[Federal Register Volume 76, Number 30 (Monday, February 14, 2011)]
[Rules and Regulations]
[Pages 8404-8477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2473]
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Vol. 76
Monday,
No. 30
February 14, 2011
Part II
Department of Agriculture
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Rural Business-Cooperative Service
Rural Utilities Service
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7 CFR Parts 4279 and 4287
Biorefinery Assistance Guaranteed Loans; Final Rule
Federal Register / Vol. 76 , No. 30 / Monday, February 14, 2011 /
Rules and Regulations
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DEPARTMENT OF AGRICULTURE
Rural Business-Cooperative Service
Rural Utilities Service
7 CFR Parts 4279 and 4287
RIN 0570-AA73
Biorefinery Assistance Guaranteed Loans
AGENCY: Rural Business-Cooperative Service and Rural Utilities Service,
USDA.
ACTION: Interim rule with request for comments.
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SUMMARY: This interim rule establishes a guaranteed loan program for
the development and construction of commercial-scale biorefineries and
for the retrofitting of existing facilities using eligible technology
for the development of advanced biofuels.
DATES: This interim rule is effective March 16, 2011. Comments must be
received on or before April 15, 2011.
ADDRESSES: You may submit comments to this rule by any of the following
methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Submit written comments via the U.S. Postal Service
to the Branch Chief, Regulations and Paperwork Management Branch, U.S.
Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW.,
Washington, DC 20250-0742.
Hand Delivery/Courier: Submit written comments via Federal
Express Mail or other courier service requiring a street address to the
Branch Chief, Regulations and Paperwork Management Branch, U.S.
Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington,
DC 20024.
All written comments will be available for public inspection during
regular work hours at the 300 7th Street, SW., 7th Floor address listed
above.
FOR FURTHER INFORMATION CONTACT: Kelley Oehler, Energy Branch,
Biorefinery Assistance Program, U.S. Department of Agriculture, 1400
Independence Avenue, SW., Stop 3225, Washington, DC 20250-3201;
telephone (202) 720-6819. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This interim rule has been reviewed under Executive Order (EO)
12866 and has been determined to be economically significant by the
Office of Management and Budget. The EO defines a ``significant
regulatory action'' as one that is likely to result in a rule that may:
(1) Have an annual effect on the economy of $100 million or more or
adversely affect, in a material way, the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities; (2) Create a serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) Materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs or the rights and obligations of recipients thereof; or (4)
Raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in this EO.
The Agency conducted a benefit-cost analysis to fulfill the
requirements of Executive Order 12866. In this analysis, the Agency
identified potential benefits and costs of the Biorefinery Assistance
Guaranteed Loan Program to lenders, borrowers, and the Agency. The
analysis contains both quantitative estimates and qualitative
descriptions of the expected benefits and costs of the Biorefinery
Assistance Guaranteed Loan Program. The environmental and energy
impacts associated with the Biorefinery Assistance Guaranteed Loan
Program were qualitatively assessed.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. Under section 202 of the UMRA,
Rural Development generally must prepare a written statement, including
a cost-benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to State, local, or tribal
governments, in the aggregate, or to the private sector of $100 million
or more in any one year. When such a statement is needed for a rule,
section 205 of the UMRA generally requires Rural Development to
identify and consider a reasonable number of regulatory alternatives
and adopt the least costly, more cost-effective, or least burdensome
alternative that achieves the objectives of the rule.
This interim rule contains no Federal mandates (under the
regulatory provisions of Title II of the UMRA) for State, local, and
tribal governments or the private sector. Thus, this rule is not
subject to the requirements of sections 202 and 205 of the UMRA.
Environmental Impact Statement
This renewable energy program under Section 9003 of the Farm
Security and Rural Investment Act of 2002 (FSRIA) (as amended by
Section 9001 of the Food, Conservation, and Energy Act of 2008 (2008
Farm Bill)) has been operating on an interim basis through the issuance
of a Notice of Funds Availability (NOFA). During this initial round of
applications, the Agency conducted National Environmental Policy Act
(NEPA) reviews on each individual application for funding. No
significant environmental impacts were reported, and Findings of No
Significant Impact (FONSI) were issued for each approved application.
Taken collectively, the applications show no potential for significant
adverse cumulative effects.
The Agency has prepared a programmatic environmental assessment
(PEA), pursuant to 7 CFR part 1940, subpart G, analyzing the
environmental effects to air, water, and biotic resources; land use;
historic and cultural resources; and greenhouse gas emissions affected
by the Biorefinery Assistance Guaranteed Loan Program proposed rule.
The purpose of the PEA is to assess the overall environmental impacts
of the programs related to the Congressional goal of advancing biofuels
production for the purposes of energy independence and greenhouse gas
emission reductions. The impact analyses are national in scope, but
draw upon site-by-site analysis for each application to the program.
Site-specific NEPA documents prepared for those facilities funded under
Sections 9003 and 9004 of the FSRIA in FY 2008 and/or 2009 were
utilized, as well, to forecast likely impacts under the interim rule.
The draft PEA was made available to the public for comment on the USDA
Rural Business-Cooperative Service's Web site on May 3, 2010. No
comments were received on the draft PEA, and the Agency is preparing to
publish a Finding of No Significant Impact (FONSI) for the program.
Executive Order 12988, Civil Justice Reform
This interim rule has been reviewed under Executive Order 12988,
Civil Justice Reform. In accordance with this rule: (1) All State and
local laws and regulations that are in conflict with this rule will be
preempted; (2) no retroactive effect will be given this rule; and (3)
administrative proceedings in accordance with the regulations of the
Department of Agriculture's National Appeals Division (7 CFR part 11)
must be exhausted before bringing suit in
[[Page 8405]]
court challenging action taken under this rule unless those regulations
specifically allow bringing suit at an earlier time.
Executive Order 13132, Federalism
It has been determined, under Executive Order 13132, Federalism,
that this interim rule does not have sufficient federalism implications
to warrant the preparation of a Federalism Assessment. The provisions
contained in the rule will not have a substantial direct effect on
States or their political subdivisions or on the distribution of power
and responsibilities among the various government levels.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA) generally
requires an agency to prepare a regulatory flexibility analysis of any
rule subject to notice and comment rulemaking requirements under the
Administrative Procedure Act or any other statute unless the agency
certifies that the rule will not have an economically significant
impact on a substantial number of small entities. Small entities
include small businesses, small organizations, and small governmental
jurisdictions.
In compliance with the RFA, Rural Development has determined that
this action will not have an economically significant impact on a
substantial number of small entities. The burden for applying for a
Biorefinery Assistance Guaranteed Loan Program loan to any one borrower
is estimated to be less than 0.1 percent of the estimated cost of the
average construction or reconstruction project funded under this
program. Further, this regulation only impacts those who choose to
participate in the program.
Executive Order 13211, Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
The regulatory impact analysis conducted for this interim rule
meets the requirements for Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use, Executive
Order No. 13211, which states that an agency undertaking regulatory
actions related to energy supply, distribution, or use is to prepare a
Statement of Energy Effects. This analysis finds that this rule will
not have any adverse impacts on energy supply, distribution, or use.
Executive Order 12372, Intergovernmental Review of Federal Programs
Rural Development guaranteed loans are subject to the Provisions of
Executive Order 12372, which require intergovernmental consultation
with State and local officials. Rural Development will conduct
intergovernmental consultation in the manner delineated in RD
Instruction 1940-J, ``Intergovernmental Review of Rural Development
Programs and Activities,'' available in any Rural Development office
and on the Internet at http://www.rurdev.usda.gov/regs, and in 7 CFR
part 3015, subpart V.
Executive Order 13175
United States Department of Agriculture (USDA) will undertake,
within 6 months after this rule becomes effective, a series of
regulation Tribal consultation sessions to gain input by elected Tribal
officials or their designees concerning the impact of this rule on
Tribal governments, communities, and individuals. These sessions will
establish a baseline of consultation for future actions, should any be
necessary, regarding this rule. Reports from these sessions for
consultation will be made part of the USDA annual reporting on Tribal
Consultation and Collaboration. USDA will respond in a timely and
meaningful manner to all Tribal government requests for consultation
concerning this rule and will provide additional venues, such as
webinars and teleconferences, to periodically host collaborative
conversations with Tribal leaders and their representatives concerning
ways to improve this rule in Indian country.
The policies contained in this rule would not have Tribal
implications that preempt Tribal law.
Programs Affected
The Biorefinery Assistance Guaranteed Loan Program is listed in the
Catalog of Federal Domestic Assistance Program under Number 10.865.
Paperwork Reduction Act
The information collection requirements contained in the Notice of
Funding Availability for the Section 9003 Biorefinery Assistance
Guaranteed Loan Program published on November 20, 2008, were approved
by the Office of Management and Budget (OMB) under emergency clearance
procedures and assigned OMB Control Number 0570-0055. In accordance
with the Paperwork Reduction Act of 1995, the Agency is now seeking
standard OMB approval of the reporting requirements contained in this
interim rule. In the publication of the proposed rule on April 16,
2010, the Agency solicited comments on the estimated burden. The Agency
received one comment in response to this solicitation. This information
collection requirement will not become effective until approved by OMB.
Upon approval of this information collection, the Agency will publish a
rule in the Federal Register.
Title: Biorefinery Assistance Guaranteed Loan Program.
OMB Number: 0570-NEW.
Type of Request: New collection.
Abstract: The collection of information is vital for Rural
Development to make wise decisions regarding the eligibility of
projects and borrowers in order to ensure compliance with the
regulations and to ensure that the funds obtained from the Government
are used appropriately (i.e., are used for the purposes for which the
guaranteed loans were awarded). Persons seeking loan guarantees under
this program will have to submit applications that include specified
information including, but not limited to, the lender's analysis and
credit evaluation, financial statements on the borrower, a feasibility
study, a business plan, a technical assessment, an economic analysis,
and a description of the borrower's bioenergy experience. The
information included in applications for loan guarantee will be used to
determine applicant and project eligibility and to ensure that funds
are used for projects that are likely to be financially sound.
Once a project has been approved and the loan has been guaranteed,
lenders must submit certain reports. Some of these reports are
associated with the performance of the lender's loan portfolio and
include both periodic reports on the status of that portfolio and, when
applicable, monthly default reports. Other reports are associated with
individual projects and include quarterly construction reports and,
once a project has been completed, annual reports through the life of
the guaranteed loan. In addition, lenders are required to conduct
annual inspections of each completed project.
The estimated information collection burden hours has not changed
from the proposed rule, remaining at 2,920 hours.
Estimate of Burden: Public reporting burden for this collection of
information is estimated to average 4.6 hours per response.
Respondents: Individuals, entities, Indian tribes, units of State
or local government, corporations, farm cooperatives, farmer
cooperative organizations, associations of
[[Page 8406]]
agricultural producers, National Laboratories, institutions of higher
education, rural electric cooperatives, public power entities, and
consortia of any of these entities.
Estimated Number of Respondents: 23.
Estimated Number of Responses per Respondent: 27.4.
Estimated Number of Responses: 630.
Estimated Total Annual Burden on Respondents: 2,920.
E-Government Act Compliance
Rural Development is committed to complying with the E-Government
Act, to promote the use of the Internet and other information
technologies to provide increased opportunities for citizen access to
Government information and services, and for other purposes.
I. Background
Rural Development administers a multitude of Federal programs for
the benefit of rural America, ranging from housing and community
facilities to infrastructure and business development. Its mission is
to increase economic opportunity and improve the quality of life in
rural communities by providing the leadership, infrastructure, venture
capital, and technical support that enables rural communities to
prosper. To achieve its mission, Rural Development provides financial
support (including direct loans, grants, and loan guarantees) and
technical assistance to help enhance the quality of life and provide
the foundation for economic development in rural areas.
Section 9003 of the Farm Security and Rural Investment Act of 2002
(FSRIA) (as amended by Section 9001 of the Food, Conservation, and
Energy Act of 2008 (2008 Farm Bill)) provides for financial assistance
in the form of grants and loan guarantees to assist in the development
of new and emerging technologies for the development of advanced
biofuels. At this time, Congress has not appropriated any discretionary
funding, which would be necessary to fund program grants. Therefore,
the interim rule only addresses loan guarantees. If and when funds for
grants are appropriated and received by the Agency, it will be
necessary for the Agency to promulgate a separate regulation for
program grants.
The interim rule establishes the Biorefinery Assistance Guaranteed
Loan Program to provide loan guarantees for the development,
construction, or retrofitting of commercial biorefineries using
eligible technology, where eligible technology is defined as:
(a) Any technology that is being adopted in a viable commercial-
scale operation of a biorefinery that produces an advanced biofuel, and
(b) any technology not described in paragraph (a) above that has
been demonstrated to have technical and economic potential for
commercial application in a biorefinery that produces an advanced
biofuel.
On April 16, 2010 [75 FR 20044], the Agency published a proposed
rule for the Biorefinery Assistance Guaranteed Loan Program. Comments
were requested on the proposed rule, which are summarized in Section
III of this preamble. Most of the proposed rule's provisions have been
carried forward into 7 CFR part 4279, subpart C, and 7 CFR part 4287,
subpart D, although there have been several significant changes.
Changes to the proposed rule are summarized in Section II of this
preamble.
Interim rule. USDA Rural Development is issuing this regulation as
an interim rule, effective March 16, 2011. All provisions of this
regulation are adopted on an interim final basis, are subject to a 60-
day comment period, and will remain in effect until the Agency adopts
the final rule.
II. Summary of Changes to the Proposed Rule
This section presents changes from the April 16, 2010, proposed
rule. Most of the changes were the result of the Agency's consideration
of public comments on the proposed rule. Some changes, however, are
being made to clarify proposed provisions. Unless otherwise indicated,
rule citations refer to those in the interim rule.
A. Highlighted Changes
The following highlight significant changes to the rule:
Revised the maximum percent guarantee provisions,
including adding provisions to allow for a 90 percent guarantee for
loan amounts of $125 million or less under certain conditions.
Added refinancing as an eligible project purpose under
certain conditions.
Removed location in a rural area as a requirement for
project eligibility; however, it is included in a scoring criterion in
order to receive points for that criterion.
Removed the citizenship requirement for borrowers.
Revised the minimum retention requirement to 7.5 percent
of total loan amount.
B. Section Specific Changes
1. Definitions
A number of definitions were added, revised, or removed.
The Agency added one definition:
``Biobased product'' was added in order to further clarify the
biorefinery definition.
The Agency revised several definitions as follows:
Business plan. The Agency clarified the wording of this
definition.
Existing businesses. The Agency clarified the wording of
this definition.
Farm cooperative. The Agency revised the definition to be
generally consistent with the definition being used in the value-added
producer grant program.
Feasibility study. The Agency replaced ``capabilities''
with ``feasibility'' to clarify the definition.
Local owner. The Agency revised the rule to remove the
reference to the feedstock supply area and now defines local owner as
``an individual who owns any portion of an eligible advanced biofuel
biorefinery and whose primary residence is located within a certain
distance from the biorefinery as specified by the Agency in a Notice
published in the Federal Register.''
Material adverse change. The Agency revised the definition
by replacing ``might'' with ``would likely'' jeopardize loan
performance.
Project. The Agency corrected the term ``biobased
byproduct'' to ``biobased product.''
Technical and economic potential. The Agency added to the
definition the phrase ``successfully completed'' when referring to the
12-month operating cycle.
Lastly, the Agency revised several definitions associated with
capital ratios to refer to the Federal Deposit Insurance Corporation
regulations in general.
The Agency removed several definitions--Agency, byproduct, future
recovery, immediate family, regulated or supervised lender, and surety.
The term ``Agency'' was removed from the definitions
because it is defined in Sec. 4279.2 and does not need to be repeated
in the interim rule.
The term ``future recovery'' was removed because the term
is not used in the interim rule.
The term ``immediate family'' was removed because the term
was only used for the citizenship requirement, which has been removed.
Thus, the term is no longer used in the rule.
The term ``regulated or supervised lender'' was removed
because of the revision made to identify eligible lenders.
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The specific definition for the term ``surety'' was
removed; the rule now refers to how the term is commonly used in the
industry.
2. Lender Eligibility Requirements
The Agency modified Sec. 4279.202(c)(1) to make the definition of
eligible lender similar, but not identical, to the definition of
traditional lender in the Business and Industry Guaranteed Loan
Program. The Agency notes that, under the interim rule, savings and
loan associations, mortgage lenders, and other lenders (those that are
not regulated lenders) are not eligible to participate in this program.
The Agency modified the rule to require that the lender meet
acceptable levels of capital at the time of application and at the time
of issuance of loan note guarantee, thereby removing the requirement of
maintaining acceptable capital levels at all times.
The Agency also clarified that, if the information to calculate
these levels of capital is not identified in the Call Reports or Thrift
Financial Reports, the lender will be required to calculate these
levels and provide them to the Agency.
Lastly, the Agency added a provision addressing lenders that are
under a cease and desist order from a Federal agency. In such
instances, the Agency will evaluate the lender's eligibility on a case-
by-case basis given the risk of loss posed by the cease and desist
order.
3. Independent Credit Risk Analysis
The Agency revised ``$100,000'' to ``$125,000,000.''
4. Conditions of Guarantee
The Agency revised the rule to indicate that both the guaranteed
and unguaranteed portions of the entire loan must be secured by a first
lien and that the Agency may consider a subordinate lien position on
inventory and accounts receivable for working capital loans if certain
conditions are met.
The Agency also clarified that the lender remains bound by all
obligations under the loan note guarantee, Lender's Agreement, and
Agency program regulations even if all or a portion of the loan note
guarantee has been sold to a holder.
Lastly, the Agency incorporated provisions associated with rights
and liabilities specific to this program, rather than relying on the
corresponding provisions in the Business and Industry Guaranteed Loan
program found at Sec. 4279.72(b), to clarify that having a holder
purchase part of the loan note guarantee does not increase the coverage
provided to the lender under the loan note guarantee.
5. Sale or Assignment
The Agency revised the sale or assignment provisions to rely solely
of the sale or assignment provisions of the Business and Industry
Guaranteed Loan program found at Sec. 4279.75.
6. Minimum Retention
The Agency revised the minimum retention provisions to rely on the
minimum retention provisions of the Business and Industry Guaranteed
Loan program found at Sec. 4279.77, except that the lender is required
to hold 7.5 percent (rather than 5 percent) of the total loan amount in
its own portfolio.
7. Ineligible Purposes
As proposed, projects in excess of $1 million that would likely
result in the transfer of jobs from one area to another and increase
direct employment by more than 50 employees and projects in excess of
$1 million that would increase direct employment by more than 50
employees, if the project would result in an increase in the production
of goods for which there is not sufficient demand, or if the
availability of services or facilities is insufficient to meet the
needs of the business, would have been ineligible purposes, as they are
in the Business and Industry Guaranteed Loan program. The Agency has
removed these types of projects as ineligible; that is, such projects
would be eligible for a guaranteed loan under this program. The Agency
has determined that to continue excluding such projects is unnecessary
for this program because the program's primary focus is on the
development of renewable energy technologies and not on job creation.
8. Fees
The Agency removed the cross-reference to the Business and Industry
Guaranteed Loan program and replaced it with provisions specific to
this program. The only substantive change is the elimination of
reference to the option to lower the guarantee fee to 1 percent, which
was never intended to be part of this program.
The Agency has added provisions that allow it to adjust the
guarantee fee and the annual renewal fee through the publication of a
Federal Register notice.
The Agency has added a 3 percent guarantee fee for loans with a 90
percent guarantee.
9. Borrower Eligibility
The Agency removed the citizenship requirement. In addition, the
Agency clarified that the borrower must have or obtain legal authority
prior to loan closing.
10. Project Eligibility
Changes made to project eligibility include:
Replacing the requirement that the project must be located
in a rural area with the requirement that the project must be located
in a State. Note that the project must be located in a rural area to
receive points under the ``potential for rural economic development''
scoring criterion.
Clarifying that the project must use an eligible feedstock
for the production of advanced biofuels and biobased products (at
proposal, only advanced biofuels was identified) to be consistent with
the authorizing legislation.
Revising the proposed requirement that ``more than 70
percent of the revenue generated by the biorefinery must be from the
sale of advanced biofuel'' to now require that the majority of the
production generated by the biorefinery must be advanced biofuels. If
the biorefinery produces biobased products and, if applicable,
byproduct(s) with an established BTU content, majority biofuel
production will be based on BTU content of the advanced biofuel, the
biobased product, and byproduct. Alternatively, if there is no
established BTU value for the biobased product or the byproduct
produced, then majority biofuel production would be based on output
volume of the advanced biofuel, the biobased product, and, if
applicable, the byproduct.
Adding a provision that the advanced biofuel must be sold
as a biofuel unless otherwise approved by the Agency and determined to
be in the best financial interests of the government.
Revising the rule to include any organic matter that is
available on a renewable or recurring basis from non-Federal land or
eligible tribal land, including municipal solid waste consisting of
renewable biomass, biosolids, treated sewage sludge, and byproducts of
the pulp and paper industry, as eligible feedstock.
Clarifying that an advanced biofuel that is converted to
another form of energy for sale will still be considered an advanced
biofuel.
11. Guaranteed Loan Funding
The Agency has made several changes in this section, including:
Clarifying that the borrower needs to provide the
remaining 20 percent from other non-Federal sources to complete the
project.
[[Page 8408]]
Revising the loan guarantee amounts associated with the
maximum percent guarantees;
Allowing a maximum guarantee of 90 percent for loan
requests of $125 million or less and identifying the conditions under
which the Agency may issue a 90 percent guarantee.
Adding a provision that loans made with the proceeds of
any obligation the interest on which is excludable from income under
the Internal Revenue Code are ineligible.
12. Subordination of Lien Position
The Agency moved this provision to the servicing section and
corrected the cross-reference (from Sec. 4279.123 to Sec. 4287.123).
13. Interest Rates
In addition to removing the proposed provisions associated with
blended rates and the 1 percent interest rate cap from the interim
rule, the Agency has significantly revised this section to now rely on
the interest provisions found in the Business and Industry Guaranteed
Loan program at Sec. 4279.125, with several exceptions:
The rate on the unguaranteed portion of the loan cannot
exceed the rate on the guaranteed portion of the loan by more than 500
basis points;
Variable rate loans will not provide for negative
amortization nor will they give the borrower the ability to choose its
payment among various options; and
Both the guaranteed and unguaranteed portions of the loan
must be amortized over the same term.
In addition, the interest rates provisions found in the Business
and Industry Guaranteed Loan program at Sec. 4287.112 also apply to
this program.
14. Terms of Loan
The maximum repayment period has been revised from ``20 years or 85
percent of the useful life of the project, as determined by the Agency,
whichever is less'' to ``20 years or the useful life of the project, as
determined by the lender and confirmed by the Agency, whichever is
less.''
The Agency also removed the cross-reference to Sec. 4279.126(d)
and inserted corresponding text specific to this program (see Sec.
4279.232(d)).
15. Credit Evaluation
The Agency made several changes to the provisions for demonstrating
the borrower's equity. One change allows equipment and qualified
intellectual project (in addition to real property as was proposed) to
be used to meet the equity requirement, but clarifying that this
provision applies to only existing biorefineries and not to new
biorefineries. In addition, the Agency clarified that equity cannot
include other direct Federal funding.
The Agency clarified that the project equity must be demonstrated
at the time the loan is closed.
With regard to collateral, the Agency added provisions that it may
consider, for both existing and new biorefineries, the value of
qualified intellectual property, arrived at in accordance with GAAP
standards and subject to discounting. The value of intellectual
property may not exceed 30 percent of the total value of all
collateral.
16. Guarantee Applications
i. Application submittal, deadlines, and process. Reference to
paper copies has been replaced with reference to the use of the annual
Federal Register notice to identify the applicable method(s) of
application submittal.
ii. Lender's analysis and credit analysis. The Agency added a
provision requiring the lender to identify whether the loan note
guarantee is requested prior to construction or after completion of the
construction of the project; revised the requirement that the required
personal credit report be from an ``acceptable'' credit reporting
company to an ``Agency-approved'' credit reporting company; added a
requirement that personal credit reports are required from key
employees of the borrower; added a provision to allow the Agency to
obtain personal credit reports when the borrower is a corporation
listed on a major stock exchange; and deleted the provision that stated
credit reports are not required for elected and appointed officials
when the borrower is a public body or non-profit corporation.
iii. Feasibility study. Several changes were made to the contents
of the feasibility study as summarized in the following table. Note
that only elements that were changed are shown in the table.
------------------------------------------------------------------------
Feasibility area Change(s)
------------------------------------------------------------------------
Economic.......................... Added feedstock risks.
Revised documentation of
woody biomass feedstock to apply
only to woody biomass feedstock
sourced from National Forest system
lands or public lands.
Added ``or sold to'' when
referring to biobased by-products
and producer associations and
cooperatives.
Market............................ Redefined risks to address
competitive threats and advantages
and specific market risks.
Technical......................... Removed ``any constraints
or limitations in the financial
projections and any other facility
or design-related factors that
might affect the success of the
enterprise.''
Under Risk Related to:
added ``Design-related factors that
may affect project success.''
Financial......................... Added reference to ``uses
of project capital.''
Revised the provision of
project balance sheets, income and
expense statement, and cash flow
statements from 3 years to over the
useful life of the project.
Management........................ Added biofuel production,
acquisition of feedstock, and
marketing and sale of off-take to
the list of areas to be covered
when describing the borrower and
management's previous experience.
Added risks related to
management strengths and
weaknesses.
------------------------------------------------------------------------
Note: No changes were made to: Executive Summary and Qualifications.
iv. Economic analysis. The elements of the economic analysis have
been incorporated in the economic feasibility and financial feasibility
sections of the feasibility study and proposed Sec. 4279.261(i) has
been removed from the rule as a separate provision.
V. Scoring information. The Agency added a paragraph requiring that
the application must contain information in a format that is responsive
to the scoring criteria.
17. Lender Certification
The lender is now required to certify that ``the lender concludes
that the project has technical merit'' rather than certify that ``the
project is able to demonstrate technical merit.''
[[Page 8409]]
18. Scoring Criteria
The Agency revised the date it will score each completed
application it receives from June 1 to May 1 in the fiscal year in
which the application is received.
The Agency also made numerous changes to the criteria it will use
to score applications. These changes are summarized in the following
table. Note that only criteria that were changed are shown in the
table.
------------------------------------------------------------------------
Criterion Change(s)
------------------------------------------------------------------------
Borrower has established a market. Added requirement for the
advanced biofuel to meet an
applicable renewable fuel standard
in order to be awarded points.
Reduced the percent
commitment from 60 to 50 percent.
Increased points from 5 to
10.
Location of biorefinery relative Revised to read ``any other
other similar biorefineries. similar advanced biofuel
facilities.''
Use of feedstock not previously No changes were made to
used in the production of this criterion.
advanced biofuels.
Working with producer associations Corrected example.
and cooperatives. Instituted a two-tier
system that begins awarding points
at a 30 percent threshold.
To be awarded points, must
meet one of the three provisions,
not all three as proposed.
Replaced ``advanced
biobased byproducts'' with
``biobased products''.
Level of financial participation Reduced points from 20 to
by the borrower. 15.
Impacts on resource conservation, Increased maximum points
public health, and environment. from 5 to 10 and redistributed the
points.
Added examples to each of
the three impact areas.
Added provision to deduct 5
points if feedstock can be used for
human or animal consumption.
Significant negative impacts on Increased points from 5 to
existing facilities. 10.
Added provision that if the
feedstock is wood pellets, no
points would be awarded under this
criterion.
Rural economic development Added provision that the
potential. project be located in a rural area
to be awarded points under this
criterion.
Removed reference to the
median household wage in the State
such that only the County median
household wage is used in awarding
points.
Increased points from 5 to
10.
Level of local ownership.......... Decreased points from 15 to
5.
Project replication............... Increased points from 5 to
10.
Use of feedstock for human or Removed as a separate
animal consumption deduction. criterion and incorporated
provision for deducting points
under the ``Impact on resource
conservation, public health, and
environment'' criterion.
Use of technology, system, or Decreased points from 15 to
process not in operation in the 5.
fiscal year.
Applications that promote Added provision to award
partnerships and other activities Administrator bonus points.
that further the purpose of the
program as stated in the
authorizing legislation.
