that the final rule allow ``as an option'' the
inclusion of Credit Subsidy Costs and administrative fees in the
definition of Project Costs. Beacon said that such costs could pose a
substantial burden on small businesses and development stage companies
unless they are included in Project Costs. (Beacon at 1). Goldman Sachs
also recommended that Project Costs be defined to include Credit
Subsidy Costs and the administrative cost of issuing a loan guarantee.
[[Page 60127]]
Goldman Sachs further recommended that Project Costs be defined to
include the costs of administrative services provided by affiliates;
development expenses; pre-completion operation and maintenance costs;
and costs of procurement and testing. Project financings, according to
Goldman Sachs, customarily cover all costs associated with the
construction of the project, including fees and expenses. To require
the project sponsor to cover these costs, in Goldman Sachs' view, would
either eliminate the non-recourse nature of the financing or mean that
the lenders would have to cover these amounts with a non-guaranteed
loan. Moreover, whereas the proposed rule states that the loan
guarantee will cover only principal and interest, Goldman Sachs
asserted that the loan guarantee should cover all borrower obligations,
including without limitation default interest and post-petition
interest, reimbursement of letter of credit drawings, prepayment
premiums, payments under interest rate hedging agreements, fees,
expenses, and indemnification payments. Goldman Sachs said this would
be consistent with the definition of ``obligations'' in project finance
loan agreements. (Goldman Sachs at 6). Ameren too opposed the NOPR's
exclusion of certain categories of costs from the definition of Project
Costs. The NOPR, in Ameren's view, does not explain why the excluded
categories are less suitable for a guarantee and Ameren said that the
exclusions are ``not conducive to encouraging innovation.'' (Ameren at
3-4).
DOE Response: For any project that is granted a Title XVII loan
guarantee, the Credit Subsidy Cost and administrative costs charged by
DOE, are costs that must be paid by the borrower and are necessary
terms and conditions of receiving the guarantee. As stated in the S&P
comments, the DOE position is consistent with the intent of Congress to
require such costs be paid by the borrower. Allowing these fees to be
included in the Project Costs would increase the amount of debt that
could be supported by a Title XVII loan guarantee. As funding is
fungible, allowing the Credit Subsidy and Administrative Costs to be
financed with the Title XVII loan guarantee could in effect transfer
these costs to the taxpayer in the event of default. Furthermore,
consistent with the requirements of Public Law 110-5 and as in the
NOPR, the final regulations prohibit a Borrower from paying any Title
XVII Credit Subsidy Cost with funds obtained from the Federal
government, or from a federally guaranteed loan.
While some commenters asserted that other Federal agencies permit
items such as Credit Subsidy Costs or similar expenses and
administrative fees to be covered by the Federal guarantee issued
pursuant to their loan guarantee programs, the Credit Subsidy Cost
under Title XVII reflects the subsidy cost of the loan guarantee, as
defined in FCRA. It is important to note that this is not comparable to
the fees cited in comments which may offset, but do not reflect the
explicit subsidy cost for the individual loan guarantee.
To the extent commenters recommended other costs that are not
specifically listed in the final regulations for inclusion in the
definition of eligible Project Costs, the Department rejects those
comments. The Department sees no adequate basis for further revising
the rule's definition of Project Costs except as otherwise provided in
the final rule.
However, DOE again stresses, just as it did in the NOPR, that the
purpose of the Title XVII Loan Guarantee Program is to foster the
deployment of qualified innovative technologies that would reduce or
sequester air pollutants or anthropogenic greenhouse gas emissions; it
is not to assist or support high-risk research into or development of
new technologies. Nor is it to assist in the ongoing commercial
operations of successful projects. Therefore, costs related to the
initial research and development of a new technology or to operating
costs will not be accepted as Project Costs for purposes of such
guarantees.
D. Solicitation
Section 609.3 of the proposed regulations required DOE to issue a
solicitation to start the process of accepting, reviewing, and
ultimately granting applications for Title XVII loan guarantees. This
section also set forth certain minimum requirements for each
solicitation, including the fees that would be required of persons
invited to submit Applications and the criteria that the Department
would use to weigh competing Pre-Applications and Applications and to
make ultimate selections for loan guarantees. The proposed regulations
set forth programmatic, technical, and financial factors, including the
percentage of the loan guarantee requested, to be used by DOE to select
projects for loan guarantees.
Public Comments: Several commenters stated that DOE should use a
``rolling'' or ``open'' application process, as opposed to only
accepting Applications for a limited time in response to a particular
solicitation. Commenters from the nuclear industry supported this
recommendation by pointing to difficulties that may be faced by nuclear
project sponsors with a project development timetable that does not
match a DOE solicitation. These commenters also noted that DOE is not
in a position to assess with precision the market forces that will
govern the number of new projects potentially eligible for loan
guarantees, or when those projects will need loan guarantees, and
contended that other major federal loan guarantee programs--including
TIFIA, Ex-Im Bank and OPIC--operate with an open or ongoing (rolling)
application process. (NEI at pp. 28-29; Nuclear Utilities at p. 17)
The Nuclear Utilities ask that DOE adopt a flexible ``open''
application process for large multi-year projects involving more than
$2 billion and/or 1,000 MW of generating capacity. (Nuclear Utilities
at p. 17) Citi stated that ``[b]y accepting applications only in
response to a particular solicitation, the DOE loan guarantee process
would be unduly prejudicial to projects that happened to have matured
to produce the required pre-application materials in the narrow
timeframe of a solicitation.'' Citi requested clarification that DOE
will accept and review applications for eligible projects at any time
when sponsors believe that the markets are ready for their investment.
This allegedly would not preclude DOE from opening or closing the
program for specific technologies at various times. (Citi at 5).
Goldman Sachs, Bechtel and USEC likewise recommended an open
application process but also supported a simplified three-step process
(application, followed by a conditional commitment, followed by
negotiation and execution of a loan guarantee agreement). (Goldman
Sachs at 8, Bechtel at 7, and USEC at 6) (Bechtel at 6-7). Bechtel
indicated that this three-step process is used by other federal
agencies. (Bechtel at 7)
Beacon further recommended that language in proposed Sec. 609.4
stating that the Pre-Application must meet all requirements in the
solicitation and in the final rule should be modified by changing
``must'' to ``should'' or ``is expected to.'' This change would prevent
pre-applications from automatic disqualification if they are missing
one item, and would make Sec. 609.4 consistent with Sec. 609.5.
(Beacon at 3)
DOE Response: While DOE agrees that an ``open'' or ``rolling''
process for Title XVII loan guarantee program applications would give
applicants greater flexibility in deciding when, or
[[Page 60128]]
if, to submit an application to DOE, adopting such a structure at this
time would interfere with the Department's ability to select which of
the technologies that Title XVII makes statutorily eligible for loan
guarantees should be the focus of any such authority made available by
Congress. If DOE were to adopt the ``window is always open'' and
``first come first served'' approach to Title XVII, as some commenters
appear to advocate, then it is possible that all loan guarantee
authority provided by Congress at any particular time could be absorbed
by only one or a few very large projects, to the exclusion of smaller
projects. This could have the result of the program focusing heavily on
only certain eligible technologies merely through operation of the rule
itself. Moreover, there is no certainty that the projects first through
the application door would be in the areas that either the Department
or Congress wished to promote at the particular time. DOE should be
able to tailor loan guarantee availability to particular technologies
and particular projects that are the most promising and that in the
Department's judgment will most benefit the Nation. Finally, adopting
the open application approach could eliminate the Department's ability
to have projects compete against one another for the available loan
guarantee authority. Especially in the situation where available
authority is likely to be insufficient to satisfy all loan guarantee
requests, DOE believes it is desirable for there to be competition
among projects for the available loan guarantees, rather than for the
authority to be used up on a first come first served basis regardless
of the relative merits of potentially eligible projects.
At some future time, after substantial experience has been gained
in the administration of the Title XVII program, it may be appropriate
and possible for the Department to reconsider this position. In the
meantime, however, DOE believes it is appropriate to implement the
program by requiring the Department to issue a solicitation for
projects, tailored broadly or narrowly as the Department sees fit at
the time and in light of programmatic objectives.
The Department thus has decided to adopt a solicitation-based
approach to the implementation of Title XVII, as was proposed in the
NOPR. The rule provides that each solicitation must set forth relative
weighting criteria specifying the factors that will be used to evaluate
applications and the relative weighting assigned to each criterion. DOE
has considered, but has decided not to require by rule, competitive
procedures or requirements to be employed when the Department evaluates
applications for loan guarantees. As a practical matter, loan guarantee
applications submitted in response to solicitations will be competing
against each other for available loan guarantee authority. This enables
and indeed requires competition to take place by requiring that each
solicitation set forth relative weighting criteria by which
applications for loan guarantees will be judged. In that manner,
applications will not necessarily be ``competed'' one against the
other, but the evaluation process nonetheless will result in the
applications being ranked in such a manner that the applications that
best fulfill statutory and solicitation criteria from the Department's
perspective will receive higher scores.