------------------------------------------------------------------------
19. Ranking of Applications
The Agency modified when it will rank applications and when
applications are due for each of the two rankings. The Agency also
modified slightly the process that will be used to rank applications,
which includes allowing an application to be competed in two
consecutive competitions. This has the effect of allowing applications
submitted during the second application period of a fiscal year to be
carried over to the next fiscal year. Conforming changes were made in
the section addressing ranked applications not funded.
20. Conditions Precedent to Issuance of Loan Note Guarantee
The Agency added to the introductory text that the lender can
request the guarantee prior to construction, but must still certify to
all conditions in this section. The Agency also added a new requirement
that the lender certify that the borrower has provided the equity in
the project identified in the conditional commitment.
21. Requirements After Project Construction
The Agency added a requirement to report on the actual amount of
biobased product and, if applicable, byproducts produced.
22. Servicing
The Agency is allowing the financial statements to be submitted
within 180 days rather than the 120 days required under Sec.
4287.107(d).
The Agency made a conforming change in Sec. 4287.307(d) that, for
working capital loans, the Agency may consider a subordinate lien
provided it is consistent with the conditional provisions specified in
Sec. 4279.202(i)(1).
The Agency determined that the interest rate adjustment provisions
of Sec. 4287.112(a)(2) should not apply to this program and has
revised the rule to exclude those provisions.
As noted earlier, the Agency moved the provisions concerning
subordination of lien position to this section (see Sec. 4287.307(g)).
The Agency revised the transfer and assumption provisions to cross-
reference this rule rather than the Business and Industry Guaranteed
Loan rule.
The Agency revised the default by borrower provisions by removing
the cross-reference to the corresponding Business and Industry
Guaranteed Loan program provisions and inserting text specific to this
program. This change was made to correct an incorrect cross-reference.
The Agency revised the liquidation provisions to correct an
incorrect cross-reference in Sec. 4287.157(d)(13) concerning
appraisals.
23. Fiscal Year 2009 and Fiscal Year 2010 Loan Guarantees
Prior to this interim rule, applications were processed and
guaranteed loans were serviced according to the provisions in the
November 20, 2008 (73 FR 70544), March 12, 2010 (75 FR 11840), or the
May 6, 2010 (75 FR
[[Page 8410]]
25076) Federal Register notice, as applicable. Because of the changes
the Agency has made to the servicing of loans guaranteed under the
Biorefinery Assistance Guaranteed Loan Program, there may be entities
that would prefer to have a guaranteed loan serviced under the
provisions of the interim rule rather than under the provisions in the
three Federal Register notices pursuant to which their guaranteed loans
were made. The Agency has determined that such entities should be
afforded the opportunity to access the servicing provisions of the
interim rule. Therefore, the Agency has added a new provision to this
effect in the interim rule.
III. Summary of Comments and Responses
The proposed rule was published in the Federal Register on April
16, 2010 (75 FR 20044) with a 60-day comment period that ended June 15,
2010. Comments were received from 42 commenters yielding 352 individual
comments on the proposed rule, which have been grouped into categories
based on similarity. Commenters included biorefinery owner/operators,
community development groups, industry and trade associations,
investment banking institutions, Rural Development personnel, and
individuals. As a result of some of the comments, the Agency made
changes in the rule. The Agency sincerely appreciates the time and
effort of all commenters. Responses to the comments on the proposed
rule are discussed below.
Requested Comments-- a. Preapplications
Comment: Two commenters state that a preapplication process that
serves as a screening process could be very helpful to all parties. One
of the commenters states that considerable effort is required to
develop an application package that may ultimately not score high
enough to meet eligibility requirements. In addition, lenders have to
commit to the application process with no reference as to how the
Agency will view the project. One option would be to move the
feasibility study (Sec. 4279.261) and the evaluation scoring (Sec.
4279.265) into a preapplication process. Screening and filtering out
ineligible or otherwise low scoring projects would streamline the
overall process and improve program efficiencies.
One commenter states that the application requirements, which
appear to be rather lengthy and burdensome, contain elements that
should be required by any prudent commercial loan committee reviewing
the loan itself. The commenter believes a preapplication process for
the program will only be of benefit to lenders and borrowers if it
includes a sign-off by the Agency as to completeness of the
application. The commenter believes it would be a waste of time to
review a project for acceptability and then review it again for
guarantee issuance; the review of a partial and then complete
application would only serve to slow down a process that we are seeking
to expedite.
One commenter believes that a preapplication process would only add
another step in the program and would not further the intent and
effectiveness of the program. Similarly, another commenter states that
a preapplication should not be required as it increases the burden of
required paperwork.
One commenter recommends that, rather than preapplications,
specialists be available to assist in evaluating how a given project
application would likely score against the program criteria.
One commenter encourages the Agency to consider a pre-application
process similar to the two-phase process employed by the Department of
Energy in its current solicitation (DE-FOA-0000140) for Title XVII loan
guarantees, the lack of which the commenter identifies as an obstacle
for applying for assistance. This process would be beneficial to the
extent the ``preapplication process'' is similar to the two-phase
process that the U.S. Department of Energy (DOE) is using in its
current solicitation for Title XVII loan guarantees. Requiring less
than a ``full-blown'' application in Phase I so that the Agency can
determine eligibility and ``invite'' those applicants with a reasonable
likelihood of success to apply in Phase II would relieve some burdens
from applicants. Phase I could include a basic application, a letter
commitment from the borrower to pursue Phase II if invited to apply and
the applicant (lender) to lend a specified amount to the project if the
Agency agrees to guarantee the loan (subject to other customary
conditions precedent), along with an overview of the project reflective
of the scoring criteria. This would reduce the level of diligence that
lenders would have to conduct for Phase I and shift this diligence to
Phase II when the success of an application is more likely. This may
entice additional qualified lenders to participate and result in the
Agency receiving more Phase I applications. A phased application
process would also reduce the burden on the borrower, who, prior to
issuance of the loan (or a greater likelihood as evidenced by an
invitation to submit a Phase II application), may choose not to apply
and instead allocate limited personnel resources to other tasks.
Response: The Agency has decided not to implement a preapplication
requirement. Because the information that would be required in the
preapplication would be similar to that in a formal application, a
preapplication would be duplicative and add further burden to the
lender and Agency. The Agency can meet with the lender/potential
borrower prior to application submission to discuss the scoring
criteria and informally review the proposal and application material
completed to date.
Comment: One commenter suggests that a qualification form be
written and posted on the Agency Web site that would be accessible to
all. The commenter recommends that such a form would contain, at a
minimum, scoring criteria; equity requirements and detailed examples of
allowable equity; eligible borrowers; eligible technologies; eligible
uses of loan proceeds; and approval timelines. The commenter also
suggests that a blog page be implemented to make available questions
and answers, new information, comments, and suggestions on an
interactive basis.
Response: The rule provides applicable eligibility criteria and so
no changes were made to the rule based on this comment. The Agency is
currently revising the USDA Web site and will consider the suggestions
offered by the commenter. The Agency will also consider preparing an
application guide.
Comment: One commenter recommends implementing a pre-application
process that does not require a lender-of-record. The first hurdle for
participation in the section 9003 program is convincing a lender to
commit resources to a project for due diligence, feasibility studies,
term sheet development, and filing of an application. The program
requirements are not conducive to lenders, particularly in light of the
inherent risks associated with first-of-kind commercial advanced
biofuel projects. Applications from several companies are being held
back simply because a lender-of-record could not be found to begin the
process. The structure that the Agency has created is counter to how
private debt transactions are generally arranged. Typically, an
investment bank represents the company/project and approaches lenders
to underwrite the loans. Then, the lender will conduct extensive due
diligence on the project and decide whether or not to lend and
[[Page 8411]]
on what terms. The proposed structure, however, requires the lender to
be identified from the beginning, without any indication from the
Agency as to whether or not there will be a guarantee from the Agency.
The commenter recommends phasing in applications in two parts as
follows:
Part I (Pre-application)--The investment bank representing the
project submits an application (similar to the current application)
along with the project company. The Part I application contains the
level of due diligence required by the Agency and gives the Agency
comfort that an accredited, U.S. Securities and Exchange Commission
(SEC)-regulated entity is representing the project and attesting to the
project's attributes and risks. The Agency reviews that application and
makes a determination, based on its review, whether a project should
receive a ``Letter of Intent'' to proceed to Part II.
Part II--Once a Letter of Intent is issued, the project then seeks
a lender for the guaranteed portion of the debt and a lender/investor
for the unguaranteed portion of the debt. The latter is going to be the
key participant and the one who will conduct a significant amount of
due diligence to decide whether or not to take the risk on investing/
lending for the unguaranteed portion of the debt. The result of that
due diligence and a decision to invest should then be submitted to the
Agency as a Part II ``application,'' which is really more of a
collection of due diligence findings. The company and the original
investment bank could even certify as to its accurateness and then the
Agency can review that final deliverable prior to issuing a guarantee
and closing the transaction.
The commenter recognizes that a potential Agency concern is that
the appropriate level of due diligence would not be conducted unless a
lender is on the hook for some portion of the unguaranteed portion of
the loan. However, the fact that there is an unguaranteed note means
that an investor or lender will do a tremendous amount of due diligence
prior to agreeing to lend/invest in the unguaranteed portion, which is
a condition precedent for the Agency to issue a final loan guarantee
and close a deal. If the Agency's concern is that proper due diligence
is being done, the Agency should be confident that it will be done
prior to the closing of the transaction and the issuance of a loan
guarantee, because there is an unguaranteed portion of the debt that
has to be placed. But by requiring the ``Lender of Record,'' as defined
to mean the holder of a portion of the unguaranteed debt, to conduct
all of that due diligence up front is both unnecessary and unfeasible
in this market. To protect the Agency from outstanding conditional
commitments, without the ability to close on the guarantee, a 6-month
time limit could be placed on submitting a Part II application.
Response: With regard to a pre-application process, for the reasons
noted in an earlier response, the Agency is not implementing a pre-
application process.
As a matter of practice, the Agency is available to meet with
potential borrowers and/or lenders prior to the submittal of an
application for a specific project.
The Agency further requires that a formal application be submitted
from an eligible lender. From the formal application forward, the
eligible lender will be the primary point of contact for the project
with the Agency.
Requested Comments--b. Feedstock
Comment: One commenter recommends removing the restriction, ``no
corn feedstock,'' from tandem USDA and DOE programs in the instance of
biobased chemicals, products, and materials only. The commenter states
that corn has long given the U.S. a competitive advantage in the
biofuel industry and that it may be our country's only advantage in the
clean energy sector. The Agency should not eliminate the advantage of a
highly efficient industrial product, engineered specifically for use in
industry and not for food consumption. The Agency should, instead,
advocate for any advantage in reaching our country's goals to achieve
both renewable fuel standards and U.S. government biobased product
procurement program goals.
One commenter believes that feedstock currently used for the
production of food, other on-site energy production, and in other
industries should not be diverted to new energy production, and that
the current proposal to exclude cellulosic feedstock and ``corn kernel
starch'' is sound and reasonable, and fits within the Agency's
guidelines, purpose, and intent.
Response: The Agency notes that the exclusion of corn kernel starch
is a statutory requirement and cannot be changed by this regulation.
However, cellulosic feedstock is eligible under this program.
Comment: One commenter believes that all biorefineries using any
eligible feedstock should be eligible for the program because the
purpose of this program is the creation of advanced biofuel
biorefineries and limiting feedstock eligibility would not further the
program's purposes.
One commenter recommends allowing byproducts from pulp and paper if
they can be upgraded to higher value products compared to power
generation, and scoring them equally to other feedstock. Another
commenter also recommends that byproducts from the paper and pulp
industry be eligible, if the byproducts meet the criteria of not being
consumed in a higher value use.
Response: The program allows for a variety of feedstock. The
feedstock must be renewable biomass, other than corn kernel starch, as
defined in the statute. The statute requires that the materials, pre-
commercial thinnings, or invasive species from National Forest System
land or public lands cannot be used for higher value products. This
``higher value'' criterion does not apply to byproducts of the paper
and pulp industry.
Comment: Six commenters note that the proposed rule limits the
types of feedstock that can be used to produce biofuels under the
program. The House Conference Report for the 2008 Farm Bill--House
Report 110-627, p. 1048, lines 3-8--specifically provides that:
``Examples of lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis include dedicated energy
crops and trees, wood and wood residues, plants, grasses, agricultural
residues, fibers, animal wastes and other waste materials, and
municipal solid wastes.'' The commenters believe that the Conference
Managers undoubtedly intended that municipal solid waste can be used as
a feedstock and state that the Agency has chosen to ignore this letter.
Instead, the Agency notes in the proposed rule: ``The Agency believes
that the statute clearly defines eligible feedstock and no further
clarification is needed in the proposed rule.''
The commenters believe that the public interest is not served by
limiting the number and types of technologies that can be used to build
biorefineries, or in limiting the types of feedstock that are available
for use and can provide an economic benefit to rural America. The
commenters urge the Agency to modify the proposed rule to specifically
state that municipal solid waste can be used as a feedstock, in
conformity with the express intent of the House Conference Report for
the 2008 Farm Bill.
One commenter also recommends stating that municipal solid waste
can be used as a feedstock and treating municipal solid waste materials
as a
[[Page 8412]]
homogeneous feedstock eligible to be used in biofuels production,
consistent with standard recycling practices.
One commenter recommends including biosolids, or treated sewage
sludge and its byproducts, as an eligible feedstock, and that
facilities producing advanced biofuels, solid and liquid, from
biosolids be allowed to apply for program funds.
One commenter recommends including all biodegradable solid wastes
to further expand the types of feedstock that can be utilized.
One commenter recommends expanding the traditional definition of
biomass to take advantage of new technologies that convert additional
organic matters into energy--such as biosolids. Such an expanded
definition of ``renewable biomass'' would take account of population
growth in our rural communities and the environmental impacts of the
traditional methods of biosolids disposal on such rural communities.
Additionally, the Agency would be encouraging the recycling and reuse
of a substantial renewable organic feedstock--biosolids, further
expanding our nation's sources of energy. Specifically, the commenter
proposes that the definition of ``renewable biomass'' be expanded as
follows to include: ``(iii) Renewable waste materials and byproducts
resulting from the treatment of sewage, including biosolids, fats,
oils, and grease and other byproducts.''
Similarly, one commenter recommends expanding the definition of
``Advanced biofuel'' as follows to include: ``(iii) Biofuel (solid or
liquid) derived from waste material, including crop residue, other
vegetative waste material, animal waste, food waste, yard waste, and
treated sewage waste, residues and byproducts.'' According to the
commenter, specifically including biosolids in the definition of
``renewable biomass'' as an eligible feedstock, and qualifying the
definition of ``advanced biofuels'' to include treated human sewage
waste materials, will encourage the wide-spread adoption of sewage-to-
energy technologies and further efforts by Congress and the
Administration to develop all sources of renewable energy and create
jobs in green technologies.
One commenter states there should be no restriction on feedstock
used and that the definition of feedstock needs to be expanded to
include municipal sludge as an acceptable feedstock. The commenter
states that, with the current need and demand for biofuels, it is
imperative that there should not be a restriction on the type of
feedstock used. In addition to producing advanced biofuels in a
sustainable, efficient manner, it is imperative that waste materials be
used to produce other advanced products and be utilized in the greatest
way to achieve energy production and reduce greenhouse gases (GHG).
Response: The Agency partially agrees with the commenters. The
Agency has revised the rule to clarify that municipal solid waste is an
eligible feedstock, but only to the extent that it meets the statutory
definition of renewable biomass. It is unlikely that homogeneous,
unsegregated municipal solid waste would meet this definition. The
Agency has also revised the rule to include as eligible feedstock any
organic matter that is available on a renewable or recurring basis from
non-Federal land or eligible tribal land, including biosolids, treated
sewage sludge, and byproducts of the pulp and paper industry. The
Agency notes that ``black liquor,'' a byproduct of the pulp and paper
industry, is not an eligible feedstock, because it includes inorganic
material and, therefore, does not meet the definition of renewable
biomass.
Comment: One commenter states that their technology is
complementary to recycling and will not use paper that is commonly
recycled. However, if paper is mixed with municipal solid waste instead
of being collected separately, it cannot be recycled and should, thus,
be considered a waste material for the production of biofuels.
Therefore, the commenter urges the Agency to broadly define waste
material, consistent with common recycling practices. Further, the
commenter requests that the Agency not establish separate compliance
obligations for various component parts of the waste stream, such as
paper. The commenter, instead, recommends that the Agency provide
additional guidance on the eligibility of paper, so that soiled paper,
which is not recyclable, be included in the definition of waste
material.
Response: The Agency considers soiled paper mixed with other
organic municipal solid waste to be eligible renewable biomass. In
Sec. 4279.228(c), the phrase ``consisting of renewable biomass'' was
added after the term ``municipal solid waste'' in the description of
eligible feedstocks.
Comment: One commenter encourages the Agency to refrain from
limiting feedstock eligibility for the program unless a particular
feedstock is prohibited by Section 9003. The commenter agrees that
``the statute clearly defines eligible feedstock and no further
clarification is required.'' The commenter states that both Section
9001(3) and 9001(12) of the 2008 Farm Bill contain lists of feedstock
that are included, but that these lists should not be construed as
limiting these definitions to those feedstock listed, but rather as
examples of the term being defined.
The commenter asserts that any fuel derived from algae, whether
blue-green, cyanobacteria, or seaweeds, meets the definition of
``advanced biofuel'' in all respects, perhaps limited only by Section
9001(12)(B). Algae are not corn starch, and it is explicitly included
as an example of ``renewable biomass.'' The commenter would object to
any efforts by the Agency or other stakeholders to exclude algae by
administrative discretion. This would be contrary to clear
Congressional support for the inclusion of algae as ``renewable
biomass'' and, therefore, an eligible feedstock. The commenter believes
the Agency views algae as an important feedstock to meeting the
mandates imposed by the Renewable Fuel Standard (RFS) as evidenced by
the loan guarantee issued to Sapphire Energy in 2009. The commenter
applauds the Agency for taking the leading role in supporting the
development of the algae industry as a vital sector of the broader
agricultural industry poised to play an important role in securing
America's energy independence and rural job growth. In sum, the
commenter suggests that the Agency resist excluding feedstock as being
``eligible'' if such feedstock would qualify under section 9003.
Response: The Agency agrees and considers the list provided by
statute to be illustrative, but not exclusive. No change was made to
the rule in response to this comment.
Comment: Two commenters urge the Agency to exercise caution when
considering limitations on feedstock for use in biorefineries. The
commenters encourage the Agency to support feedstock that increase the
overall potential of the biomass industry through widespread
applicability, creation of jobs, and a positive impact on national
security, while excluding support for feedstock that compete with food
or harm the environment. Outside of these specific areas, however, the
commenters encourage the Agency to remain as feedstock neutral as
possible in order to allow both the feedstock and biofuels industry to
innovate freely. In the notice of proposed rulemaking (NPRM), the
Agency notes: ``At this stage in the development of the biofuels
industry, it is impossible to know what technologies will become the
most effective.'' The same is true of feedstock.
Another commenter also encourages the Agency to remain as
feedstock-neutral as possible in order to allow the
[[Page 8413]]
feedstock and biofuels industry to innovate freely. The commenter
believes the Federal government has a dubious track record when it
attempts to pick winners and losers in the energy space, and the
advanced biofuels sector should be no exception. The commenter warns
against excessive limitations on feedstock for use in biorefineries.
Concerns over competition with food or harm to the environment are
legitimate and should be addressed; however, the Agency should also
take into account the overall potential of the biomass industry through
widespread applicability, creation of jobs, and a positive impact on
national security.
A third commenter states that the regulations need to provide
sufficient flexibility so that the refinery can minimize the cost of
its biofeedstock. To accomplish this, it is essential that the rules be
feedstock-neutral. The commenter understands that there are as many as
3,200 potential biofeedstock and that the economic viability of a given
feedstock is likely to vary significantly by region. The commenter
believes it is inappropriate at this stage to single out one or more
specific feedstock or those with specific characteristics that would
disqualify their use in a biorefinery supported by the section 9003
program. That decision should be made in concert with the Agency when
an application is being evaluated based on all relevant sustainability
issues. The commenter also believes that it will be necessary to
provide the ability to utilize alternative feedstock on an
opportunistic basis in the event that they are economically
advantageous to use.
Response: The Agency agrees with the commenters and is not trying
to exclude any eligible feedstock. The Agency notes, however, that it
wants to encourage all advanced biofuels, except in very limited
specific instances (e.g., feedstock that can be used for human or
animal consumption) and that, beyond such instances, it does not want
to limit specific feedstock from participation in the program.
Comment: One commenter states that any exclusion to the definition
of feedstock should be based solely upon GHG life-cycle emissions. For
example, if a specific feedstock is estimated to produce fuel that
causes no significant reduction in life-cycle GHGs compared to
conventional fuels, or causes more emissions than conventional fuels,
the Agency should consider excluding such feedstock from the list on
that basis.
One commenter states that conversion technologies, on a life-cycle
basis, are among the cleanest methods available for the production of
advanced biofuels and green power.
Response: The Agency disagrees with the recommendation to exclude
any feedstock based solely on the basis of GHG life-cycle emissions of
the resulting advanced biofuel. The feedstock must be renewable
biomass, other than corn kernel starch, as defined in the statute.
However, to help address such environmental considerations as GHG life-
cycle emissions, the Agency has revised the scoring criteria such that
an advanced biofuel must meet an applicable renewable fuel standard as
identified by the U.S. Environmental Protection Agency (EPA) in order
to receive points under the first scoring criterion.
The Agency is currently considering various models related to life-
cycle analysis and has not identified an appropriate model at this
time. Should a model be selected by the Agency, the rule will be
amended accordingly.
Requested Comments--c. Rural Area Requirement
Comment: Four commenters recommend not restricting a biorefinery to
a rural area. Restricting the location of a biorefinery to a rural area
is, in theory, a logical extension of an already established value-
added agriculture industry. At first blush, it serves the purpose of
the 2008 Farm Bill to boost the rural economy. However, as the economic
crisis continues, more flexibility of site selection, not less, should
be installed in these programs. The commenters believe that restricting
these vital programs to rural areas is not only impractical and
illogical, but fundamentally unfair to urban communities in desperate
need of economic revitalization and job creation. The Agency,
therefore, should enable biorefineries to develop wherever there is
market potential regardless of whether that area is rural.
One commenter further states that the siting of biofuel facilities
will be dependent on available feedstock, infrastructure, logistics,
and other factors. Undoubtedly, many advanced biofuel facilities will
be located in rural areas due to feedstock availability. However, to
the extent that qualifying renewable biomass is located in other areas,
the Agency should not discourage utilization of these resources by
excluding non-rural facilities from eligibility for the payments
program. Additionally, the scoring criteria in Section 9003(e)(1)(C)
also demonstrate that ``the potential for rural economic development''
is merely one of ten factors that the Agency is directed to consider.
While this scheme indicates that Congress intended that the Agency
grant some level of preference to rural development, it does not
support an interpretation that would preclude the issuance of loans to
facilities in non-rural areas. The commenter states that, as with
citizenship requirements, if Congress intended that rural development
be a prerequisite, it would have explicitly stated so.
One commenter states that the rural location requirement will
unfairly exclude biorefineries that make quality fuels, utilize
domestic feedstock, and benefit American farmers and their communities.
The commenter believes that any biorefinery constructed in the U.S.
that provides jobs for U.S. workers and utilizes domestic agricultural
feedstock produced by American farmers should be eligible for a loan
guarantee under the program. The commenter believes that this was the
intent of Congress, and is consistent with the national renewable
energy and energy security goals. The commenter recommends removing the
proposed rural location requirement in the final rule for biomass
grant, loan, and loan guarantee programs.
One commenter states that, given that feedstock availability and
reliability is paramount to success, any location that can support a
successful project should be allowed, especially if the site was chosen
in order to achieve feedstock availability and reliability. The same
could be said for off-take agreements if the chosen feedstock can be
brought to the proposed site easily, yet the off-take requirements
necessitate a non-rural location. For example, for a project with
Fisher-Tropsch output to make economic sense, the biorefinery would
need to be co-located with an existing fossil fuel refinery, which may
not be in a rural area. As another example, in order to have access to
the largest possible geography for off-take, if a project must be
located in a port facility that is in a non-rural area, this should be
equally allowed.
The commenter also states that the program will only succeed in the
event that proposed projects can minimize overall risk as much as
possible. Project location can have a huge impact on this issue. Rather
than citing ``consistency with other programs'' as a justification for
a proposed rule, the criteria should be tailored to the needs of this
specific program. In this case, any location that makes it easier to
achieve project financing should be allowed without exception. There
should be no restrictions on location for this program. It could make
sense for a different program targeted at the scale-up of commercially
proven technologies, but
[[Page 8414]]
in this context adds unnecessary additional burdens to achieving
already challenging lender financing criteria.
One commenter opposes the rural area requirement, stating that
biorefineries located in nonrural areas should be eligible. Nowhere in
the authorizing legislation for this proposed rule did Congress even
suggest that the section 9003 program be limited to rural areas. For
the Agency to go outside the statute and make such a recommendation is
puzzling at the very least, given the difficulty companies already face
in opening biorefineries. The commenter states that the Agency should
encourage biorefineries to develop wherever there is market potential,
regardless of whether that area is rural, in order to meet the Agency's
goal for an overall Federal renewable energy strategy designed to
foster the development of a strong, expanding, and sustainable group of
renewable energy industries in the U.S. to supply an increasing share
of the country's energy needs.
One commenter, while recognizing the importance for the Agency to
increase economic opportunity and improve the quality of life in rural
communities, cautions against defining ``rural area'' with too much
restriction, potentially disqualifying ideal sites for biorefineries
that would, in fact, meet the program goals and increase economic
opportunity in rural communities, but may be located in areas that do
not fit the program definition. Offering eligibility to facilities in
non-rural communities is critical to the success of the program goals
and the advanced biofuels industry. Restricting the location of these
facilities is not necessary to maintain the spirit of enhancing rural
development and the geographic diversity of advanced biofuels
production. More flexibility of site selection, not less, should be
installed in these programs.
The commenter further states that having a consistent, cost-
competitive regional supply of feedstock is key to the success of any
project. Non-rural plants that use agricultural feedstock will most
certainly rely on the surrounding rural communities to produce,
harvest, store, and handle feedstock needs. With feedstock cost
representing the largest operational cost of a biorefinery this, in
turn, means that most of what the plant spends goes to the rural
community in paying for that feedstock. This should demonstrate that
the biorefinery does not need to be in a rural area to fulfill program
goals. Excluding plants that are not in rural areas denies the
supporting rural community significant opportunity.
One commenter states that winter barley from the rural community is
key to the success of their project. According to the commenter, an
independent economic analysis determined that their project will create
an additional $100 million in revenue to rural farmers and create 450
farm jobs, clearly demonstrating that the biorefinery does not need to
be in a rural area to fulfill program goals. In some circumstances, the
decision of where to site a facility will be based on infrastructure
often not available in rural areas (power, natural gas, transportation
modes). Excluding facilities that are not within a strict definition of
a rural area denies the supporting rural community significant
opportunity.
One commenter states that their research indicates that biofuel
refinery business plans will produce biofuels that cost substantially
more than JetA and diesel. The commenter believes it is vital to
minimize biofuel costs where airlines are supporting development of
biofuel refineries by long-term cost plus purchase contracts. The
commenter states that early research suggests that biofuel costs would
be reduced by using as much existing infrastructure as possible
throughout the entire supply chain (this includes delivery pipelines,
refinery facilities, and agricultural infrastructure) and that
requiring a biorefinery to be located in a rural area is likely to make
it impossible to use some existing infrastructure, most particularly at
refineries. The commenter recognizes that the purpose of the program is
to support business development in rural areas, and proposes that
biorefineries that are not located in rural areas, but obtain more than
75 percent of the dollar value of their raw materials from rural
America, should qualify for the program.
One commenter states that, to maximize the rural economic benefits
of the section 9003 program in furtherance of the Agency mission, a
project's location in a ``rural area'' be removed as a threshold
eligibility requirement and, instead, that a project's rural economic
benefits be added as an evaluation criterion to proposed Sec.