DOE is mindful that certain projects, e.g. nuclear power plants,
require long lead times prior to the submission of a loan guarantee
application, but believes that solicitations can be devised and
tailored to particular technologies that accommodate such long lead
time requirements consistent with the overarching legislative purpose
of promoting technologies that further Title XVII policy goals.
Additionally, DOE does not believe it is appropriate to make the
language change requested by Beacon to section 609.4 of the final
regulations. The listed items to be included with Pre-Application
submissions are intended to be mandatory. However, the Department
clarifies that a Pre-Application will not necessarily be rejected
simply because one or even a few items are not in final form when they
are submitted with the initial Pre-Application submission. The
Department will exercise reasonable discretion in giving Applicants an
opportunity to complete their Pre-Application submissions in a timely
manner within the open period provided by a solicitation. DOE, of
course, may reject any Pre-Application or Application that it considers
incomplete.
E. Payment of the Credit Subsidy Cost
Section 1702(b) of the Act states that: ``No guarantee shall be
made unless (1) an appropriation for the cost has been made; or (2) the
Secretary has received from the borrower a payment in full for the cost
of the obligation and deposited the payment into the Treasury.'' (42
U.S.C. 16512) Section 20320(a) of P.L. 110-5, however, only authorized
DOE to accept Credit Subsidy Cost payments from Borrowers to pay the
full Credit Subsidy Costs of loan guarantees with respect to the $4
billion in loan guarantee authority authorized by the CR. Moreover,
DOE's intent continues to be to implement the Title XVII program only
through the self-pay authority of section 1702(b)(2). As stated in the
NOPR, DOE interprets section 1702(b) as authorizing either an
appropriation or payment of the credit subsidy cost in full by the
Borrower, but Title XVII does not allow and DOE will not allow partial
payment of the Credit Subsidy Cost by the Borrower with the remainder
covered by a Congressional appropriation.
Public Comments: Several commenters recommended a transparent
formula for the calculation of each project's Credit Subsidy Cost. They
contend that project sponsors need a reasonably accurate estimate of
the subsidy cost early in the development process in order to support
multi-billion dollar investment decisions. Otherwise, project sponsors
will be forced to engage in lengthy negotiations before they know the
amount of the Credit Subsidy Costs they will be required to pay, and
before they can properly assess their interest in the Title XVII
program. (e.g., Dominion at 9; Southern at 2) For regulated electric
companies in particular, negotiation with state regulatory bodies
concerning recovery of project costs arguably will be impossible
without some reasonable estimate of the Credit Subsidy Cost.
NEI suggested that DOE develop written guidance providing the
specific considerations that will enter into the determination of the
Credit Subsidy Cost for a project and modify the proposed rule to: (1)
Provide for early disclosure to an applicant of how DOE expects to
apply those considerations in determining the Credit Subsidy Cost for
the applicant's project; and (2) afford the applicant an opportunity to
respond in writing for the purpose of allowing DOE to determine whether
additional considerations and analysis warrant a re-estimate. (NEI at
17-18).
Other commenters seek clarification that when determining subsidy
costs, DOE and OMB will evaluate the entire risk profile of the
project, including but not limited to creditworthiness of the project
and, to the extent of the equity contribution, the project sponsor; the
Borrower's exposure to market and commodity risks; and the Borrower's
exposure to vendor cost increases or construction delays. According to
these commenters, the Department should consider that the more
creditworthy the project is, the lower the subsidy cost should be. They
ask that the final regulations recognize that greater equity
investment, liquidity, and management experience reduce default risk
and,
[[Page 60129]]
therefore, should result in lower subsidy cost. (NEI at 17-18; and
Southern at 2)
JP Morgan maintained that the magnitude of the subsidy cost could
have a significant impact on a borrower's interest in a loan and a
lender's willingness to provide the financing. Given the uncertainty of
the Credit Subsidy Cost calculation, JP Morgan recommended that DOE
provide borrowers with an option to withdraw their applications upon
DOE's notification to the borrower of the subsidy cost to be charged.
Similarly, JP Morgan asserted that lenders should be permitted to
withdraw any commitments upon notification of the subsidy cost, and
that DOE's interpretation of Sec. 1702(b) in the NOPR should be
reconsidered in order to permit borrowers to pay part of the Credit
Subsidy Costs where there has been a congressional appropriation. (JP
Morgan at 2)
USEC asserted that the Credit Subsidy Cost should be small in order
to ensure repayment (commensurate with other federal loan guarantees).