4279.265(d). Rural Development's mission to enhance the quality of life
and economic foundation of rural communities would be furthered by a
more comprehensive evaluation of a project's potential rural economic
benefits. A project's rural economic impact is not only determined by
the location of the biorefinery, but by the origin of the feedstock as
well. Awarding points to projects based on their level of economic
impact to a rural community is consistent with the Agency's mission and
allows maximum opportunity for the commercialization of domestic
advanced biofuels in the U.S. Dedicated energy crops, such as
carnelian, are grown in rural areas. Thus, the commenter encourages
Rural Development to consider a project's location in a rural area or
its feedstock's rural origins as plus factors in the evaluation
criteria. Many non-rural advanced biofuel refining projects can yield
substantial economic benefits for rural America, in addition to
increasing energy independence, decreasing greenhouse gas emissions,
and diversifying agricultural markets. Thus, a more inclusive approach
would maximize the impact of the section 9003 program.
One commenter believes that, while the definition of a rural area
should be included, the definition proposed is too broad. The commenter
requests deleting the wording ``and the contiguous and adjacent
urbanized area'' through the remainder of the paragraph ending with the
words ``otherwise considered not in a rural area under this
definition.'' The use of ``not more than 2 census blocks,'' and
``contiguous and adjacent urbanized area'' appears intended to make the
definition of rural as broad as possible, which is unwarranted and
inappropriate. The Agency's scarce funding dollars should focus on
truly rural areas particularly those further away from larger cities
and more densely populated areas. The benefits of job creation should
go to actual rural areas, not simply those areas that are adjacent to
rural areas.
One commenter states that, while the proposed rule states that
projects that are located in areas determined to be ``rural in
character'' will be eligible, it does not explain how this nebulous
determination will be made except to say in the same manner as in the
business and industry (B&I) guaranteed loan program. The commenter
believes that this terminology is far too broad and should not be
allowed for determining rural areas. B&I guaranteed loans are much
smaller than those envisioned in this program and the commenter
believes the program should truly serve rural areas. Allowing rural
areas to be defined in the manner stated is completely arbitrary and
could open the program to abuse and unnecessary criticism.
One commenter states that the rural area requirement needs to be
amended because many of these facilities have to be located where there
are essential infrastructure, land available and
[[Page 8415]]
specialized jobs, which is usually in the larger communities.
Facilities should be allowed to be located in communities larger than
50,000 if they are proposing to obtain a certain percentage (like
greater than 25 percent) of their feedstock from rural areas. This will
help farmers, rural businesses and rural cities find markets for their
feedstock (solid waste, grease, crops, etc). By allowing them to be
located in urban areas, it will increase the number of sites available
to locate these facilities but at the same time increase feedstock
markets for rural residents. Until these types of energy projects are
well developed and mature, the commenter believes that all barriers
that they may be encountering should be mitigated.
One commenter believes that, for new projects, implementing the
rural area requirement will help the Agency fulfill its mission to
improve economic conditions of rural America. However, with regard to
retrofitting of existing biodiesel facilities, this requirement may not
be practical as many existing facilities are no longer in production
and are not all located in rural areas and an exception should be
considered if the viability of the project is otherwise strong.
One commenter supports the requirement that the program only be
used for biorefineries in rural areas. The commenter believes that the
program should be targeted to rural economies.
Response: In consideration of all of the associated comments
reflected above on rural area, the Agency has, as a matter of policy,
reconsidered the proposed rural area requirement. The beneficial
impacts of the program will generally be in rural areas even if the
biorefinery is located in an area that does not meet the proposed rural
area definition, because biomass production is expected to occur
largely in rural areas and, thus, rural economies will benefit from the
increased use of biomass. The Agency is, therefore, removing the
proposed rural area requirement from the rule as an eligibility
criterion.
The Agency notes, however, two provisions of the interim rule.
First, the project must still be located in a State in order to
participate in this program. Therefore, the Agency has modified the
location requirement so the project must be located in a State, as
defined in Sec. 4279.2. Second, the project must be located in a rural
area in order to receive points under the potential for rural economic
development criterion (see Sec. 4279.265(d)(8)).
Comment: One commenter recommends redefining the definition of the
``location population'' classification of eligible and ineligible areas
for the purpose of including companies that are located in cities. The
commenter states that they would be eliminated solely due to the
Agency's classification of location population. Presently, the Agency
defines a City to be greater than 50,000 persons. The City of Erie
holds approximately 102,036 persons and the Borough of Wesleyville
holds approximately 3,617 persons. Therefore, according to the Agency
eligibility map, both the City of Erie and the Borough of Wesleyville
are deemed ineligible areas.
The commenter requests expanding the boundaries that define the
location population to define a city as a populace of over 500,000 to
1,000,000 persons versus 50,000 persons.
Due to the present classification by the Agency, the commenter is
not qualified to apply for any Agency funding programs (grants or
loans) because the commenter is located in an area that encompasses the
City of Erie and its outlying areas, even though they have low
population.
The commenter states that their plant has the versatility to run on
various feedstock from non-vegetable oils to animal fats to
agricultural feedstock such as soy. It is also located on Lake Erie
where it has access to shipping, two interconnected railroads (CSX and
Norfolk Southern), I-90 and I-79. Thus, it can easily bring in
feedstock and ship out finished biodiesel. The commenter states that,
if they could be deemed located in an applicable area, then they could
apply for Agency funding and build on relationships with local/domestic
farm institutions.
Response: As noted in the previous response, the Agency has
reconsidered the proposed rural area requirement and has removed it
from the rule as an eligibility criterion. Thus, the applicant's
facility would be eligible for participation in this program. The
Agency notes that the definition of ``rural area'' is broader than
previously used by the Agency and includes provisions for allowing
urbanized areas to qualify for being ``rural in character.''
Requested Comments--d. Foreign Ownership
Comment: Numerous commenters recommend eliminating the 51 percent
U.S. citizen ownership requirement in biomass grant, loan, and loan
guarantee programs. U.S. government grants, loans, and loan guarantees
are a large piece of incentivizing private financing for large-scale
commercial projects. This incentive is diminished by requiring at least
51 percent domestic ownership. It presents the green business world
with a conundrum. The commenters note that they need government grants,
loans, and loan guarantees to attract investors who understand green
investment. The investors who understand green investment are often
foreign, where the clean tech investment framework is readily
understood. Yet, the U.S. loan guarantees put a 49 percent limitation
on foreign investment. In the age of a global economy, this citizenship
requirement is impractical and ineffective. It inhibits the purpose of
the program to incentivize private equity investment in the sector and
may lead to job outsourcing. An increase in private equity in this
sector is the key to multiple goals of current U.S. domestic policy.
Green job creation, reduced dependence on foreign oil and reaching
climate change reduction goals all benefit the country and taxpayers
irrespective of funding sources.
As a regulatory matter, a 51 percent determination of domestic
investors is untenable. An investor's domicile often cannot be
discerned as foreign or domestic. A successful, ready to scale
biochemical company is usually funded by a number of sources, both
foreign and domestic, often made up of venture funds with investment
from around the world, funds of funds, and independent investors alike.
To discern whether or not the individual owners or investors of a fund,
that owns a fund, that is invested in a particular portfolio company
has 51 percent U.S. ownership, is not only impractical, it is
impossible.
Additionally, the citizenship requirement is hurting rural America.
The policy is delaying the administration's ability to reach its
economic goals for rural America and energy independence goals for the
country. The commenters hope that the Agency will use all of the
resources available to help the administration reach its energy
independence goals by removing all citizenship requirements. Rural
Americans that benefit from the jobs created by these biorefineries do
not care about the ownership of the biorefineries. The jobs provide
much needed economic stability for local economies. The commenters
state that Congress did not include eligibility restrictions as part of
the program and the Agency's decision is a significant departure from
Congressional intent. Rural Development regulations were implemented
when our rural economy looked significantly different from today's
rural economy. The commenters believe that the creation of
biorefineries should be promoted in rural America, regardless of
ownership.
One commenter further states that Congress specifically outlined
the
[[Page 8416]]
definition of ``eligible entity'' and chose not to include any
citizenship requirements. Had Congress intended to do so, it would have
done so explicitly.
Another commenter states that to impose such a restriction without
being mandated to do so by statute is counterproductive and will delay
the development of new technologies and thwart achievement of the
section 9003 program's purpose. To the extent the Agency considers
citizenship of the borrower, it should be limited to the requirements
of section 9003 and consider it only as one of many factors in
evaluating and scoring an application.
Two commenters recommend considering foreign ownership in the
context of all of the benefits of any given project and make decisions
on a case-by-case basis rather than establishing an inflexible limit on
the percentage of foreign investment.
One commenter offers this provision: The proposed rulemaking
requires that, if the borrower is an entity other than an individual,
it must be at least 51 percent owned or controlled by individuals who
are either citizens or legally admitted permanent residents residing in
the U.S. When an entity owns an interest in the borrower, that entity's
citizenship will be determined by the citizenship of the individuals
who own an interest in the entity or any subentity based on their
ownership interest. Similarly, if the borrower is a subsidiary, the
parent entity or the entities that have an ownership interest in that
borrower must also be at least 51 percent owned by individuals who are
either citizens or nationals or legally admitted permanent residents
residing in the U.S.
One commenter recommends that non-U.S. ownership be permitted and
that, if points are awarded for local ownership, the Agency consider
awarding points based on estimated job creation. On the whole, the
commenter supports rational requirements for new technologies that will
foster rural development as those industries have a chance to grow.
One commenter recommends that, as long as the ownership of the
project has at least 25 percent U.S. citizenship, the project be
equally eligible. Given the challenges to achieve funding sources to
date, the program should be open to the widest possible sources of
funding.
One commenter recommends allowing borrowers that are entities that
are other than individuals to be owned or controlled by less than 51
percent of either citizens or legally admitted for permanent residence.
The percentage could be 34 percent of U.S. ownership or legally
admitted for permanent residence instead of 51 percent. It will allow
for additional investment from non-U.S. investors that may have a
higher comfort level in investing in these types of energy projects.
These types of energy projects are more advanced in other countries, so
foreign investors are more familiar with the technology and are willing
to invest in these projects. Banks in Europe are also more familiar
with financing these types of projects, so they may feel more
comfortable to finance a project in the U.S. if one of their existing
customers in Europe is investing and developing an energy project in
the U.S.
One commenter believes that the foreign ownership requirement
should be strengthened to eliminate the automatic presumption that
companies traded on U.S. stock exchanges are 51 percent owned by
persons who are either citizens or legally admitted permanent residents
residing in the U.S.
One commenter states that the proposed rule makes eligibility
parameters extremely broad as almost any U.S. citizen or corporation
with majority U.S. ownership is eligible. The commenter agrees with the
citizenship requirements as one way to partially limit the scope of
those eligible for loan funding.
Response: The Agency has determined that it is in the best
interests of furthering the Administration's goal of increasing the
production of advanced biofuels to broaden the Biorefinery Assistance
Guaranteed Loan Program applicability to include making loans to
eligible domestic or foreign-owned advanced biofuel refineries.
Requested Comments--e. Program Obstacles
The Agency received numerous comments on program obstacles and ways
to improve the program. Please note that for those comments received
under this section that are the same or similar to comments made on
specific provisions within the rule, the Agency has grouped such
comments with those comments made on the specific rule section rather
than presenting them below in this section.
Total Loan Guarantee Amount
Comment: Several commenters recommend publishing the total loan
guarantee amount, not just the monetary fiscal appropriation. With all
USDA loan guarantee programs, there is a multiplier risk calculation
that is set by OMB for each annual appropriation, which allows the
total of the loan guarantees awarded to be greater than the actual cash
appropriation. The commenter state that transparency is needed from
USDA and OMB in advance to know what the lending authority is at the
beginning of the fiscal year. Without that information, applicants do
not want to apply, and lending institutions do not want to take the
time to support the application if there is not adequate funding for
the programs.
Response: The Agency will provide, by Notice, the available program
level funding for a specific fiscal year. No change was made to the
rule in response to this comment.
Evaluation and Approval Process
Comment: One commenter believes that the evaluation and approval
process may be an obstacle. The evaluation process must be transparent
and clearly stated with established timelines for the approval process.
Several commenters state that the evaluation process must be
transparent, clearly stated, with established timelines for the
approval process. These commenters recommend holding a pre-application
and post-application meeting at the state office, at a minimum, to
discuss the procedure and the requirements with the applicant and the
lending facility. Large projects take intense coordination, management,
and incur the up-front expense of permitting, detailed engineering, and
other development costs. The financing program must be implemented
within the same schedule as the other tasks to properly complete the
project on time and under budget.
Response: With regard to establishing timelines for the approval
process, the Agency disagrees that this is possible because timing
varies dependent on the unique characteristics of applications
submitted. With regard to transparency, the Agency is satisfied that
the evaluation and approval process is transparent and, for those
applications that are denied, the Agency advises the lenders
accordingly and provides them appeal rights.
Lastly, with regard to the suggested meetings, as noted in an
earlier response, the Agency can meet with the lender/potential
borrower prior to application submission to discuss the scoring
criteria and informally review the proposal and application material
completed to date. Further, Agency personnel are always available to
answer questions.
Guarantee During Construction
Comment: Several commenters state that it is imperative that the
section 9003 loan guarantee continue to cover the construction period.
No other
[[Page 8417]]
funding mechanism currently exists that could fund during the
construction period without the loan guarantee in place.
One commenter states that, to be a complete program, the loan
guarantees must include the construction period.
One commenter states that one of the greatest needs in renewable
energy financing is construction financing. The commenter recommends
setting up the section 9003 program to provide its guarantee at the
outset of the project's construction so that the guarantee covers the
construction risk. It appears this may be the case based on the
reference in Sec. 4279.256(e), but this should be made expressly clear
that such coverage is to be available routinely.
Response: The rule allows the Agency to guarantee the project prior
to construction or after completion of the construction. The Agency has
revised the rule in Sec. Sec. 4279.261 and 4279.281 to clarify this.
Forms
Comment: Several commenters recommend that the Agency prepare and
provide fillable servicing reporting forms for lending institutions to
provide the lender with a manageable, easy to use format for fulfilling
the section 9003 reporting requirements. One of the main concerns that
lenders face is the possibility of losing the Agency guarantee through
improper or misunderstood reporting requirements. The Agency should
provide actual forms and a section 9003 program reporting guidance
document to all lenders, as well as post the documents on the Agency
Web site for full review. An Agency primary contact person should also
be provided to the lender during the application process as well as
throughout the loan servicing process.
Response: The Agency will take this comment into consideration as
it develops the forms for the implementation of the regulation.
Applicants may always consult the Agency's National Office Energy
Division with any questions they may have during the application
process and loan servicing process.
Technical Reports
Comment: Several commenters recommend modifying the technical
report to include elements of a project management plan that can be
used by the applicant, lender, EPC (engineering, procurement, and
construction) contractor, and the Agency to properly evaluate,
benchmark, and complete the project within the time frames and budgets
as proposed. Every major EPC contractor has software programs and
policies and procedures in place that would provide this kind of
reporting and which has previously been used for government contracting
projects. This would also assist in organizing the application to
become a living document that could then be utilized to begin the
construction process and used throughout the life of the project,
thereby saving time and resources.
Response: The Agency does not object to the incorporation of
elements of a project management plan in the technical report. However,
the Agency is neutral on the use or brand of project management
software.
Total Project Guarantee
Comment: One commenter recommends utilizing the program to
guarantee the full cost of a project, not just the biofuels portion.
Response: The authorizing legislation does not allow the Agency to
guarantee the full cost of a project.
Comment: Several commenters recommend utilizing the loan guarantee
to purchase, build, and operate all the collateral necessary to develop
the total project, not just the biofuels portion. Because of the nature
of biomass-to-biofuel production, there can be, and usually is, a
significant portion of waste fiber material that is best utilized by
gasifying, burning, or converted in some form that is usually
ultimately manufactured into renewable electricity or another power
product. Alternatively, the waste material is utilized in the
production of animal feed or fertilizer. These products are also
vitally important in providing sustainable, long-term profitability and
production for the project and can greatly enhance the production
capabilities of the region. The loan guarantee should cover all of the
expenses of the entire project. Other expenses that are not listed in
this rule but should be included are the cost of buildings, engineering
fees, utility interconnect studies and infrastructure, vehicles,
natural gas and electricity infrastructure costs, road upgrades or
construction, and bonding and insurance costs.
Response: The Agency disagrees with the recommendation to cover all
of the expenses of the entire project. The Agency anticipates an over-
subscription of the program. Therefore, the Agency's intent is to focus
the program's limited funding resources on core project costs, which
are identified in the interim rule as eligible project costs (see Sec.
4279.229(e)). As the program matures, the Agency may consider whether
to expand the list of eligible project costs, which is provided for in
the interim rule (see Sec. 4279.229(e)(7)).
Bond Financing
Comment: One commenter advocates the Bond Loan Model as the most
efficient financing mechanism for renewable energy projects and states
it can be executed in a more cost-effective and timely manner than
conventional financing transactions utilizing the Conventional Loan
Model, particularly in light of the lack of commercial banks'
willingness to commit to loans of 15 to 20 years.
Three commenters recommend financing through the use of corporate
bonds. One commenter states that they recently reviewed a proposed
corporate bond structure that would allow companies to issue 15 to 25
year non-amortizing bonds that would have the Agency guarantee
attached. This would significantly reduce the cost of borrowing and
provide a creative alternative to conventional commercial bank
financing. The commenter believes using the loan guarantee program in
support of this type of structure would provide a very viable financing
source for these projects and would help achieve the overall objectives
of creating a biorefinery industry.
One commenter states that, because they are recognized as a more
freely tradable instrument than loan participations, the interest cost
to borrowers (bond issuers) is often lower with bonds than with
traditional loans. By not recognizing the predominant method for
financing large commercial projects, the section 9003 program will
likely not attract the larger producers of advanced biofuels and,
equally important, will likely not attract the investment banking firms
that are needed to facilitate these complex financings. The commenter
suggested language for allowing the use of corporate bonds.
Three commenters recommend allowing borrowers to issue notes or
bonds directly to accredited investors by way of capital markets
offerings for both the guaranteed and unguaranteed portions. Two of the
commenters point out that the proposed rule allows only for the sale of
indirect ``participations'' in the unguaranteed portions, with the
original lender retaining title to the notes, and does not contemplate
the sale of notes or bonds in the capital markets (except with respect
to the sale of the guaranteed portion to accredited investors).
The commenters state that banks are unwilling to fund the
unguaranteed portion of the loans. The commenters point out that, in
the current market,
[[Page 8418]]
only institutional investors are able, through capital markets
transactions, to assume the perceived level of risk on the unguaranteed
portion of the loans. Efficient capital markets transactions, including
the sale of bonds, will require the direct sale by the borrower of
notes or bonds to investors. As is market practice, a trustee would act
on behalf of the bond investors as a class with the original lender
performing the role of Collateral, Inter-creditor and Administrative
Agent on behalf of all lenders, investors and the Agency. In that role,
the original lender will perform all of the servicing duties
contemplated under the proposed rule.
One commenter encourages the Agency to consider utilization of bond
financing mechanisms in order to expand opportunities for debt finance
where traditional credit markets are tight as one way to reduce program
obstacles. The commenter believes that the currently proposed
requirements dramatically reduce the number of lenders that will be
willing to work with the program due to the current bank market and
high-risk associated with this new industry. The Agency can address
this problem by expanding the definition of eligible lender to enable
utilization of the bond market in addition to the bank market. The bond
market is favorable at this time because it is largely untapped in
comparison with the bank market, it is more flexible than traditional
commercial lending, and it eliminates a substantial portion of the risk
for the lender. This can be accomplished by permitting a corporate
trustee and investment bank to, collectively, function as an ``eligible
lender'' for purposes of taxable corporate bond transactions.
One commenter states that the regulation needs to clearly state if
bonds are allowed, what type of bonds should be allowed, who can issue
the bonds, who can purchase the bonds, and how they are to be serviced.
Response: The Agency is authorized to guarantee loans, which in
certain circumstances may include bonds as described below, under this
program. The Agency considers that this requires a lender to make the
loan from its resources and then service that loan itself. While the
Agency will permit the lender to secure limited servicing
responsibilities from third parties, the lender must remain responsible
for the servicing.
The Agency considers this as distinct from the typical investment
banking scenario, where an investment bank secures the financing from
outside investors. After the funding is secured, the investment bank
has no further involvement with the transaction. Servicing is handled
by a trustee who reports to and is controlled by the investors. The
Agency considers that this is an investment instead of a loan and that
its current authority is insufficient to guarantee investments.
Recognizing the current difficulties in securing funding, the
Agency has been approving certain bond transactions. The Agency
considers that, under the limitations contained in this regulation,
guaranteeing these bonds is in keeping with its authority. In order to
be more transparent of its willingness to guarantee certain bond
transactions, the Agency has modified this regulation accordingly.
Specifically, the lender is required to provide the loan proceeds
and service the loan. The Agency will allow a trustee to provide
limited servicing only if the trustee is fully under the control of the
lender. Holders' rights are limited to receiving payments under the
note or bond and if those payments are delinquent making demand for
payment on the lender and the government as provided in the regulation.
In certain cases where the lender and borrower desire to change the
loan terms, the holder is also required to consent to any changes.
Loans providing holders any other rights are ineligible for guarantee
under this program.
Comment: Several commenters recommend including the option to
utilize bond financing. The section 9003 program has already
established a precedent in funding a project through the use of bonds.
The need for lender participation through the section 9003 program can
be met through use of an appropriately structured bond program to
achieve effective financing in today's capital markets.
The commenters recommend expanding the section 9003 program to (1)
permit treatment of large commercial banks or investment banks with
substantial corporate trust practices as ``eligible lenders'' when
acting as a bond trustee and (2) find that the ``minimum retention''
requirements are met if the bank, in its capacity as bond trustee,
holds 100 percent of the legal title to the underlying corporation debt
obligation and to related mortgage and security interests, even if the
beneficial interests are participated out and held by a controlled
number of sophisticated, institutional investors.
For purposes of the section 9003 program, the commenters advocate
the expansion of the lending criteria to include a structured bond
financing approach, which will assure the Agency of safety and
soundness in the lending activity it guaranties, including high quality
loan servicing, as well as the involvement of knowledgeable,
professional investors well-qualified to evaluate and manage risks.
Response: The Agency can only consider bond financing where the
lender purchases all bonds and sells and/or participates thereafter. In
all scenarios, the lender is responsible and controls the servicing of
the loan. In addition, the lender would be required to fully control
any trustee related to the bond financing.
Regarding eligible lenders, the rule reflects requirements that are
similar to the requirements for a traditional lender under the Business
and Industry guaranteed loan program. The Agency has determined that
its current authority would not permit using an investment bank bond
model. Unlike the authority given to the Department of Energy that
permits the guarantee of debt obligations in addition to loans for
several of its programs, the authority for this program is limited to
guaranteeing loans.
Comment: One commenter states that several banks have noted the
limitation on the participation of noncommercial bank lenders. Given
the size of the loan required to construct a commercial cellulosic
ethanol facility, noncommercial bank participants will likely be
critical to any effort in completing financing of a project. The
commenter states that they are aware of discussions to use the loan
guarantee program to guarantee bonds sold to accredited investors.
Given the apparent lack of appetite in the debt markets, expanding the
program to cover the bond market will increase potential financing
options for cellulosic projects.
One commenter states that they have contacted numerous banks and
insurance companies and have been unable to locate a commercial lender
to finance the debt portion of a project despite the section 9003
program. Although the financial market conditions of the past 18 months
have contributed to some degree to this challenge, the lack of
available lenders has less to do with the recent debt crisis and more
to do with structural issues with the program. The section 9003 program
today is modeled after the B&I guaranteed loan program and requires a
commercial lender to apply for the guarantee. This model has worked
fine for the B&I guaranteed loan program because the typical loan size
is sufficiently small. There are hundreds, if not thousands, of small
rural banks that can fund small guaranteed loans. The section 9003
program, targeted at much larger projects with debt components that
start at $70 million and
[[Page 8419]]
go up from there, quickly outstrips the capabilities of rural and even
regional banks. The remaining lenders are ``too big to fail'' sized
banks that have little, if any, experience with USDA programs. The only
way for Wells Fargo, and even Rabo Bank, to fund one of these loans
requires a high level executive decision to create a whole new line of
business. So far that has not happened and expectations are that not
much progress will be made in this arena.
As a result, the commenter states that they have been working with
the Agency, specifically Undersecretary Tonsager and his team, to
determine how best to adapt the program to the use of the commercial
bond market which is a far better solution for the following reasons:
1. Bond investors provide ``patient'' capital that provides term
lengths that match the project life better than a commercial loan.
2. Bonds do not include ``sweep'' provisions whereby the commercial
bank lender ``sweeps'' any excess cash generated to reduce the
principal of the loan. When this happens, it reduces the returns to
equity investors and thereby makes it much more difficult to attract
equity capital.
3. The bond market is 10 times larger than the commercial debt
market.
4. Higher levels of due diligence are performed than is true with
small lenders because a professional investment bank performs the
underwriting and the bond investors also does similar due diligence.
5. Loan servicing is performed by a trustee that has a higher level
of professionalism and process technology to assure greater compliance
and overall loan processing. In the worst case scenario of liquidation,
these trustees are far more capable of making debt holders whole than
is a small lender.
The commenter proposes the bond market alternative because of the
challenges with loans of the size needed for section 9003 projects and
the lack of availability of lenders willing to participate. The
additional minimum criteria in the proposed rule will make it even more
difficult to find lenders willing to participate. The commenter
believes that the bond market approach not only meets the criteria of
the program as provided by the statute, but provides benefits in terms
of lower risk to the Agency and better screening of projects.
Response: For the reasons previously stated, the Agency can only
consider bond financing where the lender purchases all bonds and sells
and/or participates thereafter. In all scenarios, the lender is
responsible and controls the servicing of the loan. In addition, the
lender would be required to fully control any trustee related to the
bond financing. In addition to other provisions, the Agency has tried
to make the program more attractive to commercial lenders by revising
the rule to allow either 20 years or useful life of the project
(removing the ``85 percent'' provision associated with useful life),
whichever is less, to allow more flexible terms for loans.
Special Program
Comment: Several commenters recommend implementing a special
section 9003 advanced biofuels guaranteed loan-bond program for the
Gulf Coast and Eastern seaboard region to stimulate the economy ravaged
by the recent Gulf oil spill crisis. The Go-Zone Bond funding and other
business stimulus programs were vitally instrumental to getting these
regions additional financial support that stimulated business creation
and the rebuilding of the region. For the advanced biofuels industry,
the primary feedstock that is the most reliable to date ``woody
biomass'' is found in this same region in greater volumes than anywhere
else in the country.
Response: The Agency understands the commenters' concerns. However,
the Agency wants to encourage the geographic distribution of projects
throughout the U.S. and its territories and not tailor the program to
specific events. The Agency notes that there are other methods to
address specific events described by the commenter (e.g.,
Presidentially-declared disaster areas).
Demonstration Funding for Pilot and Demonstration Scale Projects
Comment: Several commenters recommend implementing the
demonstration funding portion of the section 9003 program to include
pilot and demonstration scale projects providing grants under the
section 9003 program to assist in providing additional financial
support, because these types of projects typically do not cash flow on
a commercial scale. This intermediate step is a vitally important one
in developing these new technologies to the commercial stage, and needs
funding to allow deserving, sustainable technologies to move to
commercialization.
Response: The statute only allows for demonstration scale projects
to be funded with grant funding. At this time, no funding has been
appropriated to implement a grant program.
Dairy Industry and Department of Defense Set-Asides
Comment: Several commenters recommend setting aside special funds
for USDA partnership efforts with the dairy industry and the Department
of Defense (DoD). In recent months, the Agency has entered into a
memorandum of understanding (MOU) with the dairy industry with the
intent of developing anaerobic digester technology and providing a
reduction of greenhouse gas emissions. This technology has not been
fully implemented in dairies because of the high cost and low profit
margins from currently used technologies. However, advanced integrated
biofuels technologies have been developed that dramatically increase
efficiencies and provide profitable returns for investor-owners. The
Agency can assist in this effort by supporting larger projects that are
greater than the $25 million cap in the Rural Energy for America
Program. Utilizing a 90 percent loan guarantee for these projects, and
low or no fees will also additionally incentivize the growth of these
technologies in this market segment.