Apparently in order to keep the Applicant's share of Credit Subsidy
Costs small, USEC recommended that DOE seek appropriations for credit
subsidy costs because the overall purpose of the Title XVII program is
to foster commercial deployment of new and innovative technologies.
(USEC at 5). Beacon also maintained that Sec. 609.9(d)(1) of the
proposed rule should be modified to permit partial self-funding/partial
appropriation of the Credit Subsidy Cost. Specifically, Beacon
recommended that DOE should change the parenthetical ``(but not from a
combination)'' in Sec. 609.9(d)(1) to ``(including a combination)''.
(Beacon at 6). Ameren, too, contended that the NOPR should be revised
to allow for the possibility that Congress will appropriate money for
payment of the Credit Subsidy Cost. Ameren stated that the regulations
should not always require applicants to pay the Credit Subsidy Costs
for a guaranteed loan, and encouraged DOE to follow the flexible
approach used by Ex-Im Bank. (Ameren at 4-5).
DOE Response: The Department has decided not to alter the proposed
regulation dealing with the calculation of Credit Subsidy Costs. With
respect to the issue of transparency, the Department certainly
understands the need for and importance of a mechanism to allow
potential participants in the Title XVII program to calculate an
approximate Credit Subsidy Cost for the loan guarantee they are seeking
from DOE. The Department currently is working to develop a methodology
that can be used to calculate the Credit Subsidy Cost for individual
projects under this program. With respect to the comment indicating
that the credit subsidy cost should be small, DOE must calculate the
Credit Subsidy Cost in accordance with the Federal Credit Reform Act.
DOE will calculate the Credit Subsidy Cost of any loan guarantee on a
case-by-case basis in accordance with FCRA and OMB Circular A-11. Per
the definition in FCRA, the credit subsidy cost reflects the net
present value of estimated payments from the government (e.g. default
claim payments) and to the government (e.g., recoveries), discounted to
the point of disbursement. For any project, the terms and conditions of
the guaranteed debt, the risks associated with the project, and any
other factor that affects the amount and timing of such cash flows will
affect the credit subsidy cost calculation. Factors that mitigate risks
will generally lower the credit subsidy cost. We note that the approach
used by Ex-Im and recommended by Ameren does not apply here because the
fees charged by Ex-Im do not reflect the subsidy cost for the loan
guarantee.
The Department and the Office of Management and Budget (OMB)
recognize the value to project sponsors and lenders of knowing the
earliest reasonable time the appropriate credit subsidy cost for the
sponsor's desired loan guarantee. The Department and OMB further
recognize that the two agencies must work together to produce any
preliminary credit subsidy cost estimate. Accordingly, the Department
and OMB are committed to making every effort to agree upon and provide
to project sponsors, at the time a Term Sheet is provided, a
preliminary credit subsidy cost estimate for the desired loan
guarantee, based on information available to the Department and OMB at
that time. The final credit subsidy cost determination can only be made
at the time of the Loan Guarantee Agreement, and may be different from
the preliminary credit subsidy cost estimate, depending on project-
specific and other relevant factors including final structure, the
terms and conditions of the debt supported by the Title XVII guarantee,
and risk characteristics of the project.
We note that Applicants are free to withdraw their Applications at
any time if they find that the Credit Subsidy Cost is more than the
Applicant is willing to pay. The right of an Applicant to withdraw its
application does not relieve the Applicant of any obligations to DOE at
the time of the withdrawal (including, for example, the payment of
outstanding or accrued administrative fees).
On the other hand, we do not agree that lenders in all
circumstances should similarly be permitted to withdraw their
commitments upon notification of the Credit Subsidy Cost, as
recommended by some commenters. The rights of lenders to withdraw will
turn on the nature of the commitment that the lender has given to the
Borrower.
We also reject the recommendation that Applicants should be able to
make partial payment of the Credit Subsidy Cost and rely on
appropriations for the remainder of the Credit Subsidy Cost for a
particular project. As indicated in the NOPR, DOE interprets section
1702(b)(2) of the Act as not permitting partial payment of the Credit
Subsidy Cost by the Borrower, with the remainder coming from an
appropriation. DOE believes the statutory language is clear in that
regard, but even if it were determined to be ambiguous, DOE would
exercise its policy discretion to interpret the statutory provision in
the manner set forth herein. Consequently, DOE adheres to the
interpretation of this provision set forth in the NOPR, and retains in
the final rule the all or none principle with respect to the payment of
Credit Subsidy Costs, unless otherwise provided by statute. The
Department notes that the final rule does not prohibit the use of
appropriations to pay for those Credit Subsidy Costs--indeed, Title
XVII explicitly allows that. But DOE has no current intention to seek
appropriations to pay Credit Subsidy Costs for any projects.