The Agency also recently entered into a partnership agreement with
the Navy to assist in developing advanced biofuels for fleets and
vehicles. Five energy targets have been adopted by the Navy to reduce
conventional fuel use. This will require an intense effort and
coordination by the advanced biofuels industry just to supply the Navy
this type of fuel, notwithstanding the RFS requirement and other
industry needs. It is vitally important to our national security that
the Agency can provide assistance to both the industry and the Navy in
this effort through assisting in the development, implementation and
financing of these new biofuels projects that must be implemented to
meet such a demand.
Response: The Agency is not establishing the set asides referenced
in the comment because the Agency has adopted a policy of wanting to
have a program that is technologically, geographically, and feedstock
neutral. Such a set aside would provide preferences for specific
feedstock and technologies inconsistent with this policy. The Agency
believes that feedstock, geographic, and technology neutrality are
critical to meeting the purposes of the program, which is to encourage
broad-based advanced biofuel production practices, technologies, and
feedstocks so that the best renewable energy options are supported.
However, the Agency has added a provision to the rule to allow the
Administrator to award bonus points to
[[Page 8420]]
applications for partnerships and other activities that assist in the
development of new and emerging technologies for the development of
advanced biofuels so as to increase the energy independence of the
United States; promote resource conservation, public health, and the
environment; diversify markets for agricultural and forestry products
and agriculture waste material; and create jobs and enhance the
economic development of the rural economy. The Agency will identify
these partnerships and other activities in a Federal Register notice
each fiscal year. Please note that the Agency is specifically seeking
comment on this provision (see Section IV, Request for Comments).
New Technology and Commercialization
Comment: One commenter states that there appears to be some
confusion as to how to determine whether a new technology is ready for
commercialization. This shows up in the requirement that pilot-scale or
semi-work facilities will have already been built and operated as a
means to build confidence in commercial scale rollout. For some
technologies, this is an acceptable approach, but it is not for many
others. As a result, the technology development leading up to the
proposal, and whether that work provides sufficient confidence to move
to commercial scale, should be determined as appropriate, to the
technology being proposed. Also, if the financing team and the due
diligence performed by them and the third party Technical Reviewer
finds the evidence sufficient, that is a good proxy for acceptance.
Instead, it can be a requirement of the Technology Assessment to
express whether sufficient pre-work has been performed to warrant a
commercial scale project. Or when a proposed project for commercial
scale operations is of a size that could also be considered a pilot
scale project, that such projects are equally qualified and eligible.
Although there are many technologies that are well suited to testing
with pilot scale facilities as a means to increase confidence in the
technology (e.g. fermentation), oxygen gasification of biomass is not
one of these. The commenter's commercial facility, with a proposed
budget of $140 million, is in fact at a scale that would normally be
considered ``pilot scale.'' The commenter states they considered
developing a quarter-scale facility for this purpose. Unfortunately,
the challenges of either generating or trucking sufficient oxygen to a
quarter-scale facility drives the cost of such a facility to be
comparable (approximately 70 percent) to the full commercial scale
design. Also, a quarter-scale facility provides little valuable
information in terms of scalability and therefore very little increased
confidence for the commercial scale-up. The reason is that the fluid
dynamics and chemistry within such a gasifier vary dramatically from
one size to another. Operation of a smaller unit does not predict the
actual operation of a larger unit. As a result, the design work and
subsequent validation within the pilot facility would only prove that
the pilot functions properly. The details of the full scale commercial
unit will certainly be different and require its own separate
validation. Given that the risks are similar and equally low for a
quarter-scale versus commercial scale, it is unwise to waste that much
money on a useless facility. More importantly, investors are not
willing to waste that much investment on a pilot scale that provides
little incremental value.
Response: The Agency disagrees with the comment. The application
must include documentation that proves the technology as proposed meets
the definition of eligible technology. The Agency has consulted with
technical experts and has determined that the process needs to be
demonstrated to provide reasonable experimental data to support
engineering scale-up with acceptable technical risk. That documentation
includes that the advanced biofuel technology has at least a 12-month
(four seasons) successful operating history at semi-work scale, which
demonstrates the ability to operate at a commercial scale. Semi-work
scale is defined as ``a manufacturing plant operating on a limited
commercial scale to provide final tests of a new product or process.''
The Agency did not receive many comments concerning this issue and the
commenter did not provide sufficient reasons for a change in policy at
this time.
Interest Caps and Financing Structure
Comment: To achieve the Agency's goal of leveraging Federal
government biorefinery assistance loan guarantees and private capital
sources to facilitate financing of biorefineries in the U.S., two
commenters recommend considering factors not included in the NPRM that
affect available financing of renewable energy--in this case
biorefinery--projects. Specifically, while Federal loan guarantees
provide greater certainty for private lenders, if interest caps on loan
guarantees are too low, commercial lenders are just as likely to turn
to other stable investments, such as Treasury Bills, rather than the
desired renewable energy investments. While some commercial lenders are
comfortable operating in the current program structure, the commenters
believe that the industry as a whole would benefit from maximum
competition and flexibility for lenders to negotiate business
structures and terms that provide incentives to finance biorefineries.
Response: The Agency has removed the proposed blended interest rate
requirement from the rule. The Agency has revised the interest rate
provisions to more closely match the requirements in Sec. Sec.
4279.125 and 4287.112, while providing lenders with some flexibility in
establishing loan type and terms on the unguaranteed portion. The
Agency believes that this and other changes to the rule sufficiently
address the commenter's concerns.
Grants
Comment: One commenter recommends including grants in the program.
According to the commenter, grants could be used as matches for other
funding sources and would help reduce the high startup costs associated
with the use of new technology, particularly in rural communities.
Another commenter also encourages the Agency to include grants for
developing and deploying new and emerging technologies that, at a
minimum, emanate from paradigms different from the one built into the
proposed rules, and preferably that target transformative innovations
in rural America.
Response: The Agency points out that grants for this program are
authorized by statute for the development and construction of
demonstration-scale biorefineries to demonstrate the commercial
viability of one or more processes for converting renewable biomass to
advanced biofuels, and are only funded under discretionary funding,
which must be appropriated by Congress. At this time, no discretionary
funding has been received by the Agency for the program. Therefore,
until funds for grants are appropriated, the Agency cannot address
grants in the program. Additionally, the authorizing legislation for
this program would not authorize program grants being used as a match
for another Federal grant program.
Comment: One commenter states that the language in the rules for
the grants authorized under Section 9003 are limited to only
development and construction of demonstration-scale biorefineries or
construction of commercial scale facilities based on a
[[Page 8421]]
traditional ``bricks and mortar'' paradigm. [``Grants for the
development and construction of demonstration-scale biorefineries to
demonstrate the commercial availability of one or more processes for
converting renewable biomass to advanced biofuels.''] This language
precludes the Agency from tapping into truly transformative
innovations.
The commenter further states that the Agency needs to include in
its rules the ability to fund transformative technologies in the
agriculture sector that support and accelerate the sustainable
production of advanced biofuels.
The commenter states that ag-interested/savvy venture investors do
not truly exist in the agriculture sector. Thus, incremental
agricultural improvements have tended to be the norm; paradigms
producing transformative innovations in this sector are few and far
between. The DOE views its mission in strictly narrow terms as only
pertaining to the fuel, even though by definition biofuel includes
agriculture. Thus, it has been funding interesting science ``fuel
only'' focused efforts that will likely take many, many years to deploy
at commercial scale with competitively priced output. Our urgent
national imperative is for a domestic renewable source of liquid fuels.
Urgency requires transformational innovation in the agricultural
sector. The Agency is the only entity with enough knowledge and
experience in this sector, and with a mission to revitalize rural
America, to foster the kind of innovation that can enable
transformation in the agricultural-related advanced biofuel sector.
The commenter provided the following discussion to support their
position regarding grants for innovative technology:
(1) The new paradigm is born of a different way of thinking about
how to solve our urgent near-term need for a thriving domestic biofuels
industry. The new paradigm recognizes that it is really the yeast that
produces the biofuel and thus is at the center of the ethanol
ecosystem, and that the current yeast only produces one product--
ethanol. The facilities the existing yeast is deployed in, as a
consequence are known as ``ethanol plants.'' The commenter utilized
off-the-shelf biotechnology to modify the single-product yeast so it
would multi-task. When multi-tasking yeast are deployed, producing
ethanol and valuable co-products simultaneously, ethanol plants
automatically become biorefineries by definition. Furthermore, since
yeast do not care where their C6 sugar-food comes from, the
biorefineries deploying multi-tasking yeast can use feedstock other
than grain feedstock (e.g. stover, sorghum, grasses, etc.) to produce
advanced biofuels. Off-the-shelf technology exists today to convert
cellulose into C6 sugar-food for the yeast to ferment into ethanol. The
problem heretofore has been doing so in an economically sustainable way
from just the cellulose alone. However, the valuable co-products that
multi-tasking yeast produce enable economically sustainable conversion
of only the cellulose portion of cellulosic feedstock, allowing the
hemi-cellulose and lignin to be used for heat and energy to run the
operation in a carbon neutral manner.
(2) When the yeast element of the biofuel system changes, all the
other elements of that system also change. The most important change
from switching to multi-tasking yeast is a sustainable advanced biofuel
business model. The revenue in this new model is from the sale of
ethanol and valuable co-products that are derived solely from the C6
sugars converted from just the cellulose portion. The hemicellulose and
lignin used in CHP facilities provide the heat and power to run the
operation and generate more revenue through sale of excess electricity
to the grid. Private capital will invest in a sustainably profitable
business model--the key element that is missing from the biofuel funded
efforts to date. Farmers will grow cellulosic crops when a profitable
market exists.
The logical sequence of events, therefore, will proceed as follows:
a. The Agency should change the rule pertaining to grants in
Section 9003, allowing the Agency to make ``grant(s) for the
development of processes for converting renewable biomass to
[sustainable] advanced biofuels.''
b. The revised rule would allow the commenter, for example, to
apply for a grant under Section 9003 to complete the optimization of
its multi-tasking yeast in order to produce commercially viable levels
of co-products in advanced biofuel biorefineries, furthering the
fundamental intent of the rules ``to assist in the development of new
and emerging technologies for the development of advanced biofuels.''
It would also enable the Agency to successfully advance its agenda to
revitalize rural America by creating thousands of new green jobs, and
do so at an accelerated pace.
c. The commenter would then deploy multi-tasking yeast first in
existing ethanol plants, where just the cellulose from cellulosic
feedstock (initially stover because it is already grown) is converted
to C6 sugar for the yeast to ferment.
d. Ethanol produced in the biorefinery would be sold through
existing channels at market prices as it is today, and the byproduct
portion would be sold as a molasses-type material or dried and sold as
a powder (market pricing for amino acids is quite stable), which has
enabled computation of the $0.70/gallon of revenue.
e. With a proven sustainable business model (by converting an
existing ethanol plant to an advanced biofuel biorefinery), private
capital will invest in building many new biorefineries (even without
guaranteed loans) to expand the industry, and farmers will grow the
cellulosic crops to meet the new market for them.
The systemic changes also include:
(1) No need for funding for new pilot plants to demonstrate
viability of unproven, complex and costly technologies.
(2) Existing designs for ethanol plants (substituting pulp mills at
the front end for existing corn grinders) can be used for new advanced
biofuel biorefineries, expediting deployment of these facilities at a
lower cost, and accelerating production of advanced biofuel that can
meet the RFS2 production levels and timeline.
(3) Accelerated advanced biofuel production (within 24 months post
funding) means accelerated construction and operating jobs in rural
communities, which will enable the Agency to dramatically demonstrate
to rural America and to Congress that it is the Agency that can make
the transformative difference to rural America and to our domestic
biofuels industry that the President, Congress and the American people
voted for.
In conclusion, the commenter advocates rules that allow an Agency-
funded transformational innovation to be developed wherever the
resources within the United States most readily exist in order to
expedite development and deployment, but the resulting technology must
be deployed in rural America. If the statutory language requirement in
the 2008 Farm Bill will not allow for inclusion of funding for
development of agricultural-biofuels related transformative innovations
like the one discussed above, then provision for such should be made
clear under Sec. 4279.202(b).
Response: The language in the statute (see section 9003(c)(1) of
the FSRIA) states: ``grants to assist in paying the costs of the
development and construction of demonstration-scale biorefineries to
demonstrate the commercial viability of 1 or more
[[Page 8422]]
processes for converting renewable biomass to advanced biofuels.'' This
language precludes the Agency from implementing what the commenter is
requesting. Further, to the extent commenter is requesting the Agency
to do otherwise, the Agency cannot. It is up to Congress to modify the
statutory language in order for the Agency to consider the commenter's
suggestions.
Simple Applications
Comment: One commenter recommends developing a simple application
for small biorefineries that produce less than 1,500 gallons of
biofuels per day.
Response: Because the program deals with new and emerging
technologies, the Agency needs the same detailed information on the
technology and process regardless of the size of the biorefinery.
Therefore, a simplified application is not appropriate for the program.
Small, Mobile Biorefinery Units
Comment: One commenter recommends giving preference to small and
particularly mobile biorefinery units that may be better able to serve
small rural communities on a multi-county regional basis. The commenter
states this will help provide economic security to those communities
through job creation and dependable sources of local energy and provide
greater feedstock security by having the sources located in many
different locations throughout a multi-county area instead of being
concentrated near one centralized biorefinery.
Response: Please note the previous response where the Agency stated
its position to remain technologically, geographically, and feedstock
neutral. While there is no preference given for small biorefinery
units, they are not excluded from the program. A mobile system is
eligible.
Unsecured Debt
Comment: One commenter believes that the primary obstacle to this
program is the unsecured debt requirement. According to the commenter,
lenders are not willing to take risk in the alternative fuels industry
given the current state of financial markets. The Agency must be
willing to relax this rule. Options include allowing subordinate risk,
such as a state or other credible entity, or offering a 100 percent
guarantee under conditions when a high ratio of equity investment is
secured, where technology risk is limited, and where there is a
demonstrated ability to accelerate return on investment. Loan
guarantees, like loans, should not be a ``one size fits all.'' Banks
adjust loan terms based on conditions specific to the investment the
loan supports. The Agency should consider adjustments when the
potential investment offers compelling reasons to do so.
Response: The Agency is addressing these concerns by allowing the
subordination its lien on accounts receivable and inventory for working
capital loans under certain conditions and guaranteeing up to 90
percent of the loan for guaranteed loans of $125 million or less, also
under certain conditions. As noted in an earlier response, the rule
outlines the criteria the project must meet to obtain a 90 percent
guarantee.
Requested Comments--f. Processing Technology Owned by Borrower
Comment: One commenter believes that the majority of biorefineries
will be built by entities that are not owners of the processing
technology that will be used in the biorefineries. Thus, the commenter
believes that the processing technology should not be counted as
collateral or equity in the project. In the instance where the process
technology owner is the borrower, the market value of the technology
should not be counted in the project cost. This will lower the equity
requirement of the borrower because the project cost will be lower.
Thus, the commenter recommends setting the market value of the
technology at zero, and not entering it into the calculation of the
equity requirement, if its market value cannot be determined because it
is a novel technology and unproven in the production of advanced
biofuels.
Response: With regard to process technology, the Agency agrees with
the commenter that it should not be counted as collateral or equity in
the project.
The Agency agrees that the market value of the technology should
not be counted in the project cost, because it is the Agency's intent
to focus the program's limited funding resources on implementing the
technology rather than developing technology. However, the Agency notes
that technology may be considered as part of the collateral based on
the value identified on the borrower's audited financial statement
prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and subject to appropriate discounting as provided for in the
rule.
Comment: One commenter suggests using the standard discount rate of
20 percent that is used in the B&I loan guarantee calculation.
Response: The Agency disagrees with the commenter. Prudent lending
practices dictate that the Agency use a discount factor, which may vary
depending on condition and type of collateral offered. Because of the
variability associated with the technologies participating in this
program, discounting needs to be performed on a case-by-case basis and
a standard, fixed discounting rate would be inappropriate. Where there
is an existing market for intellectual property, discounting will be
performed in accordance with the lender's standard discounting
practice. Where there is not a market for intellectual property, the
value of the intellectual property will be no greater than 25 percent,
as determined by the Agency.
Comment: One commenter suggests calculating highly skilled labor as
a business expense on the income statement and not including it in the
equity calculation.
Response: The Agency agrees that highly skilled labor will not be
included in equity calculation. However, labor is an eligible business
expense, which could be financed with working capital.
Comment: One commenter stated that a broad interpretation of
``eligible project costs'' will facilitate lending and achievement of
the purposes of the program. Because upfront transaction costs on these
projects are significant, borrowers should receive credit for their
contributions of real and personal property, including, without
limitation, laboratory equipment, intellectual property, and reasonable
fees paid to critical service providers. These fees can be substantial,
up-front costs that are often a barrier to completing a significant
application as is required for this program. If there is the
opportunity to wrap these into the loan or apply them towards the
borrower's equity contributions, additional companies with promising
technology may choose to avail of the program as a financing mechanism.
Response: It is the Agency's intent to focus the program's limited
funding resources on primary project costs and, therefore, the Agency
disagrees with the suggestion for wrapping these fees into the loan
because the Agency does not consider these fees to be primary project
costs. For existing biorefineries only, qualified intellectual
property, equipment, and real property may be considered in meeting the
equity requirement, as described in Sec. 4279.234(c)(1). The Agency
notes that a loan guaranteed under the program may only finance 80
percent of the eligible project costs. The borrower needs to provide
the remaining 20 percent from other non-Federal sources to complete the
project.
[[Page 8423]]
Comment: Two commenters state that processing technology owned by
the borrower should be included as an eligible project cost. Allowing
for a means to recoup the processing technology development costs will
speed the creation of biorefineries. It will maximize commercial
flexibility of technology owners and project developers to negotiate
deals that create incentives for innovation (on the part of the
technology owner) and commercialization (on the part of the developer).
If it is not an eligible cost, the developer will have to compensate
the technology owner outside of the project finance structure, which
reduces the capital that could be applied to biorefinery deployment/
retrofitting. This may significantly reduce the commercialization of
advanced biofuels refining technologies necessary to meet the RFS as
well as diversifying the country's transportation fuel portfolio.
Another commenter, however, states that, while physical laboratory
and equipment costs should be considered eligible project costs if they
are listed as assets of the borrower, there is no legitimate value to
intellectual property until the industry has emerged into commercial-
scale production, and, at that point, commercial values will be
changing to meet new supplies and demands. If there is the opportunity
to apply a portion of what the borrower perceives as the value of its
intellectual property towards the required equity contributions,
additional companies with promising technologies may be eligible for
assistance under the section 9003 program. Because the documentation
required by the Agency is no different than what a prudent lender
should require, eligible project costs should not include any item that
is not considered a project cost in the borrower/lender transaction
being guaranteed.
One commenter explains that, as a startup company with first-of-
kind technology, they have and will incur significant cost securing
intellectual property, financing arrangements, R&D expenditures, and
developing new forms of renewable biomass. The commenter believes these
costs should be allowed as eligible project costs and should be applied
to the cash equity requirements.
Response: The Agency will not consider processing technology as an
eligible project cost, because, as noted in a previous response, it is
the Agency's intent to focus the program's limited funding resources on
core project costs. However, the Agency acknowledges that the
processing technology has collateral value and can consider the value
of such technologies, with certain restrictions, in addressing the
program's collateral and equity requirements.
Comment: One commenter states that eligible costs should include
all costs that make up a sound project including production of
byproducts, co-products, and electricity co-generation. If a facility
generates excess heat or other forms of energy that can be harnessed to
co-generate power, it should be encouraged to do so because this
activity is in keeping with the energy goals of the Agency and the
program. Also, as long as there are investment tax credits available
for power co-generation, these ``funds'' can have a profound positive
impact on the financability of the project. Hence, these should all be
included in eligible costs so that the best possible financing package
may be brought to bear. If professional service fees include the legal
fees and other fees are required to complete the financing, including
the fees to the bank or investment bank, these should be allowed if
they are to be incurred after the guarantee application has been
submitted. These are bona fide costs of the project and should
therefore be included.
Response: The Agency agrees with the commenter to the extent that
the costs associated with byproducts, co-products, and electricity
generation are eligible project costs as provided in Sec. 4279.229(e).
The items listed in paragraphs (e)(1) through (e)(7) of Sec. 4279.229
are eligible project costs as long as they are integral and necessary
parts of the total project. With regard to professional fees, the
Agency anticipates an over-subscription of the program, so the Agency's
intent is to focus the program's limited funding resources on core
project costs, which are identified in the interim rule as eligible
project costs (see Sec. 4279.229(e)).
Requested Comments--g. Percent Revenue From Sale of Advanced Biofuel
Comment: Two commenters believe that the mandate that 70 percent of
the revenue generated by a biorefinery must be from the sale of
advanced biofuel will create a disincentive and turn companies away
from the program goals. An integrated biorefinery, as described by the
DOE, is similar to a petrochemical refinery where crude oil is
processed into a variety of fuels and chemicals. To achieve this
integrated biorefinery model, biofuel companies will have to go into
production of biochemicals themselves (incurring enormous capital
expenditure costs), or enter into a joint venture with existing
biochemical companies that have ready-to-scale technology.
Under the section 9003 program, a chemical production facility
included as part of a biorefinery can have no more than 30 percent of
the revenue generated at the biorefinery, yet the revenue generation of
chemicals compared to fuels is traditionally disproportionately higher.
This revenue restriction inhibits the creation of joint ventures by
putting a cap on the future revenue of the potential biorefinery
partner, limits the growth potential due to market demand or other
external factors that affect the partners, and limits the ability of
biofuel companies to enter into a revenue generating joint venture in
efforts to become economically viable and self-sufficient in the long-
term.
The most powerful aspect of the biorefinery as a business model is
the ability to produce multiple products, so that the plant can weather
prices drops, fluctuations in demand and volatile feedstock prices by
arbitraging between the various products produced and privileging those
that are the most profitable at any given time. If this cap exists and
biofuels are not economically viable or require large subsidies to be
viable, then limiting the amount of higher value-added products that
can be produced will condemn the biorefinery to failure.
In addition, as a practical matter, the Agency will be required to
regulate the 70 percent revenue generation requirement on an ongoing
basis. From the bioproduct and biochemical perspective, this is a
revenue limitation of 30 percent. Limiting revenue generation of one
component of a business within a free enterprise is questionable
policy. The Agency does not have a rational basis for this limitation
grounded in sound economics, nor does it serve the broader policy
purposes of the program. Biofuels and bioproduct companies should not
be limited in revenue for any reason. The U.S. economy and its
taxpayers will only reap the benefits of biorefineries if they are
profitable ventures. They should be free to innovate new business
models in order to achieve sustainable success.
One commenter agrees that the intent of the program is to create
biorefineries that produce advanced biofuels, but believes that the 70
percent requirement is too high. The commenter believes that as long as
35 percent or more of the revenue is from the sale of advanced
biofuels, then the project should be eligible for the program.
One commenter states that the advanced biofuels industry is an
[[Page 8424]]
emerging market and, as such, many configurations for profitability and
risk mitigation include the sale of byproducts and renewable
electricity as major components of the profit and product streams.
There should be no set standards for the production of the advanced
biofuels, and to require that 70 percent of the revenues are from the
sale of advanced biofuels adds a further artificial barrier on sound,
sustainable projects. The requirement should be lowered to 50 percent
and be a combination of all forms of energy, including renewable
electricity.
One commenter states that it is important that new fuel production
methods pass through the financing ``Valley of Death'' so that they can
be replicated in the market without government financial assistance.
Hence, whether a first of a kind project under section 9003 sells much,
if any, advanced biofuel should be irrelevant as long as the proposed
business plan is financeable and there is sufficient evidence that
there is a market (or emerging market) for the proposed fuel. Thus,
more new technologies will be financed and more new advanced biofuels
will ultimately come to market. Because even the small number of
section 9003 eventual winners will have a negligible total impact on
U.S. fuel consumption, it is more important to set the stage for future
growth rather than saddle these early stage projects with excessive
hurdles to overcome to create a successful business plan for a first
commercial project. As long as the borrower can explain cogently how
future plants will produce and deliver advanced biofuels and
bioproducts that mitigate imported fuel or energy intensive products,
these should be equally rewarded in this program.
One commenter agrees that the program should be focused on projects
that primarily produce advanced biofuels, and encouraged the Agency to
make a determination of the nature of the project on a site-specific
basis and not promulgate a bright-line threshold. BTL (benzene,
toluene, and xylenes) facilities can be configured to produce various
combinations of fuels, co-products, and electricity. Thus, it may be
that an optimized plant on an efficiency basis would be configured for
something marginally less than 70 percent revenue from advanced
biofuel. While a plant could be configured to meet a 70 percent
requirement, the commenter asks that the Agency provide flexibility to
allow for the most efficient plant configurations, which would be
consistent with the proposal to consider life-cycle GHG emissions and
other performance criteria.
Two commenters state that, while the Agency has proposed to require
a certain percentage of biofuels be produced at the facility receiving
an Agency loan guarantee, other product streams from the same feedstock
can enhance the economic viability of biofuel projects. Market forces
will affect revenues based on ever-shifting price points. Thus, a
requirement for a percentage of revenue would make financial and
operational planning very difficult for a biorefinery that receives a
loan guarantee. An energy content or biomass usage metric is more
effective, allowing developers to plan their facility/project at the
outset to ensure that a certain percentage of the energy or biomass is
used for biofuels. The commenters recommend basing any required
percentage related to biofuel production on energy content or biomass
usage, not revenue. The commenters also urge the Agency to promulgate
flexible guidelines to implement this approach at this stage of
development and uncertainty in the biofuels market.
Response: The Agency agrees with commenters' suggestion to remove
the 70 percent revenue threshold. The rule has been modified to require
that a majority of the biorefinery production is an advanced biofuel.
When the biobased product and any byproduct produced have an
established BTU content from a recognized Federal source, majority
biofuel production will be based on BTU content of the advanced
biofuel, the biobased product, and any byproduct. When the biobased
product or any byproduct produced does not have an established BTU
content, then majority biofuel production will be based on output
volume, using parameters announced by the Agency in periodic Notices in
the Federal Register, of the advanced biofuel, the biobased product,
and any byproduct.
The Agency has determined that measuring the output is a better
metric than the energy content of the biomass input in determining
project eligibility, because the energy value of biomass input is not
necessarily equivalent to the energy product outputs. The primary
purpose of the program is for the development of advanced biofuels. For
these reasons, the Agency is focusing on production of advanced
biofuels rather than consumption of feedstock.
Comment: One commenter recommends changing the facility's
percentage of ``revenue'' that must come from advanced biofuels to a
percentage of ``volume'' in order to enable a company to maximize the
economic viability of its operations. The commenter believes basing the
percentage requirement on revenue, and not volume, significantly
inhibits a company from pursuing its maximum economic potential as the
prices of many byproducts are greater than fuels. The commenter
believes that changing this requirement to 70 percent of volume will
still enable the Agency to pursue its goal of promoting advanced
biofuels without unduly restricting companies from pursuing the most
economically advantageous means of supporting their facilities.
Private financing entities will judge whether ``facilities are
worth financing'' solely based on the economic potential of that
facility to earn sufficient profits to be able to pay back the loan to
the financing entity as well as pay returns to its equity holders.
Therefore, any regulations should be structured such that they will
facilitate the manufacturing plant achieving maximum profits and
enhancing its economic viability. The Agency itself recognizes the
value of multiple revenue streams that exist in a biorefinery
operation. For example, the Agency states that ``byproducts are an
important revenue source for many biorefineries.''