F. Assessment of Fees
Section 1702(h) of the Act requires DOE to ``charge and collect
fees for guarantees'' to cover the administrative cost of issuing a
Loan Guarantee. Proposed sections 609.6, 609.8, and 609.10 provided
that DOE would collect fees for administrative expenses covering all
phases of an Eligible Project. As defined in proposed section 609.2,
these fees consist of the administrative expenses that DOE incurs
during: (1) The evaluation of both the Pre-Application, if a Pre-
Application is requested in a solicitation, and the Application for a
loan guarantee; (2) the offering of a Conditional Commitment, the
execution of the Term Sheet, and the negotiation and closing of a Loan
Guarantee Agreement; and (3) the servicing and monitoring of the Loan
Guarantee Agreement, including during construction, start-up,
commissioning, shakedown, and the operational phases of an Eligible
Project.
[[Page 60130]]
Public Comments: Several commenters stated that administrative fees
should be known, quantified, and/or fixed at the time an application is
submitted to DOE. Beacon, for example, recommended that all fees should
be quantified in advance as a percentage of the loan amount or in a
formula based on the loan amount, and said DOE should make a conforming
change to the proposed rule. Beacon commented that knowing the basis of
fee amounts arguably would facilitate the calculation of project costs
and alleviate the burden of cost uncertainties on small businesses and
development stage companies. (Beacon at 1). Ameren sought clarification
as to how DOE anticipates recovering the costs associated with
evaluation of Pre-Applications that progress no farther in the process.
Ameren asserted that the costs should be borne by DOE rather than from
funds made available for the issuance of loan guarantees. Ameren stated
that ``[i]t would be inappropriate to reduce funds specifically
appropriated for loan guarantees to cover Department administrative
expenses that the Department has chosen to bear.'' (Ameren at 5-6).
DOE Response: DOE recognizes the concern of several commenters on
the advantages of a well-understood formula for calculating
administrative fees. The Department may at some future time take action
with respect to administrative fees but is not doing so now. The fees
are intended to recover only DOE's administrative costs in managing the
Loan Guarantee Program. A fee schedule will be published by DOE in the
near future.
We reject Ameren's recommendation that the costs of administering
the Loan Guarantee Program should be borne by DOE. Section 1702(h) of
the Act calls for DOE to ``charge and collect fees * * * sufficient to
cover applicable administrative expenses'' of the Title XVII program.
Therefore, while DOE does have discretion to determine which
administrative expenses should be properly deemed ``applicable'' to
this program and/or to particular applications and thus recovered from
program applicants or participants, the Department certainly is not
free to determine that it will recover none of its administrative costs
from applicants or participants and, instead, fund the costs of the
program through appropriations from Congress.
G. Eligible Lenders and Servicing Requirements
The NOPR stated that participating Eligible Lenders or other
servicers must meet certain eligibility, monitoring, and performance
requirements. These requirements, which were set forth in sections
609.2 and 609.11 of the proposed regulations, were intended to ensure
that the Eligible Lender or other servicer had the financial
wherewithal and appropriate experience and expertise to meet its
fiduciary obligations in connection with the debt guaranteed by DOE.
Section 609.10(g) of the proposed regulations also provided that a
lender must provide written notification to DOE prior to the assignment
or transfer of any portion of a Guaranteed Obligation.
Public Comments: TXU stated that ``[a]ny lender providing debt
capital to a project on a limited recourse basis would be performing an
exhaustive due-diligence process, using appropriate expertise to
analyze the risks.'' TXU asserted, therefore, that the duty of care
specified in the regulations is unnecessarily duplicative of the
process that the lender will use irrespective of the Department's
involvement as guarantor. Additionally, TXU contended that any specific
duties such as notice requirements should be assigned to an
Administrative Agent or Lending Agent and that debt held by other
lenders should be freely marketable without administrative burden on
all lenders. (TXU at 8). WMPI Pty., LLC (WMPI) recommended that DOE
revise the requirements proposed for lenders to take into account that
eligible projects are more likely to be financed in capital markets by
a group of bondholders through a public offering than by a single
lender. Specifically, WMPI pointed out that a commitment letter would
not be issued where there is a bond issuance and recommended that DOE
recognize this fact in the final rule. WMPI also asserted that the
final regulations should be revised to take account of the fact that
interest charges and repayment schedules are not known in advance of a
bond sale and, therefore, regulations calling for copies of loan
documents containing all of the terms and conditions of the loan,
including interest charges and principal repayment schedules, will be
inapplicable if the financing is done through a bond public offering.
(WMPI at 11-13).
Beacon recommended that the language ``including a qualified
retirement plan, or governmental plan'' be deleted from the definition
of Eligible Lender in proposed section 609.11(a)(1) because small
businesses and development stage companies may need to approach
financial institutions that may not have the specified plans. Beacon
also recommended the entirety of proposed section 609.11(a)(6) be
deleted. That language would require eligible lenders to have
experience as the lead lender or underwriter by presenting evidence of
its participation in other energy-related projects. Beacon maintains
that this requirement is unduly restrictive because not many lenders
have such experience and it is also generally irrelevant since the loan
guarantee program is limited to new or significantly improved
technologies. (Beacon at 7).
Goldman Sachs asserted that, except for certain critical
requirements (e.g., eligible lenders are disqualified if they have been
disbarred from participation in a Federal government contract), the
provisions in the NOPR regarding the eligible lender should apply only
to the lead lender. This is necessary, Goldman Sachs argued, because
only a small number of lenders will be able to meet the standards set
forth in the NOPR, e.g., will have the experience originating and
servicing loans similar in size and scope to the projects that will be
the subject of loan guarantee applications; or be able to demonstrate
experience as the lead lender in other energy-related projects.
Particularly as regards the expected financing needs of nuclear power
projects, Goldman Sachs maintained that the potential lending pool
should be kept as large as possible. (Goldman Sachs at 8).
DOE Response: The Department endorses the idea of maximizing the
pool of Eligible Lenders and of allowing the use of loan servicers that
may not be Eligible Lenders but that otherwise meet all applicable
standards.
In addition, in response to comments that DOE finds persuasive, the
Department has eliminated proposed section 609.11(a)(1) from the final
rule. Furthermore, while DOE rejects Beacon's suggestion that the
Department delete the entirety of section 609.11(a)(6) of the proposed
regulations, we did expand the definition. While it is arguably true
that the pool of servicers might be increased even further if section
609.11(a)(6) were completely eliminated, deletion of this provision
altogether would not be consistent with DOE's desire to establish a
program where there was a reasonable assurance of repayment in
connection with guaranteed loans. We note, however, that in the final
rule, section 609.11(a) and (b) do not apply to a loan servicer unless
the servicer is also the Eligible Lender.
In response to WMPI's comments, DOE believes that today's final
rule is flexible enough to support bond financing. Among other things,
the definition of ``Holder'' is sufficiently
[[Page 60131]]
broad to cover the issuers of that type of debt.
H. Federal Credit Reform Act of 1990 (FCRA)
FCRA provides that for any federal credit program, new direct loans
and loan guarantees may not be made unless authority has been provided
in advance in appropriations act(s). See 2 U.S.C. 661c(b). Title XVII
authorizes the issuance of loan guarantees where the credit subsidy
cost, calculated in accordance with FCRA, is paid either through
appropriations or by the borrower receiving the loan guarantee from the
Department. On February 15, 2007, Public Law 110-5 was enacted. That
statute provides DOE with the necessary authority, consistent with FCRA
and section 1702, to guarantee in the aggregate up to $4 billion in
loans for Title XVII projects. The authority to issue guarantees,
however, was limited to Borrowers who pay the applicable Credit Subsidy
Cost. No general funds are available to pay Credit Subsidy Costs.
Public Comments: A number of commenters questioned DOE's view that
authority in an appropriations act is needed for the issuance of Title
XVII loan guarantees. These commenters pointed to a statement by the
Government Accountability Office (GAO) that Title XVII itself provides
adequate authority for DOE to issue loan guarantees without the need
for any additional authority in an appropriations act, provided DOE
employs the Title XVII ``self-pay'' authority. Specifically, by letter
dated April 20, 2007, GAO indicated its belief that because Title XVII
allows for Credit Subsidy Costs to be covered by appropriations or by a
payment from the borrower, where the recipient of a loan guarantee
fully funds the Credit Subsidy Cost for its loan guarantee, no
appropriations act authority should be required. Some commenters added
that if DOE plans to adhere to the view that appropriations act
authority is required for all Title XVII loan guarantees, it must seek
and obtain an amendment to Title XVII or sufficient appropriations act
authority to allow the Title XVII loan guarantee program to succeed.