To provide an example: The commenter's process inherently produces
byproducts at a certain level. Monetizing these byproducts
significantly enhances the financial viability of a biorefinery
facility. As an example, one of the byproducts is an organic acid that
sells for more than $2,000/ton, significantly more than the value of
ethanol. Under a revenue-based eligibility requirement, the commenter
states they would be significantly restricted from monetizing this
byproduct, which is currently made exclusively from fossil fuels. Since
this acid sells for more than 3 times the value of ethanol, the
commenter states they would only be able to sell very small amounts in
a revenue-based scenario, losing not only the revenue and societal
benefit of replacing a fossil fuel derived material, but also incurring
a cost to dispose of the material. In a volume-based scenario, the
commenter states they would still focus on producing advanced biofuels
as the primary purpose of the facility, but also would be able to
enhance the economics of the facility by realizing the value inherent
in its processes' byproducts.
Response: As noted in the response to the previous comment, the
Agency is replacing revenue as the standard of measurement and instead
will determine the majority biofuel production based on BTU content of
the advanced biofuel, biobased product, and any byproduct. However, if
the biobased
[[Page 8425]]
product or any byproduct does not have an established BTU value, the
Agency will determine majority biofuel production based on output
volume of the advanced biofuel, the biobased product, and any
byproduct.
Comment: One commenter states that the 70 percent requirement is
not contained in Section 9003 and may cause significant problems, both
in terms of deterring companies from using the section 9003 program and
then increasing the chance of default if a loan guarantee is issued.
The commenter recognizes that the primary purpose of Title IX is
``Energy''; however, Title IX also recognizes that, like petroleum, co-
products provide essential revenue streams. Liquid transportation fuel
has been the ``holy grail'' of the algae industry since its inception,
but many companies are shifting their business plans away from a fuel-
dominant approach in the short term and dedicating more efforts to
developing higher-value co-products such as chemicals, agricultural
soil remediation and fertilization, and plastics. This has been driven
primarily by high production costs for lipids and having to compete
with low-cost crude oil. One of the primary reasons for the high
production costs of algal-based fuels is the lack of commercial-scale
(and even demonstration-scale) projects that provide opportunities to
optimize and de-risk technologies and reduce costs with scale. The
algae industry views the section 9003 program as a much-needed
financing tool to develop projects and bring down costs and risks. As
the Agency notes, ``byproducts are an important revenue source for many
biorefineries.'' They will be even more important for the long-term
success of the algae industry and the ability of the industry and its
technologies to mature to the point where algal-based liquid
transportation fuels are price competitive with petroleum gasoline,
diesel or jet fuel.
For this reason, the commenter strongly encourages the Agency to
interpret the purposes of Section 9003 broadly and in a way that will
most likely accelerate the ultimate development and production of
advanced biofuels. Imposing a 70 percent revenue requirement defeats
this purpose.
First, it is unclear what the ramifications would be to the
applicant if, in practice, this 70 percent threshold was violated.
Would this constitute a default under the credit facility or security
agreement? If so, this injects an artificial limit into the operation
of projects that may, at points, obligate the applicant to run the
project in a commercially unreasonable or imprudent way by producing
products that fail to provide sufficient revenue to meet debt service.
Second, and related to the first, it is much more difficult to
control price for a product (unless long-term off-take contracts are in
place) than volume produced. Price fluctuations may inadvertently cause
a breach of any loan agreement or security document.
Third, there is a significant pricing differential for feed,
nutraceuticals, bioplastics, and biochemicals compared to fuel. This
pricing differential could distort financial models and disqualify
early algae projects that will rely on co-product sales to make the
fuels portion of the project ``pencil out.'' Borrowers should not be
penalized for capitalizing on multiple value streams. If any limit on
product mix is imposed, this should be volumetric rather than revenue-
based.
Fourth, Section 9003 imposes no such specific threshold for
purposes of a biorefinery's eligibility for the section 9003 program.
Section 9003 provides that ``eligible technology'' for purposes of
qualifying for a loan guarantee is ``technology that is being adopted
in a viable commercial-scale operation of a biorefinery that produces
an advanced biofuel'' as well as ``technology * * * that has been
demonstrated to have technical and economic potential for commercial
application in a biorefinery that produces an advanced biofuel.''
Nothing in this sentence requires anything more than a biorefinery to
produce some quantity of advanced biofuel, and it certainly doesn't
base a requirement on a percentage of revenue. Further, a
``biorefinery'' is defined as a ``facility (including equipment and
processes) that ``(A) converts renewable biomass into biofuels and
biobased products; and (B) may produce electricity''. On the face of
the statute, Congress did not require a project's eligibility to be
based on production and sale of a specific product mix or revenue mix,
and biobased products and electricity are specifically anticipated to
be key attributes of any biorefinery. The Agency's exercise of
administrative discretion on this issue goes too far and jeopardizes
the success of a much-needed program.
This limit on the revenue mix from products produced by the project
is counterproductive to the purpose of the section 9003 program.
Imposing an arbitrary limit on the product and revenue mix unsupported
by Section 9003 will negatively affect borrower's ability to make
prudent business choices and maximize revenues based on market demand
for certain products at any given time during the loan term. This is
not in the lender's best interest, it is not in the borrower's best
interest, and it is not in the taxpayer's best interest when the
borrower defaults.
The commenter recommends considering the merits of (most desirable
to least desirable): (i) Completely eliminating this requirement for
project eligibility in favor of a certification by the borrower that
the primary purpose of the project over the term of the loan is the
production of advanced biofuels; (ii) imposing a volumetric requirement
rather than a revenue requirement with the volumetric requirement being
a ``majority'' rather than 70 percent; (iii) reducing the 70 percent
revenue threshold to a ``majority''; (iv) providing a waiver process to
avoid default; and (v) permitting the carry-forward and carry-backward
of surpluses and deficits so that the 70 percent revenue requirement is
imposed over multiple years.
In any event, the commenter encourages the Agency to clarify its
intent here and the ramifications for failing to meet such a
requirement, and recommends either discarding the 70 percent revenue-
from-fuels requirement or completely restructuring this requirement.
Response: For program integrity the Agency cannot rely just on
certifications. As has been noted in the responses to the two previous
comments, the Agency is replacing revenue as the standard of
measurement and instead will determine the majority biofuel production
based on BTU content of the advanced biofuel, biobased product, and any
byproduct. However, if the biobased product or any byproduct does not
have an established BTU value, majority biofuel production will be
determined based on output volume of the advanced biofuel, biobased
product, and any byproduct. The Agency has also removed the 70 percent
threshold and replaced it with a majority threshold. Based on the
changes, the Agency has determined that a waiver process and the carry
of revenue surpluses and deficits are not required. The Agency reserves
the right to take any legal action to address default when the borrower
is not operating as originally proposed.
Comment: One commenter believes that biobased chemicals and
biobased products must be included in grant, loan, and loan guarantee
programs under the section 9003 program to enable stand-alone
commercial scale facilities. Currently, most, if not all, large funding
advantages in the DOE and USDA biomass program are
[[Page 8426]]
available to biofuels production projects only (with one exception).
Expanding funding programs to include production of biobased chemicals
and products will enable shovel ready projects that are the
cornerstones of new biobased industries to immediately take hold. The
2008 Farm Bill states clear objectives for our nation yet these
programs exclude loans, loan guarantees and grants for biochemical and
biobased material production that would immediately enable these goals.
The commenter believes the U.S. cannot afford to miss an economic and
environmental opportunity for ready to scale green technology that
falls well within the parameters of 2008 Farm Bill concerns.
Response: The Agency disagrees with commenter. The purpose of the
program, as provided in the statute, is to assist in the development of
new and emerging technologies for the development of advanced biofuels.
Pursuant to the statute, all biorefineries financed under the program
must produce advanced biofuels.
Requested Comments--h. Value of Feedstock Supplied by Producer
Association and Coops
60 Percent Threshold
Comment: One commenter strongly opposes the proposed 60 percent
threshold. The advanced biofuel feedstock markets, particularly for
algae and cellulosic ethanol, are immature and have not developed to
date using the agricultural cooperative model. Given transportation
costs and other logistical issues, algal feedstock will likely be grown
by the same companies that harvest the lipids/triaclglycerides and
convert the same to advanced biofuels or other biobased products at the
same or an adjacent site.
While the commenter encourages and supports the premise that
``algae is agriculture,'' the commenter urges the Agency to avoid
making the same mistakes that Congress and other agencies have made in
the past when crafting legislation or policy with traditional
agricultural food crops in mind. The Agency should not impose an
existing model on a new industry at this point in its development,
despite the fact that cooperatives and producer associations have
served the terrestrial agricultural industry well. To do so in terms of
awarding points when scoring applications would severely disadvantage
biorefineries seeking to use algal feedstock (and other feedstock) vis-
[agrave]-vis other projects that would, for example, use corn stover,
cobs, straw, sugar, or other cellulosic feedstock.
The commenter recognizes the requirements in Section 9003(e)(1)(C)
and the critical importance of producer associations to the development
of the agriculture industry in the U.S.; however, the commenter urges
the Agency to avoid imposing existing models on new industries.
Disproportionate benefits should not be afforded to certain business
structures that may be inapplicable to certain sectors of the bioenergy
industry. The commenter states that the Agency should minimize such
benefits.
One commenter states that, because most producer associations and
coops are not yet involved with nor have a track record in feedstock
procurement and supply, a lender will generally consider such contracts
to be unreliable and likely unfinancable. This proposed criterion
should be dropped in its entirety so as to allow projects to procure
reliable feedstock wherever possible so that pre-commercial
technologies can be built and validated. Do not add this level of
complexity. It will almost certainly render most projects ineligible
and would be a travesty for the program.
Three commenters state that the Agency should not place limits on
feedstock suppliers in order to qualify for this program. Feedstock
availability and price basically determine the success of the plant and
maximum flexibility should be awarded in order to maximize the
opportunity for success.
Several commenters state that a 60 percent threshold is unrealistic
and, at this time, presents an artificial restriction for good,
bankable projects. The commenters state that woody biomass is currently
the lowest cost, most dependable, and most accessible feedstock for
large-scale commercial advanced biorefineries, and is not traditionally
owned, managed, or harvested by producer associations and/or
cooperatives. The commenters support the activities of producer
associations and cooperatives in developing advanced biofuels
facilities and/or supplying biomass to these facilities, but state that
the current costs and lack of infrastructure to economically and
sustainably supply the facility with crops, such as miscanthus or
energy cane, at a price comparable to woody biomass restricts the
project from providing the necessary base level of feedstock pricing
support that makes this type of business model bankable in the near
term.
Response: The Agency appreciates the commenters' concerns. However,
the statute requires the Agency to consider whether the borrower is
proposing to work with producer associations or cooperatives. The
Agency has modified this criterion to award points if the project can
document working with cooperative and producer associations under one
of the three criteria rather than all three. In addition, this scoring
criterion has been revised by incorporating a two-tiered system that
begins awarding points at a 30 percent threshold.
Algae Exception
One commenter states that they reviewed several proposals from
potential algae producers to build out 10 to 100 acre algae production
facilities that could provide a minimum of approximately 10,000 gallons
(235 barrels) per acre/year, and over a million gallons of biomass per
acre/year on a totally renewable basis without having to address
growing seasons, rainfall and other factors that crop farmers must
consider. Due to these considerations and the land use requirements of
other feedstock, this would be practical, but due to the de minimus
land requirement for algae production, the commenter does not believe
that this is a practical restriction and requests that an exception be
granted for algae production.
Response: The Agency disagrees. The Agency has adopted a policy to
have a program that is technologically, geographically, and feedstock
neutral. As noted in the response to the previous comment, the Agency
points out that the rule has been revised to award points if the
project can document working with cooperative and producer associations
under one of the three criteria rather than all three. In addition,
this scoring criterion has been revised by incorporating a two-tiered
system that begins awarding points at a 30 percent threshold.
Requested Comments--i. Measuring Potential for Rural Economic
Development
Comment: One commenter believes that the scoring system is flawed
in regard to rural economic development. In large states, such as
Texas, the requirement that the average wage created by the project be
above the county and state median household wage will greatly affect
project scoring compared to a small state since the Texas median state
wage may be significantly higher than the county median wage. If a
project's average wage is above the median household wage in the county
and contiguous rural counties, then the project should receive the
points for this criterion. Rural counties would be defined in this
instance to be all nonmetropolitan
[[Page 8427]]
counties, as defined by ERS, with a rural-urban continuum code of 4
through 9. The commenter believes, however, that this criterion should
be worth 15 points and not the 5 points in the proposed rule.
Response: The Agency has considered the comment and revised the
criterion to reflect the location of the project (must be in a rural
area in order to be awarded points) and County median household wage
only. The Agency agrees that the points for this criterion should be
increased, and has increased the points from 5 to 10, which the Agency
has determined is appropriate relative to the other scoring criteria.
Comment: One commenter states that standard economic impact
analysis software is easily obtained through several private
organizations and universities, and has often been used to judge the
economic impact of a new business in a community. The key components
that can be compared are number of direct and indirect jobs created,
the area multiplier effect, and the impact of purchases of local goods
and services, including feedstock.
One commenter states that when measuring the potential impacts on
rural economic development, the easiest things to measure are:
1. Construction Phase
a. Amount of construction funds that will be spent in the local
area and immediate region for equipment, supplies, labor and other
support services.
b. Downstream effects of construction job spending on the local
economy, which is generally a multiple of the primary spending
(velocity of money).
2. Operations Phase
a. Number of new jobs and salaries to be paid plus the downstream
effects that these employees will have on spending in the local
economy.
b. Feedstock purchases. Determine who gets paid and how much in the
feedstock supply chain in the local area. In some cases these will be
estimates, but given that the feedstock supply chain must be fairly
transparent to meet lender requirements, these estimates can be quite
accurate.
Response: The Agency does not agree with changing the economic
impact analysis at this time. The Agency has not identified the
appropriate models to determine the economic impact in the manner
suggested by the commenter. If the Agency identifies an appropriate
model, it will amend the regulation accordingly and notify the public.
Requested Comments--j. Measuring Positive Impacts
Comment: One commenter believes that the production of advanced
biofuels will have positive impacts on resource conservation, public
health, and the environment. The commenter believes the Agency should
rely on the definition of advanced biofuels as defined in the 2008 Farm
Bill and believes EPA is using unproven combinations of models to
calculate the GHG reduction for biofuels. Also, EPA's delay in
qualifying existing and new feedstock and process pathways will not
allow for quick implementation of the program. There could be instances
where a feedstock could be under review until 2012 by EPA--the
expiration of the current Agency program.
Dependence by the Agency on the RFS2 definitions and delineations
is premature. Once the science behind GHG emissions is more fully
understood and defined, then the Agency may want to look at including
some tiered system to determine the environmental positive impact. The
commenter suggests that this could be a much more appropriate
discussion as the 2012 Farm Bill takes shape.
The commenter states that a tiered scoring system based on GHG
reductions would not further the intent of the program and not help
rural economies through the creation of advanced biorefineries.
However, the commenter believes that a project should show a reduction
in GHG emissions as verified through a life-cycle analysis in the
published literature or completed by a university or a private third
party that specializes in such analysis.
Response: The Agency agrees with the commenter, and requires that
the project produce an advanced biofuel as defined in the statute. The
Agency has decided not to require compliance with the Renewable Fuel
Standard, because to do so would narrow the range of feedstocks
eligible under this Program. Furthermore, the renewable fuel standards
only apply to liquid transportation fuels, while this Program applies
to a broader range of advanced biofuels. However, the Agency has
modified the scoring criteria such that in order to receive points
under the first scoring criterion an advanced biofuel must meet an
applicable renewable fuel standard as identified by the EPA and
clarified the scoring criterion associated with demonstrating positive
effects that compliance with the renewable fuel standard is one way
that a positive effect on the environment can be demonstrated.
With respect to the commenter's concern about GHGs, the Agency
encourages applicants to provide any and all information that supports
a positive effect on resource conservation, public health, and the
environment. The Agency considers a reduction in life-cycle GHGs to be
a positive effect on the environment. Thus, if the borrower
demonstrates a reduction in life-cycle GHGs, the borrower will receive
points under Sec. 4279.265(d)(6). However, a borrower will also
receive points under this criterion if they demonstrate a positive
effect on resource conservation, public health, or the environment in
another manner. Finally, to help address GHG life-cycle emissions, the
Agency has revised, as noted above, the scoring criterion such that an
advanced biofuel must meet an applicable renewable fuel standard as
identified by the EPA in order to receive points under the first
scoring criterion.
Comment: One commenter states that eligible projects should provide
a reduction in GHG reductions, as verified through a GREET Analysis or
other university or private, third party analysis. The project should
also meet or exceed the EPA standards for permitting. Extra points
should be given for projects that provide additional clean, potable
water for human use and/or irrigation.
Response: Applications will be accepted for biorefineries that
produce an advanced biofuel. The Agency is considering the impacts of
the EPA requirements on the program and has not made a final
determination to date. As noted in the response to previous comments,
to help address GHG life-cycle emissions, the Agency has revised the
first scoring criterion such that an advanced biofuel must meet an
applicable renewable fuel standard as identified by the EPA in order to
receive points under the first scoring criterion.
With regard to the comment on potable water, the Agency encourages
applicants to provide any and all information that supports a positive
effect on resource conservation, public health, and the environment.
The Agency may consider potable water under this criterion, for example
resource conservation. Thus, if the borrower demonstrates positive
impact GHGs or potable water, the borrower may receive points under
Sec. 4279.265(d)(6) and, as noted above, the advanced biofuel must
meet an applicable renewable fuel standard as identified by the EPA to
receive points under the first scoring criterion. However, the Agency
has chosen to provide applicants more options in demonstrating a
positive effect on
[[Page 8428]]
resource conservation, public health, or the environment.
Comment: One commenter agrees that biofuels and bioproducts that
significantly reduce greenhouse gas emissions are more desirable than
those that do not. Such criteria also ensure that the net energy
balance of the proposed fuels or products is higher, which in turn
reduces imported energy products to a higher degree. Hence, such a
measurement is consistent with the overarching goals of the program.
Fuels and products that can be produced with low overall water
consumption should also score higher. Given that most fossil fuels
require water for production and to date most biofuels require
dramatically higher uses of water, which is unsustainable, low water
consumption should be considered to be one of the highest and most
important criteria.
One commenter recommends structuring the loan guarantee program to
promote the best-performing biofuels to the maximum extent possible and
``pay for performance.'' As one of the purposes of the program is to
``promote resource conservation, public health and the environment,''
the commenter encourages the Agency to link the loan guarantee
application scoring criteria to the entire performance profile of the
advanced biofuel proposed to be produced.
The commenter believes that, while the assessment of the GHG
performance of fuels, as well performance relating to air quality,
water quality, and water quantity are all important aspects of the
performance profile of a fuel, the Agency should assess other important
factors, such as the compatibility of fuels with existing
infrastructure and equipment and the total thermal efficiency of the
facility, among other relevant factors. Linking payments to the
achievement of GHG reduction thresholds under EPA's RFS2 program, as
suggested in the proposal, would certainly help to achieve the goal of
reducing GHG emissions.
While supporting consideration of life-cycle GHG reductions, the
commenter encourages the Agency to fill existing policy gaps and
maximize GHG reductions from biofuels by scoring proposed projects on
the full life-cycle reductions actually anticipated based on a site
specific life-cycle analysis, not merely on the basis of achieving
minimum thresholds. The existing RFS2 program only requires that
biofuels meet specific thresholds (such as a 60 percent reduction for
cellulosic biofuels), but the program offers no incentives for
producers to exceed those thresholds. Conversely, low-carbon fuel
standards being developed by California and the Northeastern states
encourage maximum reductions by fully crediting the reductions
achieved. Under such an approach, a facility producing a fuel with a 90
percent GHG reduction benefit would score comparatively higher than a
facility producing a fuel that merely meets RFS2 thresholds. The
commenter encourages the Agency to adopt a similar approach that would
best help the Agency achieve incremental GHG reductions and support the
Administration's goal of reducing GHGs.
One commenter states it is important to remember that the industry
must fulfill the advanced biofuel requirement of the RFS. The commenter
believes that, if the Agency decides to award points towards an overall
score that will then be used to evaluate and compare applications for
facilities that produce biofuels that significantly reduce life-cycle
GHG emissions compared to conventional fuels, the regulations should be
kept simple to encourage streamlined administration of the program.
While the commenter does not believe that the indirect land use change
calculations included in the RFS regulation are mature or have been
adequately vetted in the scientific community, if the Agency does
include life-cycle GHG emission reduction benchmarks as a way to reward
lower emitting fuels with additional points, the commenter recommends:
(1) Relying on already established regulations instead of creating a
new set of regulations for those calculations (i.e., EPA RFS), and (2)
Not complicating the program with multiple threshold levels that the
Agency will need to create and monitor, but simply create one value (5
points) for advanced biofuels that meet the RFS life-cycle GHG emission
reduction requirements.
Response: In addition to the reasons already provided, the Agency
also notes that it agrees with simple implementation of this scoring
criterion and encourages applicants to provide information that
supports a positive effect on resource conservation, public health, and
the environment. The applicant can consider a recognized and published
source of information to document the impacts noted above. The Agency
has increased the amount of points under this scoring criterion and
added provisions to deduct points if the feedstock can be used for
human or animal consumption.
Comment: Regarding suggested metrics for the other proposed
performance criteria, in assessing air quality, one commenter
recommends looking at conventional pollutant emissions of a fuel as
compared to a baseline represented by the fuel it replaces. For water
quantity, fuels could be scored on water use in production per BTU of
energy produced. Fuels could be scored on the basis of the fertilizer
use and runoff related to their feedstock.
Despite requesting comment on many performance criteria, the Agency
has proposed to reduce the points allocated to these criteria in its
ranking scheme. Rather than reducing the points, the commenter believes
it would be appropriate for the Agency to substantially tailor the
scoring system around such criteria.
Response: The Agency agrees that the metrics identified by the
commenter can be used to demonstrate the impacts of a biorefinery.
However, the Agency disagrees that it is necessary to identify these
metrics specifically in the rule. This criterion is written broadly to
allow applicants to provide whatever information the applicant believes
will demonstrate the positive impacts of their proposed projects. Thus,
the Agency encourages applicants to provide any and all information
that supports a positive effect on resource conservation, public
health, and the environment. The applicant can consider a recognized
and published source of information to document the impacts noted
above. As noted in the response to the previous comment, the Agency has
increased the amount of points under this scoring criterion and added
provisions to deduct points if the feedstock can be used for human or
animal consumption.
Comment: Two commenters encourage the Agency to coordinate with the
DoD to ensure that any requirement regarding the reduction of life-
cycle GHGs does not inhibit DoD's goal of increasing the amount of
domestically-produced jet fuel. The Agency should ensure that
facilities that could provide such fuel are not ineligible for the
program based on how GHGs are calculated on a life-cycle basis. The
commenters support program incentives that reduce life-cycle GHGs as
technologies advance, but recommends that national security benefits be
considered for the eligibility of biofuel programs.
Response: Although the statute does not require the Agency to
consider national security as an eligibility requirement, the Agency
recognizes the importance of biofuels to national security and has
signed a MOU with the Navy. The MOU encourages the development of
advanced biofuels in order to secure the strategic energy future of the
United States and will be
[[Page 8429]]
supported by the Agency to the extent possible. Further, as noted in a
response to a previous comment, the Agency has included in the rule a
provision, for which it is seeking comment, to allow the Administrator
to award bonus points to applications that promote partnerships and
other activities that assist in the development of new and emerging
technologies for the development of advanced biofuels that further the
purpose of this Program, as stated in the authorizing legislation. The
Agency will identify these partnerships and other activities in a
Federal Register notice each fiscal year. Therefore, the Agency has
determined that it is unnecessary to add the suggested scoring
criterion to the rule.
Comment: One commenter urges the Agency to ensure that the program
is flexible so that a producer can reapply in order to meet the higher
criteria for the same project as it evolves. Liquid biofuels are the
only advanced biofuels that currently have a regulatory framework in
place for measuring GHG emission reductions compared to their
counterparts. If the definition of advanced biofuels in the final rule
applies to solid, liquid, or gaseous fuels, the Agency would need to
determine how they will quantify gaseous and solid advanced biofuels
emission reductions when compared to their counterparts. In addition,
it should be assumed that producers of advanced liquid biofuels would
not produce fuels that do not meet the RFS qualifications, therefore,
including life-cycle GHG emission reduction requirements in this
program for liquid transportation fuels would be redundant and the
commenter cautions against adding any unnecessary regulations to this
program that could slow or complicate the process of awarding
guarantees and therefore retard commercialization and production.
One commenter supports the approach the Agency is considering that
would award more points to facilities that produce biofuels that
significantly reduce life-cycle GHGs compared to conventional fuels.
Drafting language to incorporate the EPA's renewable fuels standard and
ongoing biofuels life-cycle analysis (in partner with the National
Academy of Sciences) would structure the rules effectively. Given the
need to address climate change, awarding points is a practical step in
fostering development of emission-reducing feedstock production.
One commenter supports basing scoring criteria on life-cycle
assessments and encourages the Agency to employ established methods
being utilized by other agencies (e.g., the U.S. EPA). If the section
9003 program is a means to achieve the ends required by the RFS
Program, then requirements imposed on borrowers as producers of
renewable fuel for sale to obligated parties should be synchronous.
Response: The purpose of the program, as provided in the statute,
is to assist in the development of new and emerging technologies for
the development of advanced biofuels. The Agency is currently
considering various models related to life-cycle analysis and has not
identified a model at this time. When the Agency determines the
appropriate model, it will amend the rule accordingly. As stated above,
the Agency encourages applicants to provide any and all information
that supports a positive effect on resource conservation, public
health, and the environment and, to help address such environmental
considerations as GHG life-cycle emissions, the Agency has revised the
scoring criteria such that an advanced biofuel must meet an applicable
renewable fuel standard as identified by the EPA in order to receive
points under the first scoring criterion.
Requested Comments--k. Definition of Agricultural Producer
Comment: Two commenters recommend keeping the definition of
agricultural producer as proposed. According to the commenters, there
is no advantage increasing this guideline, which will put another
artificial barrier or restriction in place to qualifying producers. The
definition should be consistent across all areas of Agency funding
programs.
Response: The Agency thanks the commenter for their comments and
the Agency has decided not to change the definition.
Requested Comments--l. Local Ownership
Distance
Comment: Two commenters recommend increasing the mileage allowance
to 200 miles. The project must be economically and financially
sustainable, and could require feedstock procured and obtained from a
larger area. The most economically advantageous site may be located
away from the owner's business or home location. This is another
artificial barrier that must be removed from the process.
Two commenters recommend that, if the Agency insists on providing a
benefit to locally owned companies, this should be increased to 200
miles from 20 miles. This required scoring criteria, like the producer
association scoring criteria, benefits certain sectors of the bioenergy
industry and not others and actually serves as a way for producer
associations to get ``double points'' for the same thing. Owners of
companies developing large-scale algae growth and cultivation
biorefineries, unlike their counterparts using corn stover or wheat
straw, will likely be located far from these production facilities due
to the fact that these facilities are best located in areas where
terrestrial agriculture activities requiring fresh water would be
impossible.
To reduce possible double benefits for producer associations in the
scoring criteria and to more realistically account for project finance-
type investment by funds with urban domiciles into these $100+ million
facilities, the commenter recommends basing ``local ownership'' on
owners living either within the state in which the project is located
or 200 miles.
One commenter states that the 20 mile limitation for local
ownership is too restrictive. Many of these facilities will have to be
located in larger communities that have essential infrastructure to
service them, which could easily be more than 20 miles from the source
of the feedstock. Also, many of these facilities will be utilizing
specialized feedstock that may have to be obtained from further
distances. The commenter recommends that 100 miles be used to determine
local ownership.
Response: In the definition of local ownership, the Agency has
replaced the feedstock supply area provision with the distance an
owner's primary residence is from the location of the biorefinery, with
the distance to be specified by the Agency in a Federal Register
notice. The Agency is seeking comment on this provision (see Section
IV, Request for Comments). It is the Agency's intent to implement in
the final rule for this Program a specific criterion, or set of
criteria, to establish such distance or distances for defining a local
owner. The Agency plans on using the input provided in response to the
requested comment in finalizing this definition for the final rule.
Comment: One commenter agrees with the local owner definition
requiring a local residence in proximity to the feedstock area. The
commenter, however, recommends strengthening the phrasing ``an
individual who owns any portion'' to say an individual who owns a
specific minimum dollar amount or percentage. Otherwise, the provision
could be open to abuse.
Response: The Agency disagrees with the recommendation, and wants
to clarify that local ownership will be determined based on the
percentage of ownership of the biorefinery rather than
[[Page 8430]]
on the number of owners. The Agency would like to be as inclusive as
possible and consider all local ownership interests instead of setting
a minimum dollar or percentage threshold.
Scoring
Comment: One commenter believes there should not be more than 5
points allotted for local ownership.
Another commenter states that local ownership is important, but not
as important as the jobs created in the rural economy where the
biorefinery will be placed. The commenter does not support the scoring
system in regards to this criterion. The commenter proposes the
following criterion with a maximum of 10 points:
1. If more than 20 but less than or equal to 50 percent of the
biorefinery's owners are local owners, 6 points will be awarded.
2. If more than 50 percent of the biorefinery's owners are local
owners, 10 points will be awarded.
3. A biorefinery that has as its majority owner a publicly traded
entity shall not be eligible for any points under this criterion.
Two commenters suggest that the Agency reconsider its proposal to
award increased points to loan applicants that have a higher percentage
of owners whose primary residences are within 20 miles of the area
supplying feedstock to the biorefinery. While it is reasonable to
expect that biomass production sites will be near a biorefining
facility, requiring local ownership of the project and establishing a
strict 20-mile proximity requirement for scoring is not necessarily the
only manner in which to achieve this goal. The commenters urge the
Agency to be flexible in its scoring on this matter and to ensure that
comparable points are awarded for projects that use other means to
encourage nearness of feedstock to biorefinery.
Response: The Agency disagrees with the commenters in that this
criterion is not intended to encourage nearness of the feedstock to the
biorefinery, but to encourage local ownership of the biorefinery, which
is a specified criterion in the statute. The Agency notes that it has
revised the points associated with this criterion, from 15 to 5.
Delete the Criterion
Comment: One commenter states that the local ownership requirement
should be removed to be in keeping with the goals of financing pre-
commercial projects. Although in the past we have seen much local
ownership in ethanol and biodiesel plants, this was not true with the
first commercial scale facilities. It was only after a track record had
been established that rural residents became comfortable with these
investments. Requiring local investment is yet another hurdle not
needed for a pre-commercial support program.
One commenter states that the Agency should not require local
ownership of a biorefinery to qualify for this program. Local ownership
requirements place additional investment challenges on projects that
otherwise could have a significant impact on rural development. Lack of
investment financing is the biggest impediment and this requirement
handicaps projects even further.
Response: The Agency points out that local ownership is not an
eligibility criterion, as the commenters seem to think, but is one of
the criteria that the Agency will use to score applications. Further,
because the statute identifies local ownership as a scoring criterion,
the Agency must include it in the rule.
Scope
Comment: One commenter states that the aviation industry welcomes
``local'' investors in an alternative aviation fuel biorefinery, but
believes that these investors should be allowed to live within the
geographic region where the feedstock is grown. In addition, the
commenter proposes that the regulations allow refineries that invite
``local'' investors into a project after it has been structured to
score local ownership points.
The commenter further states they have seen a number of aviation
fuel biorefinery proposals for 100 million gallons per year refineries
that plan to use camelina, one of the most promising non-food
feedstock. Each proposal indicates that, until camelina becomes a
generally accepted crop by farmers, it is likely that a refinery would
have to purchase camelina from farmers in several states and, as a
result, the definition of ``local'' would need to be changed.
Response: The Agency has revised the rule to remove the reference
to the feedstock supply area and now defines local owner as ``an
individual who owns any portion of an eligible advanced biofuel
biorefinery and whose primary residence is located within a certain
distance from biorefinery as specified by the Agency in a Notice
published in the Federal Register.'' As has been noted previously, the
Agency is seeking comment on the most suitable mechanism for defining a
local owner. The Agency disagrees with the comment on inviting ``local
investors into a project after it has been structured.'' To be
considered under this score criterion, local investors need to be
identified in the application. The Agency can consider local owners
from more than one state as long as the owners are within a certain
distance from the advanced biofuel biorefinery. The Agency notes that
the scoring criteria give preference; they do not determine
eligibility. As to gaming the local ownership provision, the Agency has
addressed this by clarifying that it will examine the percentage of
local ownership versus number of owners.
Purpose and Scope (Sec. 4279.201)
Comment: One commenter supports the continued development of a loan
guarantee program for biorefineries in order to encourage the
development and construction of commercial scale biorefineries and for
the retrofitting of existing facilities using eligible technology for
the development of advanced biofuels. The commenter supports the goal
of the program and believes that the Agency is being prudent by
remaining open to all feasible technologies at this stage in the
development of the biofuels industry. In addition, the commenter
supports the Agency's proposal to conduct the program on a rolling
application acceptance basis that allows the Agency to make decisions
regarding proposed deals in a relatively short period of time.
Response: The Agency appreciates the commenter's support.
Definitions (Sec. 4279.202(a))
Comment: One commenter recommends reviewing the definitions within
the October 7, 2009 DOE solicitation to determine if some of these
definitions can be utilized for this regulation so there are some
common definitions between the DOE and the Agency loan guarantee
programs.
Response: While both Agencies have similar terms, specific
definitions have to vary in response to different statutory provisions
and Departmental policies.
Affiliate
Comment: One commenter recommends adding a definition of
``affiliate,'' to read: ``Affiliate. This term has the meaning set
forth in Section 2(k) of the Bank Holding Company Act (12 U.S.C.
Section 1841(k)).'' The commenter points out that commercial banks and
thrifts administer their CDFI Fund approved New Markets Tax Credit
Program (NMTC) Program through controlled affiliates. This addition
would enable CDFI Fund approved NMTC Program lenders that are under the
control of a bank or thrift to become eligible for the section 9003
program
[[Page 8431]]
and provide the benefits of the NMTC Program to projects financed using
guaranteed loans under the section 9003 Program.
Similarly, another commenter states that they have discussed with
many prospective biorefinery applicants the advantage of combining
Federal NMTC Program available to certain commercial banks with a loan
guarantee under the section 9003 program. The NMTC Program is
administered by the Community Development Financial Institution Fund
(CDFI Fund) within the Department of Treasury and provides tax credit
equity to certain approved lenders. The program has the effect of ``de-
leveraging'' a project by passing through the tax credit equity to the
borrower as an additional source of funds for a project. The commenter
states that in order to accommodate the use of the NMTC Program by
affiliates of commercial banks and thrifts who have been approved by
the CDFI Fund and the section 9003 program, Sec. 4279.202(c)(2) must
be revised to read as follows:
``The lender must maintain at all times the minimum acceptable
levels of capital specified in paragraphs (c)(2)(i) through (iii) of
this section. If the regulated or supervised lender is a commercial
bank or thrift, or an Affiliate of a commercial bank or thrift, these
levels will be based upon those reflected in the Call Reports and
Thrift Financial Reports of that commercial bank or thrift.''
Response: The Agency disagrees with commenters that a definition of
affiliate is needed as it relates to a lender. Lenders must
independently qualify regardless of whether they are affiliated with
another eligible lender.
Association of Agricultural Producers
Comment: One commenter urges the Agency to ensure that state and
national trade associations are not included in this definition because
it would be improper for such groups to receive Agency loan funds.
Because money is fungible, it would be difficult for the Agency to
track the actual usage of the funds. Funds should go for those
activities strictly associated with building and operating advanced
biorefineries.
Response: The Agency disagrees with the commenter. The statutory
language is broad enough to include these entities. The Agency does not
want to limit the pool of eligible applicants as suggested. However, it
should be noted that most associations would not have the ability to
own, operate, and incur debt for such a project. Further, the Agency
would rely upon the lender to ensure that funds were spent as proposed.
Biofuel/Advanced Biofuel
Comment: One commenter recommends expanding the definition of
biofuel to include heat and power derived from renewable biomass. The
commenter states that the production of renewable heat and power from
renewable biomass is just as advantageous to national security and
energy independence as transportation fuel.
Response: The Agency disagrees with the recommendation. Per the
authorizing legislation, heat and power are not considered biofuel. The
applicant would first need to demonstrate they are producing an
advanced biofuel, which could then be used for combined heat and power
systems.
Comment: Regarding the definition of advanced biofuel, one
commenter states that EPA now requires that diesel engines used in
transportation must emit extremely low levels of nitrogen oxides
(NOX). The most common way to mitigate NOX
emissions is to use urea to react with the fuel exhaust in a catalytic
converter. Given that it will soon be illegal to drive a diesel vehicle
without such capabilities, that the engine exhaust is an integral part
of the fuel system, and that such exhaust must be treated, it can be
argued that any additive that reduces such emission is part of the
overall fuel system. When produced from renewable biomass, these would
be considered advanced biofuels. Also, given that urea and all such
other nitrogen products are being imported as foreign produced energy
intensive products, production of these advanced biofuels in a
biorefinery meet and achieve the overarching goals of the program and
should qualify equally for the program.
Response: Applications will be accepted for biorefineries that
produce an advanced biofuel. At the present time, urea is not
considered an advanced biofuel. However, urea is considered a biobased
product. The rule has been modified to require that a majority of the
biorefinery production is advanced biofuels. The definition of
biorefinery requires the production of biobased products in addition to
biofuel.
Comment: One commenter is concerned that the Agency has
misconstrued congressional intent with regard to the definition of
``advanced biofuel'' when the Agency states in the preamble that it
``understands the definition to apply to solid, liquid, or gaseous
fuels that are final products.'' The Agency's Commodity Credit
Corporation made a similar statement regarding solid advanced biofuels
in its Biomass Crop Assistance Program (BCAP) proposal, where it stated
that a biomass conversion facility includes a facility that proposes to
convert renewable biomass into heat, power, biobased products, advanced
biodiesel, or advanced biofuels, such as wood pellets, grass pellets,
wood chips, or briquettes.
The commenter does not believe that any solid fuel qualifies as an
advanced biofuel under the 2008 Farm Bill. The Farm Bill definition
closely tracks the definition in the 2007 Energy Independence and
Security Act (EISA). Like the definition in EISA, the 2008 Farm Bill
Section 9001 definition of advanced biofuel includes seven qualifying
types of fuel. These fuels are listed in the exact same order, except
that the 2008 Farm Bill definition replaces references to ``ethanol''
with references to ``biofuel.'' Congress also replaced the reference to
``biomass-based diesel'' in EISA to ``diesel equivalent fuel.''
The commenter states these changes did not evidence an intent to
broaden the definition to include solid fuels, but rather indicated
Congress' growing understanding that there were numerous kinds of
advanced biofuels other than ethanol, including cellulosic diesel
(e.g., BTL). Thus, it is clear that the 2008 Farm Bill definition
builds and improves upon the EISA definition, but that in both cases
Congress intended to include only liquid fuels and biogas. While the
EISA definition specifically focuses on transportation fuels and the
2008 Farm Bill definition does not, there is no indication that
Congress ever intended to include products such as wood pellets, grass
pellets, wood chips, or briquettes within the definition in either
definition. Rather, under the 2008 Farm Bill, these types of products
are either a ``biobased product'' or simply renewable biomass. The mere
act of chipping, pelletizing, or compressing renewable biomass does not
convert it into an advanced biofuel. The commenter encourages the
Agency to clarify that advanced biofuels are liquid fuels (and biogas)
as defined in the 2008 Farm Bill.
Response: The Agency disagrees and is satisfied that the statute
does not provide an exclusive list of eligible advanced biofuels and
does permit solid fuels. However, the Agency has added a provision to
the scoring criterion addressing a proposed project's impact on
existing manufacturing plants and other facilities that use similar
feedstock that if the facility proposes to use wood
[[Page 8432]]
pellets as its feedstock, no points would be awarded under this scoring
criterion.
Comment: One commenter states that the definition of advanced
biofuels in the 2008 Farm Bill is ambiguous in regards to the inclusion
of biofuels derived from sugar and starch. The commenter believes the
Agency needs to clarify that advanced biofuels other than ethanol, for
example fuels with a different molecular structure such as biobutanol,
or other hydrocarbons with 4 or more carbons, produced from a corn
starch feedstock, qualify for this program under the definition of
advanced biofuel. The proposed rule for this program states that ``to
be eligible for payments, advanced biofuels must be produced from
renewable biomass, excluding corn kernel starch, in a biorefinery
located in the United States.'' The inclusions section of the advanced
biofuel definition in the legislation specifically includes ``(ii)
biofuel derived from sugar and starch (other than ethanol derived from
corn kernel starch)'' and ``(vi) butanol or other alcohols produced
through the conversion of organic matter from renewable biomass.'' The
commenter believes that this legislative ambiguity requires the Agency
to clarify in the final rule that the only fuel produced from corn
kernel starch excluded from this program is ethanol, per the
legislation.
Response: The Agency disagrees with the commenter. The statute
defines advanced biofuels as fuels derived from renewable biomass other
than corn kernel starch. Therefore, any advanced biofuel produced from
corn kernel starch is excluded.
Comment: Several commenters recommend broadening the definition of
advanced biofuels to include bioproducts. There are many new
technologies that are being developed in the pursuit of advanced
biofuels that can significantly contribute to rural economic
development through the use of biobased feedstock and/or biobased
products that are more environmentally desirable as well as more cost
effective. Many of these new technologies also require plants to be
built to an economy of scale that would require a loan guarantee in the
$100 to $250 million range. These projects can also provide needed jobs
in rural areas and bring enhanced economic development to the region.
Response: The definition of ``advanced biofuel'' is provided in the
statute and, thus, cannot be changed by the Agency. The statute also
defines ``biorefinery'' to include the production of both biofuels and
biobased products. However, the potential borrower must demonstrate
that the majority of the production is advanced biofuels.
Biorefinery
Comment: One commenter states that the language ``and may produce
electricity'' seems to be at odds with Sec. 4279.228(d). The commenter
asks if this means a facility that produces electricity from an
advanced biofuel is not an eligible project, unless the revenue
generated from the sale of electricity is less than 30 percent of the
total revenue generated by the biorefinery. The commenter believes that
a facility that makes an advanced biofuel and biobased products (such
as biogas) and then produces electricity from the advanced biofuel or
biobased products should be deemed to be both a ``biorefinery'' within
the meaning of Sec. 4279.202(a) and an eligible project within the
meaning of Sec. 4279.228. In any event, clarity is needed in these two
sections.
Response: As long as the electricity is derived from advanced
biofuels produced in the facility, the Agency agrees and has included
clarifying language in the project eligibility section of the rule.
Byproduct
Comment: One commenter suggests that the definition of byproduct
include the primary product being produced whenever the primary product
has more than one marketable use beyond as an advanced biofuel. For
example, anhydrous ammonia is an excellent fuel in its own right, is
the best way to transport, store, and recover hydrogen, and can also be
used as fertilizer. There should be no penalties for a biorefinery that
sells all of its product to established markets, whether as an advanced
biofuel or as a byproduct, as long as the project can be financed.
Response: As noted earlier, the Agency has removed the requirement
that 70 percent of the revenue must be from the sale of advanced
biofuel. To be eligible, the project needs to produce an advanced
biofuel and biobased product and the majority of the production is
advanced biofuels.
Eligible Technology
Comment: One commenter states that, in conversations with Agency
staff that oversees this program, there appears to be an
``institutional bias'' in favor of technologies that follow a specific
technology development pathway. There appears to be an expectation that
all technologies should have completed a ``pilot facility'' as a
precursor to commercial viability. However, not all technologies neatly
fit into a reasonably priced ``pilot project'' pathway. Not all
technologies can, nor should be required to, follow one common pathway
to commercialization. For example, oxygen gasification of biomass to
produce syngas to then produce fuels does not neatly fit into a
reasonably priced, pilot scale technology development pathway.
Specifically, the commenter states that their technology, when produced
at commercial scale, will perform at a level that would normally be
considered a pilot scale.
Because of the type of technology involved, there are less
expensive and better ways than a ``pilot project'' to design, optimize,
and achieve high confidence in a commercial scale design. For example,
to produce a quarter-scale implementation, the cost would be 70 percent
of the commercial project and would not yield much valuable data for
predicting the success at full scale. The physics and fluid dynamics
differences between different scales of the same gasifier technology
means that data gathered in one scale are only marginally useful in
another scale. As a result, different techniques have been developed to
design and scale such gasifiers. These techniques lead to an equal
level of confidence in the proposed design and implementation as is
often garnered from other technologies that are better suited to pilot
scale projects. Therefore, the commenter maintains that requiring the
advanced biofuel technology ``has at least a 12-month (four seasons)
operating cycle at semi-work scale'' is unwarranted and unacceptable.
This criterion assumes that there are no alternative, less expensive,
or even better approaches to achieving confidence that the new
technology is ready for first-time commercial deployment. In fact,
there are such alternative approaches for many technologies. The
program evaluation criteria must be flexible enough to provide the
acceptance of technologies that do not neatly fit into the ``standard''
scale-up model that appears to be expected in this proposed rule.
Response: The Agency disagrees with the recommendations. Because of
the operational risks associated with these new and emerging
technologies, it is necessary for the semi-work scale facility to
operate for a sufficiently long period to determine if there is any
seasonal variation in the production process. To determine if there is
any seasonal variation, at least 12 months of operation is required.
The technology must demonstrate technical and commercial viability at
semi-work scale to qualify for the program. The technical
[[Page 8433]]
assessment criterion is not specific to any one technology.
Comment: Two commenters state that the definition of technical and
economic potential is inconsistent with prevailing industry practice
and requirements of other Federal programs. Standard industry practice
is to operate a demonstration plant for a sufficient enough time to
generate steady state operating data that validates key unit operations
and the integrated biorefinery process. For example, the DOE requires
six months of operation and 1,000 to 2,000 hours of operating data at
the demonstration scale level. The commenters recommend adopting a
1,000 hour operating data requirement to define ``technical and
economic potential'' instead of the 12-month requirement in the
proposed rule.
Another commenter states that, although it is generous to add a
provision for ``semi-work scale,'' it is restrictive to include the 12-
month (four season) operating history in all cases. To prove the
viability of the technologies being used, the commenter suggests that
the requirement be changed to require that, with regard to algae
projects, the growing, harvesting, and extraction systems be
benchmarked by three independent third parties rather than requiring a
specific length of operating history without a `proven results'
requirement.
Response: The Agency disagrees with the recommendation. Because of
the operational risks associated with these new and emerging
technologies, it is necessary for the demonstration plant to operate
for a sufficiently long period to determine if there is any seasonal
variation in the production process. To determine if there is any
seasonal variation, at least 12 months of operation is required. Thus,
requiring only 1,000 hours, as suggested, would not allow this
determination of potential seasonal variation. Therefore, the Agency
has not revised the rule as requested.
Farm Cooperative
Comment: One commenter believes this definition would
unintentionally exclude long-standing cooperatives from eligibility for
the program. Cooperatives are not required to be formed under a
cooperative incorporation statute in order to qualify as a cooperative
for purposes of the IRS Code or other Federal statutes. A cooperative
may be organized, instead, under a state's general business corporation
statute and have its cooperative characteristics established in its
articles and bylaws. The commenter is aware of many farmer cooperatives
incorporated in this manner.
The commenter recommends using the definition as put forth in the
recently published proposed rule regarding the VAPG Program, 7 CFR
parts 1951 and 4284, RIN 0570-AA79. In the proposed rule, ``farmer or
rancher cooperative'' is defined as: ``A business owned and controlled
by agricultural producers that is incorporated, or otherwise identified
by the state in which it operates, as a cooperatively operated
business.''
This definition would include farmer cooperatives that are
incorporated under general business corporation statutes and yet
operate in a cooperative manner and are recognized as farmer
cooperatives for purposes of Federal and state taxation and other
statutes.
One commenter agrees with the Agency's definition as being a
business incorporated as a cooperative that is solely owned and
controlled by agricultural producers. However, operational aspects
should also be included, consistent with the requirements of the
Capper-Volstead Act. This will help prevent the abuse of the term
farmer cooperative.
Response: In considering these comments, the Agency has determined
that it is appropriate to revise the definition in the rule to be
generally consistent with the definition being used in the value-added
producer grant program. The revised definition requires the business to
be ``cooperatively operated,'' which addresses the one commenter's
request concerning operational aspects.
Participation
Comment: One commenter recommends adding a definition for
``participation.'' The commenter suggests the following:
Loan Participations
Structure: Generally, participations are loans where the ``lead
lender'' (Lead) sells a participation in a loan to one or more
participating lenders (Participant(s)). The sale may be expressed in
terms of a dollar amount or a percentage of the loan. The Lead then
continues to manage the loan on behalf of itself and the Participants.
The relationship among the lenders is typically formalized by a
participation agreement, which states in writing that the Participant
receives an undivided interest in the loan. The sale of the
participation generally occurs after the Lead and the borrower have
executed the loan documentation. The Participant is thus dependent upon
the Lead for protection of its interests in the loan--the Participant
and the borrower do not have privity of contract and thus have no
rights or obligations to one another.
Response: The Agency has determined that the definition of
participation found in Sec. 4279.2, which is incorporated by reference
in this rule, is sufficient. Thus, the Agency has not included the
definition of participation suggested by the commenter.
Regulated or Supervised Lender
Comment: One commenter states that, in order for the implementation
of their recommended Bond Loan Model to be successful, the definition
of Lender needs to be modified to add to the end thereof:
``* * * and may include a regulated or supervised lender, acting
through its corporate trust department, that otherwise meets the lender
eligibility requirements in Sec. 4279.202(c). A lender that otherwise
meets the lender eligibility requirements of Sec. 4279.202(c), where
the guaranteed and/or unguaranteed portions of the loan are to be
funded through bonds, may join with a broker or dealer that is
regulated by the Securities Industry and Financial Markets Association
and is otherwise a registered broker or dealer within the meaning of
the Securities Exchange Act of 1934, in submitting the application
required by Sec. 4279.260 and be a party to such application for
purposes of assisting the lender in assuring compliance with Sec.
4279.261.''
Response: The Agency disagrees with the commenter's suggested
revision to the definition of lender. The Agency is authorized to
guarantee loans, which in certain circumstances may include bonds as
described below, under this program. The Agency considers that this
requires a lender to make the loan from its resources and then service
that loan itself. While the Agency will permit the lender to secure
limited servicing responsibilities from third parties, the lender must
remain responsible for the servicing. The rule clarifies the definition
of eligible lenders, which is similar to that used in the Business and
Industry Guaranteed Loan Program. As noted earlier, savings and loan
associations, mortgage companies, and other lenders (those that are not
regulated) are not eligible to participate in this program.
The Agency considers this as distinct from the typical investment
banking scenario where an investment bank secures the financing from
outside investors. After the funding is secured, the investment bank
has no further involvement with the transaction. Servicing is handled
by a trustee who reports to and is controlled by the
[[Page 8434]]
investors. The Agency considers that this is an investment instead of a
loan and that its current authority is insufficient to guarantee
investments.
Renewable Biomass
Comment: One commenter states that they are aware of the numerous
definitions of biomass in Federal statutes and understand that the
Agency is compelled to administer the loan guarantee program based upon
the definition in Section 9001 of the 2008 Farm Bill. The commenter
hopes that Congress will consider reconciling these definitions in the
near future, and asks that the Agency, in coordination with the
Biofuels Interagency Working Group, provide recommendations on a
definition of biomass that is consistent with sustainability principles
while also providing adequate supplies of biomass. The commenter
believes that the 2008 Farm Bill definition meets these criteria.
Response: The Agency acknowledges the comment.
Syndication of Loans
Comment: One commenter recommends adding a definition of
``syndication of loans.'' The commenter suggests the following:
Syndication Structure: A loan participation is similar to a loan
syndication in that a group of lenders provides funds to a borrower. In
a syndication, however, each lender signs the loan agreement with the
borrower and thus has a direct legal relationship with the borrower.
One of the lenders will be designated as the agent-lender (Agent) for
the other syndicate members. The Agent is typically the lender owning
the largest percentage of the loan or the lender with enough prestige
to form a syndicate of lenders. The Agent may also be the lender with
an established relationship with the borrower. It is responsible for
structuring the intended credit facility, pricing the loan, developing
information pertaining to the borrower, and negotiating and closing the
transaction. Thus, all formal communications among the lenders, as a
group, and the borrower are conducted through the Agent and all funds
are disbursed through and received by the Agent.
Response: The Agency does not agree that the rule needs to include
provisions directed at syndication. The Agency has made three
significant changes to the rule that mitigate and minimize the concerns
expressed by this and other commenters for syndication in order to
mitigate lead lender risk. Specifically, the three changes are:
Revising the minimum retention requirement from 50 percent
of the unguaranteed portion to 7.5 percent of the total loan amount;
Enabling the interest rate of the unguaranteed portion of
the loan to increase by 500 basis points rather than 1 percent as
proposed; and
Allowing loan guarantees up to 90 percent for guaranteed
loans of $125 million or less.
Lender Eligibility Requirements (Sec. 4279.202(c))
Comment: One commenter states that the early preamble comments to
the regulation indicate that lender eligibility will be restricted to
regulated, supervised lenders. Given the highly specialized nature of
biorefinery lending, the restriction on eligible lenders should not be
driven by regulatory controls, but rather by experience and
sophistication in financing biorefinery projects. The parameters for
eligible lender instead should be broader than those outlined in 4279-A
and should include experienced investment bank consortiums with an
emphasis on experience and capitalization. The commenter states he did
not actually find the lender eligibility criteria anywhere in the
proposed rule.
One commenter recommends expanding the definition of eligible
lender to make it clear that lenders other than commercial banks are
allowed. The definition could be: ``Any person or legal entity for the
purpose of, or engaged in the business of, lending money, including,
but not limited to, commercial banks, insurance companies, credit
unions, mutual funds, factoring companies, investment banks,
institutional investors, venture capital investment companies, trusts,
or other entities designated as trustee or agents acting on behalf of
bondholders or other lenders.''
Another commenter is concerned that allowing only commercial banks
to participate in the loan guarantee program limits the pool of
potential investors and rules out investors such as insurance
companies, pension funds, mutual funds, and college endowments. The
commenter believes it makes sense to allow the borrower to fund debt
from any accredited investor in order to maximize the potential
investor base and lower the overall cost of borrowing for biofuel
projects.
Response: The Agency disagrees with the commenters regarding
eligible lenders, and the rule reflects requirements that are similar
to those for a traditional lender under the Business and Industry
guaranteed loan program. The Agency requires a lender to make the loan
from its resources and then service that loan itself. While the Agency
will permit the lender to secure limited servicing responsibilities
from third parties, the lender must remain responsible for the
servicing.
Comment: One commenter believes that allowing biorefinery
applicants to use the Federal Financing Bank as the sponsor lender,
similar to the DOE loan guarantee program, would provide projects with
another option to secure debt financing.
Response: The Agency cannot consider the Federal Financing Bank as
an eligible lender because it requires a 100 percent guarantee, which
the Agency is prohibited from offering by statute.
Comment: One commenter recommends allowing a ``lead lender/
arranger'' to submit an application for a loan guarantee by the NOFA
deadline, stating the level of their funding commitment along with a
funding plan on how the remaining portion of the loan will be financed
by other lenders. The other lenders may not be identified until after
the ``lead lender'' receives the Conditional Commitment, but will be
identified and subject to the Conditional Commitment prior to issuance
of the Loan Note Guarantee.
Response: The comment presumes that the rule would allow
syndication. However, for the reasons presented in response to an
earlier comment, the interim rule does not contain provisions specific
to syndication. Therefore, no changes have been made to the rule in
response to this comment.
Comment: One commenter recommends allowing the ``lead lender/
arranger'' to perform the servicing activities of the syndication, and
deal directly with the borrower instead of requiring all the lenders of
the syndication perform duplicate routine servicing activities. Each
original lender will hold its own promissory note and the collateral is
held by the arranger as agent for each of the members of the syndicate.
As to any matters of significance, a vote or approval of 51 percent of
the lenders is required to take any action (e.g., waive or modify
covenants, release collateral, agree to forbearance, declare default
and liquidate collateral, etc.). Each of the original lenders in the
syndication would be responsible for servicing, but there would only be
one original lead lender performing most of the servicing activities.
Response: Absent syndication, the Agency agrees with the concept of
a lead lender in the context of participation. As noted in a previous
response, while the interim rule does not contain provisions specific
to
[[Page 8435]]
syndication, the rule does provide other ways lenders can manage risk,
which address the concerns raised by the commenter.