DOE Response: The Department does not interpret section 1702(b) of
the Act as providing either budget authority or other authority to make
any individual loan guarantee, as is required by FCRA. Instead, DOE
reads the Act and FCRA in harmony, which means that while Title XVII
authorizes DOE to carry out the loan guarantee program, the Department
may not issue any loan guarantees until it has received budget
authority or is otherwise provided authority to make guarantees in an
appropriations act. While the Act authorizes payment from a borrower as
an alternative source of funding, any such alternative source of
funding does not relieve DOE from the necessity of obtaining authority
in an appropriations act for the issuance of any loan guarantees, even
in cases where the Credit Subsidy Cost will be paid by the borrower or
project sponsor and no appropriations are used to pay such costs.
Congress acted consistent with this interpretation of Title XVII and
section 504 of FCRA when, in section 20320 of Public Law 110-5, it
authorized a $4 billion loan guarantee limitation and required the use
of the self-pay authority of Title XVII for the loan guarantee
authority provided by Public Law 110-5.
In the absence of the Title XVII authorization for DOE to receive
borrower-paid funds to pay for the Credit Subsidy Cost of a particular
loan guarantee, DOE would not have the ability to defray the Credit
Subsidy Costs for loan guarantees in that manner. Title XVII clearly
authorizes those costs to be covered either with appropriated funds or
with borrower paid funds. Furthermore, Title XVII and FCRA, read
together, require DOE to obtain authority in an appropriations act to
issue loan guarantees, even when employing the Title XVII self-pay
authority.
Section 20320 of Public Law 110-5 does three things: (1) It
provides a loan guarantee volume limitation of $4 billion; (2) it
requires that borrower self-pay the Credit Subsidy Cost; and (3) it
prohibits the use of general fund appropriations for such costs. In
enacting Public Law 110-5, Congress acted consistently with the
Administration's view that authority in appropriations acts is required
in advance before a loan guarantee can be issued. Therefore, for the $4
billion authorized by Public Law 110-5, DOE will implement the program
with self-pay authority. Furthermore, DOE intends to continue to
implement the Title XVII program through the self-pay authority
provided by the Act and has no current intention to seek appropriations
to pay Credit Subsidy Costs for any project.
I. Default and Audit Provisions
Title XVII, sections 1702(g) and 1702(i), require DOE to promulgate
regulations to address default and audit requirements (42 U.S.C.
16512(g), (i)). Sections 609.15 and 609.17 of DOE's regulations,
respectively, address these requirements. These provisions will apply
to all loan guarantees issued under the Title XVII program.
Public Comments: USEC expressed concern that the Department's
assertion of audit authority could be interpreted as requiring
application of the Federal Acquisition Regulations (FAR). (USEC at 6)
Other parties were concerned that after-the-fact audits could reduce
the amount of project costs and the extent of the guarantee coverage.
According to Bechtel, in particular, such a requirement would make the
guarantee a conditional commitment. (Bechtel at 5-6) These parties
pointed out that in project financing, an independent engineer is
customarily used to review and certify costs prior to each loan
disbursement and they recommended this approach be adopted in DOE's
regulations. In Bechtel's view, once a disbursement is made, the
guarantee should be unconditional and not subject to reduction in a
post-disbursement audit. (Bechtel at 5-6).
Goldman Sachs recommended that the final rule clearly provide for
the guarantee to be available in the case of defaults other than non-
payment of principal and interest without the need for a DOE
determination of material effect. Goldman Sachs maintained that as
proposed, the rule would prevent lenders from making a demand on the
guarantee in the case of defaults other than non-payment of principal
and interest unless DOE agrees, and would potentially decrease the pool
of lenders willing to participate. Goldman Sachs also recommended the
adoption of a ``well-defined, market-based, and court-tested''
mechanism for handling default and suggested that DOE look to the
monoline insurance market which provides credit enhancement to capital
markets transactions. (Goldman Sachs at 4-5)
DOE Response: DOE clarifies that the final rule and the Title XVII
loan guarantee program are not subject to the FAR. The Department also
clarifies that the audit provisions do not render the loan guarantees
conditional, but that the need to retain audit authority is necessary
to prevent fraud and abuse and should in no way be construed as
limiting the enforceability of the Title XVII Loan Guarantee.
DOE does not accept Goldman Sachs' recommendation that DOE give up
its right to approve claims on the guarantees in the event of defaults
for circumstances other than non-payment of principal and interest.