Comment: One commenter recommends allowing lenders to ``participate
the loans,'' which is different than ``syndication of lenders'' with
other lenders by Participation Agreements.
Response: Participations are not excluded under the rule. The
Agency has determined that the definition of participation found in
Sec. 4279.2, which is incorporated by reference in this rule, is
sufficient for allowing participations.
Comment: One commenter recommends clearly allowing a ``syndication
of lenders'' to finance a single project. The process could be
structured similar to the Solicitation Notice DE-FOA-0000166 issued by
the DOE on October 7, 2009. This is the traditional way large loans of
this type are financed by lenders.
Response: For the reasons previously provided in response to other
comments on syndication, the interim rule does not contain provisions
specific to syndication. As noted in a previous response, while the
interim rule does not contain provisions specific to syndication, the
rule does provide other ways lenders can manage risk, which address the
concern raised by the commenter.
Lender Eligibility Requirements (Sec. 4279.202(c)(1))
Comment: One commenter recommends allowing SEC-regulated investment
banks, as well as commercial banks, to act as the applicant ``lender-
of-record.'' According to the commenter, commercial banks are not the
best equipped entities to perform due diligence and debt structuring
and placement on first-of-kind biorefinery projects. Because a
``lender-of-record'' serves as the applicant for the program, this
restrictive definition of eligible ``lenders-of-record'' fundamentally
restricts the potential applicant pool.
Response: The Agency's current statutory authority does not permit
investment banks to be eligible lenders. The rule reflects requirements
that are similar to those for a traditional lender under the Business
and Industry guaranteed loan program. The Agency requires a lender to
make the loan from its resources and then service that loan itself.
While the Agency will permit the lender to secure limited servicing
responsibilities from third parties, the lender must remain responsible
for the servicing.
Comment: One commenter states that the ``supervised or regulated''
lender terms are unclear and further definition or guidance needs to be
provided so potential lenders know if they meet the criteria prior to
applying for a loan guarantee. The commenter recommends loosely
defining the term ``supervised or regulated'' in order to allow as many
different types of lenders as possible to qualify, but still have an
adequate amount of oversight by a state or Federal agency. If a lender
is not ``supervised or regulated,'' then provisions should be stated as
to what other criteria they can meet so they can become an eligible
lender. This could be patterned after the ``non-traditional'' lender
requirements that the B&I guaranteed loan program utilizes.
Response: The Agency agrees with the commenter that the term
``supervised and regulated'' was unclear and has modified the rule to
define eligible lenders similar to the Business and Industry Guaranteed
Loan Program. However, the Agency disagrees with the commenter to make
the requirements similar to the non-traditional lender language under
the Business and Industry Guaranteed Loan program. Due to the amount of
risk associated with these projects, the Agency has determined, based
on the its experience in managing lender risk in other guaranteed loan
programs, that traditional lenders offer stronger capital base and loan
and servicing experience.
Lender Eligibility Requirements (Sec. 4279.202(c)(2))
Comment: One commenter asks how the requirement that the lender
must maintain at all time the minimum acceptable levels of capital
specified in Sec. 4279.202(c)(2)(i) through (iii) will be enforced.
The commenter also asks: What is the purpose of this requirement? What
happens if the lender fails to meet the requirements? The commenter
recommends that this requirement be removed from the proposed
regulation.
Response: The Agency has modified the rule to require that the
lender must meet acceptable levels of capital at the time of
application and issuance of loan note guarantee, thereby removing the
requirement of maintaining acceptable capital levels at all times,
which addresses the enforcement concern noted by the commenter.
Comment: One commenter requests clarification as to whether there
are any minimum total risk based capital ratios or leverage capital
ratio requirements if the lender is not a commercial bank or thrift.
Response: Lenders other than commercial banks or thrifts must also
demonstrate that they meet the same criteria identified in Sec.
4279.202(c)(2).
Debarment/Suspension (Sec. 4279.202(c)(3))
Comment: In pointing out that one of the lender eligibility
requirements is that the lender must not be otherwise debarred or
suspended by the Federal government, one commenter states that he
assumes this language does not disallow lenders that may have a cease
and desist order or other directive requesting corrective actions from
FDIC from obtaining a loan guarantee. The commenter recommends that
lenders be able to obtain a loan guarantee even if they have a cease
and desist or other directive from FDIC requesting corrective actions.
The B&I guaranteed loan program allows lenders to continue to obtain
loan guarantees.
Response: Because of the maximum program loan amount for this
program (i.e., $250 million) and the associated risk under this
program, the Agency is concerned that allowing a lender with a cease-
and-desist order to continue to obtain a loan guarantee may not be in
the government's best interests. Therefore, the Agency will evaluate
such instances on a case-by-case basis.
Lender Experience (Sec. 4279.202(c)(5))
Comment: One commenter states that the Agency is contemplating
approving loan guarantees only for lenders with adequate experience (as
determined by the Agency) with similar projects and the expertise to
make, secure, service, and collect loans approved under the section
9003 program. The Agency believes this provision is necessary to
further limit Agency risk, and the Agency is proposing the issuance of
loan guarantees to regulated or supervised lenders, which precludes
bond financing monies from being guaranteed under this program. In a
better economy, other forms of financing, such as bond financing, might
become available. Although the underwriting requirements are not
necessarily as stringent as bank loans, and given the results of the
state guarantees of debt for biorefineries, the commenter suggests
that, in order for bond financing to qualify for Agency guarantees, the
same guidelines and requirements be implemented as for more traditional
lenders.
The commenter proposes that the Agency, the lenders, and the
borrowers all remember that the Agency is offering to issue loan
guarantees, and that the guidelines not interfere with the traditional
asset-based lending process,
[[Page 8436]]
but supplement it by offering lenders inducements to make the loans
necessary to develop commercial-scale projects.
Response: The Agency is authorized to guarantee loans, which in
certain circumstances may include bonds as described below, under this
program. The Agency considers that this requires a lender to make the
loan from its resources and then service that loan itself. While the
Agency will permit the lender to secure limited servicing
responsibilities from third parties, the lender must remain responsible
for the servicing.
Recognizing the current difficulties in securing funding, the
Agency has been approving certain bond transactions. The Agency
considers that, under the limitations contained in this regulation,
guaranteeing these bonds is in keeping with its authority. In order to
be more transparent of its willingness to guarantee certain bond
transactions, the Agency has modified this regulation accordingly.
Specifically, the lender is required to provide the loan proceeds
and service the loan. The Agency will allow a trustee to provide
limited servicing only if the trustee is fully under the control of the
lender. Holders' rights are limited to receiving payments under the
note or bond and if those payments are delinquent making demand for
payment on the lender and the government as provided in the regulation.
In certain cases where the lender and borrower desire to change the
loan terms, the holder is also required to consent to any changes.
Loans providing holders any other rights are ineligible for guarantee
under this program.
Independent Credit Risk Analysis (Sec. 4279.202(d))
Comment: One commenter states that the requirement for an
independent risk analysis mentioned in Sec. 4279.202(d) refers to a
$100,000 threshold, and recommends a threshold of $100 million.
Response: The Agency agrees that the $100,000 amount was in error.
The error has been corrected in the rule to $125 million.
Environmental Responsibilities (Sec. 4279.202(e))
Comment: One commenter recommends basing the environmental review
requirements of Sec. 4279.202(e) on 7 CFR part 1794 rather than 7 CFR
part 1940, subpart G. The commenter points out that 7 CFR part 1940,
subpart G, relies heavily on agency personnel to conduct the
environmental analysis, whereas 7 CFR part 1794 places the burden for
preparation on professional consultants whose work is then subject to
agency review. This latter approach is appropriate given the
complexities of biorefinery environmental impacts. The commenter
believes that Agency personnel will typically lack the expertise for a
project of this nature.
Response: The Agency disagrees with the commenter. The program is
consistent with the Business and Industry Guaranteed Loan Program, 7
CFR part 4279, subparts A and B, which references 7 CFR part 1940,
subpart G. The rule requires the applicant to complete Exhibit H of 7
CFR part 1940, subpart G, which is an environmental report, similar to
the Rural Utilities Service 7 CFR part 1794 process. Neither this
program nor the Business and Industry Guaranteed Loan Program precludes
third parties from performing the environmental analysis necessary for
the Agency to conduct its National Environmental Policy Act evaluation
as long as the submitted material is sufficient for the Agency
purposes.
Conditions of Guarantee (Sec. 4279.202(i))
Comment: Several commenters state that, as proposed, the guarantee
would protect only 60 percent of the bank's position. The commenters
recommend that, if the Agency wants to insist on a first lien position,
a guarantee of up to the 90 percent level allowed by statute is
certainly warranted for loans on first-of-a-kind technologies. If the
Agency does not increase the guarantee level to 90 percent, some of the
commenters recommend that the lien positions of the Agency and the
holders of unguaranteed debt have equal priority.
Response: The Agency is allowing a guarantee of 90 percent for
guaranteed loans of $125 million or less under certain conditions. To
clarify for the commenter, the Agency requires that the lender acquire
the first lien position on the collateral. The Agency does not file a
lien against the collateral. The Agency notes that the guaranteed and
the unguaranteed portions of the loan have the same lien priority.
Comment: One commenter states that a working capital lender is
vital to the success of any biorefinery, and that, under commercial
lending practices for project finance transactions, a working capital
lender will require a first lien on raw goods, works in progress and
finished goods inventory, as well as proceeds thereof (in the form of
accounts receivable), including any insurance proceeds. Therefore, the
commenter recommends modifying Sec. 4279.202(i) to provide that a
working capital lender may have a first lien on raw goods, work in
process and finished goods inventory, as well as proceeds thereof (in
the form of account receivable), including any insurance proceeds.
Response: The Agency is agreeable to allowing working capital
loans, not guaranteed by the Agency, which are secured by the inventory
and accounts receivable. The Agency may consider a subordinate lien
position on inventory and accounts receivable for working capital loans
under certain conditions (see Sec. 4279.202(i)(1)). The Agency
disagrees with the comment regarding inclusion of insurance proceeds.
The borrower should be able to obtain a working capital loan without
the inclusion of insurance proceeds.
Comment: One commenter believes that the requirement of Sec.
4279.202(i) for a first lien on all collateral is too inflexible. The
commenter recommends that a section 9003 loan be fully secured, and any
improvements or property financed with section 9003 funds be pledged
under a first lien. Beyond this, the collateral should be negotiable.
The commenter believes it may be necessary to allow other lenders to
have a first lien on assets they finance, and this is certainly the
case with any lender providing working capital.
Response: The Agency partially agrees with the commenter. The
Agency is agreeable to allowing working capital loans, not guaranteed
by the Agency, which are secured by the inventory and accounts
receivable. The Agency may consider a subordinate lien position on
inventory and accounts receivable for working capital loans under
certain conditions. However, the Agency disagrees with rest of the
comment due to the risk to the government.
Comment: Two commenters state that the proposed rule appears to
conflict with the 9003 NOFA in that it would put the unguaranteed
lenders in a junior position to the Agency, whereas the 9003 NOFA
states: ``The entire loan will be secured by the same security with
equal lien priority for the guaranteed and unguaranteed portions of the
loan.''
Response: There is no conflict. Within the rule at Sec. 4279.224,
a cross reference is made to the provisions found in Sec. Sec.
4279.107 through 4279.187, which includes Sec. 4279.131(e) stating
``the entire loan will be secured by the same security with equal lien
priority for the guaranteed and unguaranteed portions of the loan.'' As
noted above for clarification purposes, the Agency requires that the
lender acquire the first lien position on the collateral. The Agency
does not file a lien against the collateral.
[[Page 8437]]
Comment: One commenter states that the Agency should clarify that
the guaranteed and unguaranteed lenders will rank pari passu with
respect to the first lien on project collateral as specified in the
2008 Notice of Funding Announcement (NOFA). The commenter believes the
Agency added the first lien requirement in the proposed rule due to the
size of the guaranteed loans under this program. This requirement puts
lenders in a secondary position behind the Federal government. The
lender's position is protected by the loan guarantee--but only up to
the percentage amount of the guarantee. In case of default on a $125 to
$250 million loan, the guarantee would protect only 60 percent of the
lender's position, according to the proposed rule's current structure.
The commenter recommends that, if the Agency includes the first
lien position as specified in the proposed rulemaking in the final
rule, a guarantee of up to the 90 percent level, as allowed by statute,
be provided for loan guarantees on first-of-a-kind technologies.
Response: As noted above for clarification purposes, the Agency
requires that the lender acquire the first lien position on the
collateral. The Agency does not file a lien against the collateral. As
previously referenced, the entire loan will be secured by the same
security with equal lien priority for the guaranteed and unguaranteed
portions of the loan.
Comment: One commenter states that the requirement for the
guarantee to be secured by a first lien on all collateral to run the
project in the event of a borrower's default, along with a bank lender
being required to hold 50 percent of the unguaranteed portion, has the
effect of being an unguaranteed loan equal to 10 percent of the project
loan for the bank. The commenter recommends some form of lien with pari
passu repayment formula in order to provide sufficient incentive for
lenders to participate.
Response: Within the rule at Sec. 4279.224, a cross reference is
made to the provisions found in Sec. Sec. 4279.107 through 4279.187,
which includes Sec. 4279.131(e) stating ``the entire loan will be
secured by the same security with equal lien priority for the
guaranteed and unguaranteed portions of the loan.'' Therefore, the
guaranteed and unguaranteed portions of the loan enjoy the same lien
position.
Comment: One commenter states that the proposal requiring that the
guarantee be secured by a first lien on all collateral is unreasonable
from a commercial lending standpoint. In order to comply with basic
asset based lending guidelines and prudent commercial lending
guidelines, the lender must have a first lien position on all assets of
the borrower. The commenter further states that, because the terms of
the guarantee documentation will address when the guarantee comes into
play, which would be after an uncured event of default by the borrower
under the lender's loan documents, an assignment by the lender to the
Agency of its lien position, should the lender pursue the guarantee, is
a standard and customary term.
Response: As noted above, the Agency requires that the lender
acquire the first lien position on the collateral. The Agency does not
file a lien against the collateral. As previously referenced, the
entire loan will be secured by the same security with equal lien
priority for the guaranteed and unguaranteed portions of the loan.
Comment: Several commenters state that the Agency should not hold
the first lien on all collateral necessary to run the project in the
event of a borrower's default. Lenders would, therefore, be subordinate
to the government. In the event of default, the lender's position is
only protected up to the percentage of the B&I guaranteed. The
commenters also state that this also contradicts the current B&I
guaranteed loan requirements, which have worked well for the Agency in
the past.
Response: As noted above, the Agency requires that the lender
acquire the first lien position on the collateral. The Agency does not
file a lien against the collateral. As previously referenced, the
entire loan will be secured by the same security with equal lien
priority for the guaranteed and unguaranteed portions of the loan.
Comment: One commenter states that authorizing guarantees of a
revolving credit facility for future working capital and allowing the
replacement of the non-guaranteed portion of the loan with equity would
provide cellulosic biofuel companies necessary flexibility to better
finance commercial projects.
Response: The Agency does not agree with authorizing guarantees of
a revolving credit facility for future working capital. Working capital
is an eligible purpose for the guaranteed loan but, at this time, the
Agency feels that lenders can administer revolving credit facilities
more efficiently. Therefore, the Agency is agreeable to allowing
working capital loans, not guaranteed by the Agency, which are secured
by the inventory and accounts receivable. The Agency also does not
agree with allowing the replacement of the non-guaranteed portion of
the loan with equity. The non-guaranteed portion of the loan cannot be
converted because the Agency wants the lender to maintain a lending
interest in the loan.
Sale or Assignment of Guaranteed Loan (Sec. 4279.202(j))
Comment: Based upon the state of the commercial banking industry,
one commenter recommends applying the language regarding the
transferability of the loan to any accredited investor to both the
guaranteed and unguaranteed portions of the loan.
Response: To allow the transfer of the unguaranteed portion of the
loan beyond the minimum retention requirement would minimize the
lender's financial interest in the project. Therefore the Agency
disagrees with the recommendation. The Agency notes that the
unguaranteed portion of the loan in excess of the minimum retention
requirement may be sold to third party holders.
Comment: One commenter states that the Agency should explain why it
will not guarantee a loan funded with the net proceeds of a bond
described in section 142(a) of the Internal Revenue Code of 1986.
Another commenter believes what the Agency intended to say in the
second part of Sec. 4279.202(j) is that the guaranteed portion of the
loan may not be funded with the net proceeds of bonds described in
section 142(a) of the Internal Revenue Code of 1986, as a result of the
prohibition thereof contained in Section 149(b). The commenter suggests
revising Sec. 4279.202(j) to read as follows:
``In addition to complying with the provisions of Sec. 4279.75,
and subject to the limitation imposed on the original lender by Sec.
4279.202(k), the guaranteed and unguaranteed portions of the loan shall
be fully transferable to any accredited investor and the Agency may not
guarantee any portion of the loan funded with the net proceeds of the
bond described in section 142(a) of the Internal Revenue Code of 1986.
The unguaranteed portion of the loan may be funded with the net
proceeds of a bond described in section 142(a) of the Internal Revenue
Code of 1986.''
A third commenter states that borrowers should be permitted to
access the tax-exempt capital markets for the unguaranteed portion of
debt. Tax-exempt project debt appears permitted, but should be
explicitly allowed for the unguaranteed portion of the debt. Projects
should be afforded every opportunity to lower interest costs,
especially by way of Federal, state and local programs designed to meet
regional and national priorities such as
[[Page 8438]]
the Recovery Zone bond programs. The commenter recommends that
borrowers should be permitted in all cases to access the tax exempt
capital markets, including when necessary through state authority
issuance vehicles.
Response: The Agency disagrees with the request to modify proposed
Sec. 4279.202(j). To support consistency between this program and the
B&I guaranteed loan program and to eliminate any duplicative Federal
assistance that would be provided by the subsidy for the loan note
guarantee and the tax exemption, the Agency has determined that it
would be inappropriate to distinguish between guaranteed and
unguaranteed portions of the loan when applying this provision.
Minimum Retention (Sec. 4279.202(k))
Comment: Seven commenters state that the proposed level of
unguaranteed loan retention by the original lender is not possible
given today's market conditions. The commenters state that banks remain
extremely cautious to make loans to first-of-a-kind technologies. One
commenter states that the risks associated with holding a large
unguaranteed portion of a loan is akin to making an equity investment
in the enterprise being financed, something most lenders are unable to
do because of regulatory constraints, or are unwilling to do because of
the high degree of risk involved. These commenters, therefore,
recommend eliminating this provision.
Six commenters recommend using the same requirement for minimum
retention that is allowed for the guaranteed Business and Industry loan
guarantee program where the lender is to retain 5 percent of the loan
amount.
One commenter believes, for a multitude of reasons, that this
section of the proposed rule is unworkable and relies upon assumptions
that are incorrect. The commenter disagrees with the size of the
minimum retention requirement and the assumption on which it was based
for the following reasons:
(1) The Agency did not do adequate diligence or inquiry of the
commercial banking industry when it proposed the 50 percent minimum
retention requirement in the Section 9003 NOFA as is evidenced by its
recent outreach to commercial banks to determine why they have been
unwilling to act as a sponsor/lender of a section 9003 program
guaranteed application;
(2) the Agency incorrectly assumed that a commercial bank
originating a loan guarantee under the section 9003 program would be
less interested in or attentive to the servicing of a loan where the
potential loss to the lender in a liquidation scenario would be
$12,500,000 (assuming application of the B&I Program's 5 percent
minimum retention requirement) versus $50,000,000 (assuming application
of the section 9003 program's 50 percent of the unguaranteed portion
minimum retention requirement). The commenter asserts that there is not
a commercial bank in the U.S. that would devote less attention to a
$12,500,000 potential loss than a $50,000,000 potential loss, as either
loss is material;
(3) the Agency did not do adequate diligence in setting the minimum
retention requirement in the Section 9003 NOFA, because, if it had, it
would have understood that for a $250,000,000 loan guarantee, there are
likely less than 5 commercial banks in the U.S. that have the capacity
to originate such a loan where they were required to retain 50 percent
of the unguaranteed portion thereof; and
(4) the Agency failed to do appropriate diligence when it issued
the Section 9003 NOFA because there are no commercial banks in the U.S.
that are either willing or able to approve through their respective
loan committees a $50,000,000 unguaranteed loan for a nonrecourse
financing of a first-of-a-kind technology which loan cannot be
syndicated or participated.
The commenter suggests that the language should incorporate either
``syndication'' or ``participation,'' such that a lender can syndicate
and/or participate a portion of the lender's risk position. The
commenter also suggests that the language which provides that lenders
may syndicate a portion of its risk position to other eligible lenders
be revised to provide syndication and/or participation to any
accredited investor in order to make Sec. 4297.202(k) consistent with
Sec. 4279.202(j).
The commenter states that, in the context of the Bond Loan Model, a
bond trustee holds title to and is the owner of 100 percent of the Bond
Loan Note and the Collateral Documents securing the guaranteed and
unguaranteed portions of the loan for the entire term of the loan.
Additionally, a corporate trustee is the agent of and fiduciary for the
bondholders, and the commenter states that the minimum retention
requirements of Sec. 4279.202(k) should be deemed satisfied as a
direct result of the corporate trustee reporting to and being
controlled by the underlying bondholders in a way which permits and
requires bondholders, subject to Agency retained rights, to exercise
their rights as at-risk investors through the trustee. The commenter
states that the notion that institutional bondholders working together
with a corporate trustee are somehow less accountable to the Agency
than an AgBank or other lending institution is simply unfounded. As
evidenced by the one trillion dollar annual bond market, which utilizes
the Bond Loan Model, there is a demonstrated confidence in and success
rate for project finance utilizing the Bond Loan Model. Consequently,
the commenter requests that the Agency deem the minimum retention
requirement of the section 9003 program to be satisfied by a trustee
acting on behalf of the bondholders when a financing is accomplished
utilizing the Bond Loan Model.
Based on the above, the commenter recommends revising Sec.
4279.202(k) to read as follows: ``The provisions of Sec. 4279.77 apply
to this subpart. Lenders may syndicate and/or participate a portion of
their risk position to other eligible lenders or accredited investors
provided that at no time during the life of the guarantee may the
original lender hold an amount of the loan less than the amount
required by Sec. 4279.77. The requirements of this section and Sec.
4279.77 will always be deemed satisfied by a trustee where bonds are
used to fund a guaranteed loan.''
Response: The Agency recognizes the concerns raised by the
commenters regarding the impact of a minimum retention requirement.
Based on the Agency's lengthy experience, it believes that it is
necessary for participating lenders to always retain a portion of the
risk to ensure that the loans are properly serviced. The Agency also
recognizes that the minimum retention requirement in the proposed rule
did not strike a proper balance with respect to these concerns. As a
result, the Agency has revised the minimum retention requirement to be
similar to that found in the Business and Industry Guaranteed Loan
program. The Agency notes that, given the size and complexity of
projects under the Biorefinery Assistance Program, the minimum
retention was increased from 5 percent to 7.5 percent.
As previously stated, it is the Agency's position that its current
authority does not permit a trustee, whether that trustee is an
eligible lender or not, to just hold a beneficial interest for other
lenders.
Guarantee Fee (Sec. 4279.226(a))
Fee Structure
Comment: Several commenters believe that the current Agency fee
structure is onerous for larger projects, and should be set at one flat
fee as in
[[Page 8439]]
the other Agency loan guarantee programs. These fees need to be
affordable for these types of projects. The Agency should not receive a
fee based on the amount of equity that is contributed as long as the
loan follows the minimum guidelines. The fees should be capped at the
same amount, and because these are large projects, it should be no more
than 0.5 percent. Having a fee in the 2 percent range adds tremendous
pressure on debt financing that is already higher than usual because of
the risk profile. Annual renewal fees should also be capped at 0.25
percent.
Response: The Agency disagrees with commenter. The Agency has
structured the fees to address the risk and cost to the government.
Comment: One commenter recommends that the guarantee fee set forth
in Sec. 4279.226 be left subject to change in each Federal Register
notice that announces the availability of funds. The actual subsidy
rate cost of running this program may change as more information about
the risks associated with it become clear, and because the projects
that will be submitted are already controlled by a NOFA process, the
Agency should retain the right to set a new fee structure with each
NOFA. The commenter believes the Agency should not lock itself in to
fees in the regulation.
Another commenter believes the fee structure is reasonable in terms
of requiring lower fees for lower dollar projects. The commenter
suggested periodically reviewing whether the two percent fee for larger
projects is warranted to ascertain its appropriateness as projects are
funded.
Response: The Agency generally agrees with commenters. The intent
of establishing a specific guarantee fee in the rule is to provide a
stated fee in the rule. However, the Agency does acknowledge there may
be a time when a different guarantee fee may be required. Therefore,
the Agency has revised the rule to allow it the option of adjusting the
guarantee fee through the publication of a Federal Register notice.
Borrower Eligibility (Sec. 4279.227)
Comment: One commenter states that the distinction between the
proposed rule and the May 6, 2010 NOFA is the addition of the term
``persons'' and the deletion of the term ``individuals.'' The proposed
rule does not define the term ``persons''; however, the Section 9003
NOFA and the May 6, 2010 NOFA define ``person'' to mean ``Any
individual, corporation, company.'' With the term ``person'' now
defined to include ``corporations'' that are ``citizens,'' then a
``borrower'' for purposes of the section 9003 program seemingly can be
owned by corporate or other types of entity shareholders at the first
ownership level above the borrower, as corporations or other entities
incorporated, organized or otherwise established in the U.S. have
traditionally been held by our laws and courts to be U.S. citizens.
This interpretation would then require no further ``look-up'' the
ownership chain, as U.S. citizenship will have been legally established
at the first ownership level above the borrower. However, the commenter
states that in the May 6, 2010 NOFA the Agency unnecessarily goes a
step further (this further step is also contained in the proposed rule)
by adding a sentence stating: ``When an entity owns an interest in the
borrower, its citizenship will be determined by the citizenship of the
individuals who own an interest in the entity or any sub-entity based
on their ownership interest.''
According to the commenter, notwithstanding that the term
``person'' includes a corporation that is a U.S. citizen, the Agency
will continue to look-up the chain of ownership to determine the
ultimate individual owners of such entity and the total percentage U.S.
citizenship among them, ignoring that the corporate entity is a U.S.
citizen. The commenter states that the Agency seemingly went out of its
way to complicate and confuse the otherwise clear meaning of the term
``person'' to require that a further test of U.S. ownership be
undertaken by adding a seemingly endless upstream ownership analysis
notwithstanding that these entities may be legally incorporated,
organized or otherwise established entities of the U.S., which are
legitimate U.S. citizens under long-established laws.
The commenter states that this U.S. ownership restriction has no
bearing on the creditworthiness of any borrower under the section 9003
program. Rather, in the current adverse economic climate of diminishing
numbers of available investors, and in light of President Obama's
expressly stated dual intentions to (1) create 5 million new jobs from
the renewable energy industries and (2) double the percentage of
renewable energy in each of the three years between January 1, 2009 and
January 1, 2012, these restrictions fly in the face of the
Administration's clearly stated goals.
The commenter, therefore, recommends that Sec. 4279.227(a)(2)
either be deleted or revised to read as follows: (ii) Entities other
than individuals must be at least 51 percent owned by persons who are
either citizens as identified above or legally admitted permanent
residents residing in the U.S.'' The commenter noted that comparable
Department of Energy and Department of the Treasury loan guarantee and/
or grant programs do not contain similar citizenship restrictions.
Response: As noted in a previous response, the Agency has
reconsidered the citizenship requirement and has decided to eliminate
this requirement from the final rule. Because we have removed this
requirement, no action is required to address the commenter's concern.
Comment: One commenter states that the proposed program does not
include 501(c)(3) nonprofit organizations as an eligible applicant for
the program and believes nonprofit organizations, because of their role
in communities as being there for the good of all, can help showcase
the biorefinery technology, support small local businesses through
their purchasing power, and even encourage the startup of privately
owned biorefineries.
Response: Nonprofits can apply provided they meet the eligibility
requirements.