Inasmuch as DOE likely will be the largest risk taker in any project
receiving a Title XVII guarantee, the Department is not being
unreasonable in insisting that it have a say about what event can
accelerate
[[Page 60132]]
payments under the Loan Guarantee Agreement.
However, the Department has revised section 609.15(e), which
requires lenders to provide supporting documentation to justify a
payment demand, to specify that requirements will be provided in the
Loan Guarantee Agreement. Also, DOE clarifies that proposed section
609.15(b) is not intended and should not be read to preclude demands
for failure to pay principal and interest where there has been a
default other than a payment default. A non-payment default can become
a payment default if such default is not cured within the time
specified in the Loan Guarantee Agreement and the debt is accelerated
and thus causes the entire amount of the loan to become immediately due
and payable. DOE will retain the audit provision in section 609.17(b)
which permits DOE, in the course of conducting an audit, to exclude
from or reduce project costs that are determined to be unnecessary or
excessive. As indicated above, such an audit provision is necessary in
order to protect the Federal government against the possibility of
fraud or abuse.
J. Tax Exempt Debt
Section 103(a) of the Internal Revenue Code (IRC), 26 U.S.C.
103(a), provides that ``gross income'' does not include interest on any
state or local bond, with certain exceptions. Section 149(b) of the
IRC, 26 U.S.C. 149(b), provides that the section 103(a) exclusion from
gross income ``shall not apply to a state or local bond if such bond is
federally guaranteed.'' Section 149(b) in effect converts tax exempt
debt to taxable debt when such debt is guaranteed by the Federal
government. Accordingly, DOE proposed in section 609.10 of the NOPR to
prohibit the Department from directly or indirectly guaranteeing tax
exempt obligations.
Public Comments: The Nuclear Utilities stated that section 609.10's
prohibition against issuing any loan guarantees that finance directly
or indirectly any tax exempt debt is unnecessarily broad, and appears
to establish new policy that negates provisions of current law on tax
exempt financing. The Nuclear Utilities focused on several exceptions
in 26 U.S.C. 149(b)(3)(A), which permit loan guarantees to apply to tax
exempt debt obligations under certain conditions, and request that the
final rule provide that loan guarantees may be issued for debt
obligations if they qualify under such a statutory exception in
existence at the time of loan guarantee agreement is executed.
Specifically, they request that the prohibition in section 609.10(d)(7)
of the NOPR should be amended by adding the proviso, ``unless such debt
obligations fall within one of the exceptions enumerated in 26 U.S.C.
149(b)(3)(A), or other similar law.'' (Nuclear Utilities at 15).
Bechtel recommended the deletion of the proposed requirement that
prior to the execution of the loan, DOE must ensure that the guarantee
does not finance tax exempt debt because it might exclude many
municipal and cooperative electric utility companies that rely heavily
on tax exempt financing. (Bechtel at 6). CPS sought elimination of the
prohibition on grounds that it is duplicative of IRC section 149(b).
(CPS at 3)
DOE Response: The prohibition on municipalities issuing tax-exempt
obligations that are also guaranteed by the Federal government is set
forth in Federal law, and DOE cannot change the statutory prohibition,
regardless of whether or not a similar prohibition is expressed in
Title XVII regulations. DOE believes, however, that in the interests of
clarity and completeness, the rule should contain such a prohibition.
Nonetheless, we are persuaded that the prohibition in the final rule
should be expressly coextensive with the statutory prohibition such
that any statutory exceptions in effect at the time that a guarantee is
issued will also be deemed exceptions from the regulation, because it
is not DOE's intent to prohibit by rule, except to the extent
prohibited by statute, loan guarantees from being issued for projects
employing tax exempt debt. We have modified section 609.10(d)(7) of the
final rule accordingly.
K. Full Faith and Credit
Section 609.14 of the proposed regulations provided that the full
faith and credit of the United States would be pledged to the payment
of all Guaranteed Obligations. It further provided that the guarantee
shall be conclusive evidence that it has been properly obtained, that
the underlying loan qualified for the guarantee, and that but for fraud
or material misrepresentation by the Holder, is presumed to be valid,
legal, and enforceable. DOE stated that it maintains a strong interest
in ensuring that the debt incurred in order to finance innovative
projects can be financed and sold in secondary markets.
Public Comments: The commenters addressing this issue stressed the
need to ensure that the guarantees issued by the Department are
completely unconditional and obtain a ``AAA'' credit rating. The
Investment Bankers focused on several provisions that appear to weaken
the unconditional nature of the guarantee. For example, the NOPR sought
to impose on Eligible