Revenue From Sale of Advanced Biofuel Requirement (Sec. 4279.228(d))
Comment: One commenter states that there are numerous scenarios
whereby the only way to achieve financing for a new renewable fuel
product is to make it and sell it into an alternative market because
this approach achieves the lower risk level required by the investors
and lenders. The commenter states that one example would be to convert
biomass into methanol. Methanol is a promising and emerging fuel for a
large class of fuel cells than can be used for stationary electricity
generation, or as a means of recharging a battery in an electric car
when a plug is not easily accessible. Or, for electric delivery
vehicles that stop regularly, such fuel cells would be providing near-
real-time battery recharge. This would not be a typical gasoline
replacement fuel scenario but achieves the same goals. While that
market is emerging, the production volume that would make the
biorefinery sufficiently efficient and therefore economically viable
could likely exceed the near term need as fuel. In that case, the
financing group could require that the biorefinery sell the methanol to
biodiesel plants or as a replacement denaturant for ethanol production.
Very few of these uses looks like a standard ``fuel'' business yet in
all cases meets the intended overarching goals of the program which is
the reduction of the imports of foreign
[[Page 8440]]
energy (especially given that the U.S. imports 100 percent of the
methanol used in the U.S.). The commenter states that, as a result,
this criterion should be dropped in its entirety and replaced with
criteria that cover whether the product proposed replaces an existing
fuel or energy intensive product and whether the replacement
substitutes for an equivalent imported energy product. Examples of
products where substitutes would meet this requirement are: oil (and
refined products like gasoline, jet fuel, diesel), methanol, anhydrous
ammonia (or other nitrogen derivatives such as urea), LPG/LNG. Any
product that replaces any of these energy or energy intensive products
should be equally allowed.
Response: The Agency allows the sale of biobased products and
byproducts. However, the project must demonstrate that the majority of
the production is advanced biofuels, which corresponds with the intent
of the authorizing legislation. Unless otherwise approved by the
Agency, and determined to be in the best financial interest of the
government, the advanced biofuel must be sold as a biofuel.
Comment: One commenter states that, although the purpose and intent
of this funding is for alternate fuel feedstock, the nature of algae as
a feedstock puts producers in an unusual position: Algae produces many
different biomass co-products and biocrude oil, both of which have
marketability, whereas most feedstock sources result in one or two
products. The commenter states that, while the 70 percent restriction
is certainly appropriate for non-algae producers, it reduces the
ability of algae producers to develop additional revenues from which it
can pay down its loan (and consequently reduce the amount of funds
being guaranteed). The commenter proposes that algae producers be
excluded from the requirement that 70 percent of its revenue must be
from the sale of advanced biofuels. If that is not possible, a suitable
compromise would be that at least 50 percent of what algae producers
produce be dedicated to the sale of advanced biofuels and that the
proceeds (gross vs. net could be determined based on percentage) of the
sale of all co-products must be used to pay down the debt being
guaranteed. The loan covenants and business plans would have to address
the pricing differentials and percentage ratios in entering into the
required off-take contracts.
The commenter believes that this solution more specifically mirrors
the original intent, as stated in the definition of `biorefinery' in
the 2008 Farm Bill.
Response: The Agency disagrees with the commenter to develop a
separate threshold for algae producers. As noted above, the Agency has
removed revenue as the standard of measurement, and the rule has been
modified to require that a majority of the biorefinery production is
advanced biofuels. When the biobased product and any byproduct have an
established BTU content from a recognized Federal source, majority
biofuel production will be based on BTU content of the advanced
biofuel, biobased product, and any byproduct. When the biobased product
or any byproduct does not have an established BTU content, majority
biofuel production will be based on output volume, using parameters
announced by the Agency in periodic Notices in the Federal Register, of
the advanced biofuel, biobased product, and any byproduct.
Cash Equity Requirement (Sec. 4279.228(e))
Equity Sources
Comment: Several commenters recommend allowing all sources of
equity available to the project when calculating the equity percentage
for the project. These projects have large equity requirements, and
should be allowed to utilize advanced carbon credit sales, subordinated
debt, preferred stock or loans from investor-owners, New Markets Tax
Credits, sale of accelerated depreciation, and other means of securing
the large amount of capital that is needed to provide the equity
component. There is currently a bill in Congress to provide the 30
percent grant by Treasury for biofuels production in lieu of the ITC/
PTC credits. As a part of implementing that program, the requirements
for application and approval of that program need to be changed to
allow Treasury to supply a letter of pre-approval for the project that
can be used as a financeable instrument in this process. Currently,
this grant is applied for and paid 60 days after the project is
commissioned. To be able to properly use this incentive, it is
imperative that the legislation and approval process be changed to
provide a financeable instrument that can be recognized as collateral
by the financing community at the beginning of the project.
Response: The Agency will consider a wide variety of assets as
equity. However, in order to control risk, an asset used as equity, for
the purpose of this regulation, must be available at the time of
closing.
Comment: One commenter states that the 20 percent proposed minimum
cash equity requirement is acceptable and appropriate. The commenter
states that, given the size of the projects, there are no investors
that are truly able to invest in such projects with the expectation of
losing funds. Twenty percent of $100 million project ($20 million) is a
real and meaningful commitment by an investor or investor group. A
higher amount of investment does not actually achieve any higher level
of commitment since the amount is already so high. These amounts are
also too large for a venture investor given that the project returns do
not meet their high return requirements (usually 40 percent) and so
these applications will only see project equity investors whose $20
million represents a very real commitment. Hence, by requiring only 20
percent equity and not offering more points for a larger percentage,
the Agency can rest assured that sufficient project due diligence will
have been performed. When calculating total equity in the project,
technology contributions and in-kind services should be counted for any
amount above the 20 percent minimum cash equity requirement.
Response: The Agency does score projects based on the level of
financial participation by the borrower. In addition, the Agency will
consider, for existing biorefineries only, the value of intellectual
property based on the value identified on its audited financial
statement, prepared in accordance with GAAP. Given the potential size
and complexity of these projects, the risks inherent in projects
attempting to commercialize new and emerging technologies make in-kind
contributions unsuitable for inclusion in the equity calculation.
Comment: One commenter states that, as with cost-sharing in the
grants context, consideration should be given to a borrower's
contributions of land, personal property, intellectual property, and
other assets. The Agency could use the type of ``equity'' composing the
20 percent (or the borrower's contribution in general) as part of the
scoring criteria, but contributions of assets other than cash should
not operate to disqualify a project for failing to meet eligibility
criteria.
Two other commenters recommend considering existing equipment,
building, and land at appraisal value when calculating the equity
requirements of the borrower.
Response: The Agency agrees with the commenters to the extent that,
for existing biorefineries, qualified intellectual property, equipment,
and
[[Page 8441]]
real property can be considered in meeting the equity requirement, as
described in Sec. 4279.234(c)(1). The Agency will consider the value
of qualified intellectual property based on the value identified on its
audited financial statement, prepared in accordance with GAAP. The
Agency notes that a loan guaranteed under the program may only finance
80 percent of the eligible project costs. The borrower needs to provide
the remaining 20 percent from other non-Federal sources to complete the
project.
Comment: Two commenters state that the requirement for a 20 percent
cash infusion will impose a significant burden that may render many
otherwise well-qualified projects unable to secure financing. Any
applicant that brings a project to the stage where it is able to
achieve financial closing will, by virtue of the selection criteria,
have incurred significant pre-closing costs that will not take the form
of real property that can be collateralized. This is especially likely
to be the case with projects that make use of new technology or new
feedstock, endeavors that are especially likely to require up-front
commitments of capital. The commenters state that it would be
appropriate, in the scoring of applications, to grant extra points to
those applicants that commit to provide cash equity at closing, thereby
enhancing the competitive position of their proposals; however, the
posting of this equity commitment should not be an absolute threshold
requirement for participation, as this would have the effect of
removing many otherwise-worthy projects from consideration.
The commenters recommend eliminating the requirement for 20 percent
cash equity and allowing applicants to include preconstruction costs as
contributed equity.
One commenter believes that the requirement that the project must
have cash equity of not less than 20 percent of eligible project costs
should be changed to allow for non-cash equity, and that ``eligible
project costs'' should not include goodwill or non-proven or non-
benchmarked technologies. The commenter states that the latter could be
included as a portion of the required equity, but that they believe
that the demise of the dotcom industry lay in the fact that values were
attributed to unproven ideas and that they are not interested in
allowing history to repeat itself, especially with something as
important as energy security.
Response: The Agency disagrees with removing the 20 percent cash
equity requirement. The Agency may consider, for existing biorefineries
only, qualified intellectual property, equipment, and real property in
meeting the equity requirement, as described in Sec. 4279.234(c)(1).
The Agency notes that, by statute, a loan guaranteed under the program
may only finance 80 percent of the eligible project costs. The borrower
needs to provide the remaining 20 percent from other non-Federal
sources to complete the project.
Guaranteed Loan Funding (Sec. 4279.229)
Comment: One commenter recommends that borrowers be permitted in
all cases to access the tax exempt capital markets, including when
necessary through state authority issuance vehicles. The commenter
states that tax-exempt project debt appears permitted, but should be
explicitly allowed for both the guaranteed and unguaranteed portions.
According to the commenter, projects should be afforded every
opportunity to lower interest costs, especially by way of Federal,
state and local programs designed to meet regional and national
priorities such as the Gulf Opportunity Zone bond programs.
Response: Tax-exempt debt cannot be part of the guaranteed loan,
which includes the unguaranteed portion of the loan. To support
consistency between this program and the B&I guaranteed loan program
and to eliminate any duplicative Federal assistance, the Agency has
determined that it would be inappropriate to distinguish between
guaranteed and unguaranteed portions of the loan when applying this
provision.
Guaranteed Loan Funding (Sec. 4279.229(a))
Comment: One commenter recommends not limiting the availability of
funds as set forth in Sec. 4279.229(a). Once a NOFA is issued, all
funds should be available rather than have half of the funds reserved.
If the idea is to get viable advanced biorefinery projects financed,
the commenter believes they should be financed as they are submitted
rather than potentially be required to wait for a second funding
period.
Response: The authorizing legislation states: ``Of the funds made
available for loan guarantees for a fiscal year under subsection (h),
50 percent of the funds shall be reserved for obligation during the
second half of the fiscal year.'' Therefore, the Agency cannot
accommodate the commenter's request.
Comment: One commenter points out that the program has statutory
minimum funding requirements and an ability to add discretionary funds
and, in order to maximize the benefits of the program, recommends that
the Agency authorize the maximum funding (statutory and discretionary)
in each fiscal year.
Response: The Agency points out that it is Congress, not the
Agency, who is authorized by statute to provide discretionary program
funds. It is the Agency's intent to maximize funding on this program
based on Congress's appropriations.
Comment: One commenter recommends that the Agency provide a Web
page for the program that shows a running tally of funds expended and
funds remaining available on any given day. This should be represented
as the actual dollars authorized (and remaining) and the total amount
of loan guarantee these dollars represent as authorized (and remaining)
because these numbers are different. The available loan guarantee
amount is the one that is of most relevance and interest for proposed
project sponsors and lenders.
Response: Projects funded are announced by the Agency on its Web
site. At this time, the Agency does not have the administrative
resources to assume the burden associated with maintaining and
verifying the accuracy associated with the suggested Web page. As this
request would not require a rule change, none has been made.
Guaranteed Loan Funding (Sec. 4279.229(b))
Comment: Six commenters recommend offering guarantees of 90 percent
of the total loan amount. Each commenter points to the authorizing
legislation, which authorizes the Agency to offer loan guarantees up to
90 percent. Concerns identified by the commenters include:
1. The level of guarantees in the proposed rule may be appropriate
for existing, commercially available technologies. But they do not
provide sufficient risk reduction for new, emerging technologies. That
is why the authors of the statute specified in Section 9003, paragraph
(e)(2)(B)(iii) that ``The Secretary may guarantee up to 90 percent of
the principal and interest due on a loan guaranteed under [this]
subsection.''
2. Low guarantee amounts, such as those proposed by the Agency,
limit the number of lenders who will be willing to assume the risks
associated with the high capital costs of building and operating a
facility that employs a new, first-of-a-kind technology that has not
been commercially proven. This makes capital harder to get, and means
fewer projects will be funded. As a result, new technologies will be
deployed much more slowly. The public interest is not served by this
approach.
[[Page 8442]]
3. Guarantee amounts less than 100 percent create an additional
burden for first-of-a-kind technology projects by requiring the nearly
impossible task of placing unguaranteed debt in the market. While
commenters believe that funding these unguaranteed portions of debt
might be possible in the taxable and tax exempt bond markets, it is not
at all clear that the very tight credit market will in fact be
receptive to unproven technology risk. There is, therefore, a real risk
that projects could succeed in obtaining an Agency loan guarantee, yet
end up failing to fund the unguaranteed debt in any market and fail to
secure financing.
4. Without a 90 percent guarantee, it is unlikely that first-of-a-
kind technology projects will secure financing.
5. At a 90 percent level, the amount of unguaranteed debt could be
more easily placed in the market and should keep lenders with some
``skin'' in the deal. One commenter points out that the Senate version
of this program provided for a 100 percent guarantee. The guarantee was
reduced to 90 percent in conference committee due to pressure from
House negotiators who felt that not only project developers, but banks
as well, should have ``some skin in the game.''
6. The decision to limit the guaranteed percentage to 60 to 80
percent with a maximum of 60 percent for loans greater than $125
million leaves a significant amount of unguaranteed debt that banks are
not willing to accept.
One commenter suggests as an alternative, loan guarantee
percentages could be adjusted higher depending upon the specific
circumstances of a project. For example, a maximum guarantee could be
offered under conditions when a high ratio of equity investment is
secured, where the use of proven technology removes technology risk,
and where there is a demonstrated ability to accelerate return on
investment.
Two commenters believe that with the oil spill in the Gulf, prices
at the pump creeping up in preparation for the summer travel season,
two wars in the Middle East, and a U.S. Department of Energy loan
guarantee program that has to date proven unworkable for financing
biorefineries, the U.S. can no longer delay efforts to commercialize
promising technologies that can lessen our impact on the environment
and increase our energy security.
One commenter recommends that the loan guarantee percentage be a
maximum of 90 percent per the statute. The commenter states that they
make this recommendation based on their experience seeking debt
financing for their project. The commenter states that they have been
told by most lenders that 80 percent is insufficient, given that the
lender must hold no less than 50 percent of the unguaranteed portion of
the loan. At an 80 percent guarantee, that represents 10 percent of the
total loan. Unlike venture capital, banks are in the business of
lending without the expectation of a loss of capital. When combined
with the Agency first lien proposal, the guarantee is not perceived as
much of a guarantee by the bank holding the unguaranteed portion. Given
the perceived technology risk, the bank perceives that they are taking
a 10 percent capital risk in such a deal. As a result, the program
requirements are not in alignment with the banking industry
requirements for lending. In addition, the maximum percentage should
not decrease with the size of the loan. As it has been implemented in
the NOFAs, projects larger than a certain size, will only achieve a
lower percentage guarantee. Given the conflicts noted above with
standard banking criteria, these larger projects cannot be financed.
Too much would be at risk for the bank and hence they cannot do the
deal. At the same time, equity investors cannot make up the difference
because doing so will increase the require IRR to a level that is not
achievable. Hence, the guarantee percent should be 90 percent no matter
whether it is a $40 million loan or a $250 million loan.
Response: The Agency has revised the rule to allow a guarantee of
90 percent for guaranteed loans of $125 million or less. The rule also
outlines the criteria the project must meet to obtain a 90 percent
guarantee, as well as the guarantee fee for loans obtaining a 90
percent guarantee. In the Agency experience there is greater loss
exposure with larger loans; therefore, if the loan does not meet the
requirement to issue a 90 percent guarantee, the percent of guarantee
will be based on loan size. In addition, with regard to this comment,
the Agency continues to support consistency between this program and
the Business and Industry guaranteed loan program.
Comment: Several commenters state that the guarantee fees should be
consistent at 90 percent, as set by the 2008 Farm Bill. There is no
provision for the lesser guarantees. To raise the 20 percent or more
equity that is required and to find lending institutions to fund the
remaining debt, it is imperative that the guarantee be raised to the 90
percent level that was legislated by Congress. Recent success with the
additional B&I Loan Guarantee appropriation in the ARRA (which had up
to a 90 percent guarantee, and reduced or no fee structure) resulted in
the program being totally subscribed ahead of the September 30, 2010
deadline for use of these funds. This shows that the lending community
will utilize these types of programs with this higher level of credit
enhancement.
Response: The Agency has revised the rule to allow a guarantee of
90 percent for guaranteed loans of $125 million or less. The rule also
outlines the criteria the project must meet to obtain a 90 percent
guarantee, as well as the guarantee fee for loans obtaining a 90
percent guarantee. In the Agency experience there is greater loss
exposure with larger loans; therefore, if the loan does not meet the
requirement to issue a 90 percent guarantee, the percent of guarantee
will be based on loan size. In addition, with regard to this comment,
the Agency continues to support consistency between this program and
the Business and Industry guaranteed loan program.
Guaranteed Loan Funding (Sec. 4279.229(c))
Comment: One commenter states that, rather than define a maximum
amount of $250 million to a given borrower under the program in any
given fiscal year, it should only be an initial threshold. In the event
that there are budget funds remaining after all other eligible projects
have been reviewed, and a borrower has already borrowed $250 million,
that borrower should be allowed to borrow additional guaranteed funds
in that same fiscal year. This flexibility will allow equal access to
the program and yet allow the best borrowers who have more than one
excellent project to participate at a higher level. This will also
allow the program to achieve its maximum potential in the shortest
possible time. Under this same provision, the commenter recommends that
more than one similar project be eligible for the extended funds. The
commenter states that, for example, their core technology is based on
oxygen gasification of biomass to produce syngas. There are three fuels
that their analysis indicates are viable in the marketplace: anhydrous
ammonia, methanol and dimethyl ether. Although they would each leverage
the same core gasification technology, they would each address
different fuel market opportunities and each should be allowed
simultaneously under the program until they have been proven at
commercial scale.
Response: During these early program years, the Agency believes
that it is
[[Page 8443]]
prudent to diversify its risk, to allow more entities to participate,
to assist a more diverse group of applicants, and to provide assistance
to geographically separate areas. To this end, the Agency prefers to
carry over funds, if available, to the next fiscal year rather than to
give an already funded entity more money in that fiscal year.
Therefore, the Agency has not revised the rule in response to this
comment.
Guaranteed Loan Funding (Sec. 4279.229(d))
Comment: One commenter states that the proposed rule limits the
guaranteed percentage to 60 percent for loans greater than $125
million, even though Congress authorized the Agency to provide
guarantees of up to 90 percent for the entire loan amount. Given that
commercial-scale cellulosic projects will exceed this $125 million
threshold and because these are first-of-kind projects, limiting the
guaranteed percentage to 60 percent creates a higher level of risk for
many lenders, and could result in projects not being able to secure the
non-guaranteed portion from the marketplace. This is compounded by
additional restrictions on lenders discussed elsewhere. The commenter,
therefore, urges the Agency to implement the program to the fullest
extent authorized by law and allow a 90 percent guarantee on the full
loan amount regardless of size.
One commenter states that section 9003 permits guarantees of up to
90 percent of the principal and interest, but noted that Sec. 4279.229
provides for guarantees of a lower amount. The level of guarantees may
be appropriate for existing, commercially available technologies;
however, these levels fall significantly short of providing sufficient
risk reduction for new, emerging technologies, and will not incentivize
private institutions to lend. Low guarantee amounts limit the number of
lenders who will be willing to assume the risks of capital-intensive,
first-of-their-kind projects. As a result, entire fledgling industries
may disappear and technologies will be deployed slowly and perhaps not
at all.
The commenter states that the rule should provide for the full 90
percent guarantee for the principal and interest up to $250 million
and, at a minimum, should provide for a 90 percent guarantee of up to
$125 million and 80 percent guarantee of principal and interest up to
$250 million. The commenter states that it is important to note that
the Senate version of the program provided for a 100 percent guarantee.
The guarantee was reduced to 90 percent in conference due to House
negotiators wanting project developers and lenders to have some ``skin
in the game.'' This is not objectionable, but the intent of Congress
was clear that the guarantee of a significant amount of the loan is
necessary for lenders to finance new technologies.
Two commenters state that insufficient or too low loan guarantee
amounts create a major hurdle for first-of-kind technology projects by
requiring the placement of significant amounts of unguaranteed debt in
very challenging markets. The commenters believe that funding
unguaranteed portions might be possible in the taxable and tax exempt
bond markets, but that it is not at all clear that these volatile
markets will in fact be receptive to unproven technology project risk.
There is, therefore, a very real risk that projects that succeed in
obtaining a partial Agency loan guarantee nevertheless end up failing
to fund the unguaranteed portion in any market. Furthermore, the tiered
structure of the guarantee levels is based solely on the size of the
loan amount, without regard to overall capital structure. This can
create a situation where the Agency guarantee is exposed to a
disproportionate share of project risk relative to private capital. For
example, on a $200 million project, with a capital structure of 75
percent debt and 25 percent equity, the Agency guarantee covers 60
percent of the loan amount, or $90 million. This reflects nearly double
the investment of equity providers. However, if the guarantee
percentage were based on the capital structure, with the guarantee
percentage growing to 80 percent on projects that have a minimum of 40
percent equity, the Agency's exposure on the project is the same, at
$90 million, and yet less than the exposure of equity providers.
The commenters recommend adhering to the statutory language to
provide maximum flexibility for project finance and suggest adopting a
tiered guarantee coverage based on the overall capital structure, for
example:
------------------------------------------------------------------------
Minimum equity percentage USDA guarantee level (percent)
------------------------------------------------------------------------
50 90
40 80
30 70
20 60
------------------------------------------------------------------------
This structure would allow the Agency to more fully employ its
statutory ability to covering up to 90 percent of a loan for strong
projects with a significant equity, where private capital contributions
are strong. For large projects, as most commercial scale advanced
biorefinery projects will be, it still affords a sizeable unguaranteed
exposure to lenders. This will ensure adequate risk sharing and,
therefore, due diligence by private capital sources whether in the form
of unguaranteed loans or equity participation.
One commenter states that the percentage of the loan guarantee
should not be limited beyond what the statute sets forth by amount or
otherwise. Lowering the percentage for larger loans would unfairly
penalize new technology and feedstock that, by the nature of being new,
require larger initial funding. In an already difficult lending
environment, the proposed limitations would have a deleterious effect
on economic-growth oriented innovation. The rural credit crunch has
made it imperative for the Agency to guarantee a very high percentage
of project costs or offer significant grants in conjunction with those
guarantees. The construction of large biofuels facilities should be
encouraged.
One commenter believes that the purpose of the loan guarantee
program should be to bring alternative energy technologies on line as
quickly as possible. Regrettably, current loan guarantee guidelines,
while perhaps appropriate for existing, commercially available
technologies, do not provide sufficient risk reduction where they are
needed most--in the commercial demonstration of new advanced biofuel
technologies. That is why the authors of the statute specified that the
secretary may guarantee up to 90 percent of the principal and interest
due on the a loan guaranteed under this subsection (Sec.
9003(e)(2)(B)). Therefore, the rule should be modified to allow for
guarantees up to the maximum amount allowed by statute: 90 percent of
all loans up to $250 million. If the Agency wishes to require a first
lien position, then a guarantee of up to the 90 percent level is
certainly warranted for loans intended to assist these emerging
technologies at the pilot or commercial demonstration stage.
One commenter questions whether the guarantee amounts are too low
based on size of the project (e.g. 70 percent on loans over $80
million; 60 percent over $125 million). Because these may be larger
dollar projects, they may easily top $125 million in project costs. A
60 percent loan requirement seems too low to attract private funding
given the unproven aspects of commercializing the new technologies. The
commenter suggests that a portion of Agency funds should be reserved to
provide a higher guarantee percentage on at least a couple of larger
projects if projects
[[Page 8444]]
cannot be funded with lower guarantee amounts.
One commenter states that the Agency should consider applying the
20 percent non-guaranteed requirement across the board, and not
decrease the percentage guaranteed as the amount of the debt increases,
as currently proposed in Sec. 4279.229. By decreasing the amount
guaranteed by the Agency as the principal amount of the loan increases
(as currently proposed), borrowers will be less likely to find an
eligible lender that is willing to retain the un-guaranteed debt. At
the maximum level of $250,000,000 (resulting in a 60 percent guaranty),
a lender would be required to retain at least $50,000,000 of the loan
(50 percent of the non-guaranteed portion), assuming the lender is able
to find participants for the other 50 percent of the non-guaranteed
debt, and possibly the full $100,000,000 if no participants are found.
The commenter states that the likelihood of finding eligible lenders
that are willing to participate at these levels is extremely unlikely.
Response: The Agency has revised the rule to allow a guarantee of
90 percent for guaranteed loans of $125 million or less. The rule also
outlines the criteria the project must meet to obtain a 90 percent
guarantee, as well as the guarantee fee for loans obtaining a 90
percent guarantee. In the Agency experience there is greater loss
exposure with larger loans; therefore, if the loan does not meet the
requirement to issue a 90 percent guarantee, the percent of guarantee
will be based on loan size. In addition, with regard to this comment,
the Agency continues to support consistency between this program and
the Business and Industry guaranteed loan program.
Eligible Project Costs (Sec. 4279.229(e))
Comment: One commenter recommends expanding the eligible loan
purposes listed in Sec. 4279.229(e) to allow debt refinancing on
existing advanced biorefineries. Any assistance this program can bring
to this emerging sector should be authorized, and debt refinancing on
existing projects that may need workout assistance should not be
excluded.
Response: While the program is meant for first-of-a-kind
technology, the Agency agrees that there may be some refinancing
projects that may be suitable for potential funding. Therefore, the
Agency will consider refinancing as an eligible project purpose under
two situations (see Sec. 4279.228(g)). The first situation is where
permanent financing is used to refinance interim construction financing
of the proposed project only if the application for the guaranteed loan
under this subpart was approved prior to closing the interim loan for
the construction of the facility. The second situation is where
refinancing is not more than 20 percent of the loan for which the
Agency is guaranteeing and the purpose of the refinance is to enable
the Agency to establish a first lien position with respect to pre-
existing collateral subject to a pre-existing lien and the refinancing
would be in the best financial interests of the Federal Government.
Guaranteed Loan Funding (Sec. 4279.229(e)(6))
Comment: One commenter recommends including the section 9003
guarantee fee as an eligible loan purpose, contrary to what is stated
in Sec. 4279.229(e)(6). The commenter believes there is no reason to
exclude this purpose, which is offered in the B&I program and other
Agency guaranteed programs.
Response: The Agency disagrees with commenter. As noted in previous
responses, the Agency is focusing the program's limited funding
resources on core project costs, such as construction costs, in order
to fund more projects.
Interest Rates (Sec. 4279.231)
Comment: One commenter states that the rules on interest rates in
Sec. 4279.231 are too elaborate and complex. The commenter asks why
not simply stick with the proven, viable regulations found in 7 CFR
part 4279, subpart B? According to the commenter, consistency between
guaranteed loan programs should be maintained for simplicity and
consistency's sake unless something about a program absolutely requires
deviation. The commenter believes there is no reason to believe
advanced biorefinery interest rate protocols are different than other
business loan pricing.
Response: The Agency has revised the interest rate provisions to
more closely match the requirements in Sec. Sec. 4279.125 and
4287.112, while providing lenders with some flexibility in establishing
loan type and terms on the unguaranteed portion.
Interest Rates (Sec. 4279.231(a)(1))
Comment: One commenter recommends modifying the amortization
requirements for commercial loans for first-of-kind technology to allow
a 5- to 10-year non-amortizing period with annual amortization after
the non-amortizing period.
Response: The Agency disagrees with the comment. In accordance with
Sec. 4279.126(b), interest only payments are allowed for up to three
years. Interest only payments for up to ten years substantially
increases Agency risk in the event of default by not reducing the
principal balance and the commensurate decline in collateral value.
Interest Rates (Sec. 4279.231(a)(2))
Comment: Three commenters state that bank project financing is most
efficiently provided on a floating rate basis during the construction
period, given the difficulty of setting a fixed rate on future loan
disbursements over a long construction period. Bond investors, however,
typically require fixed rate issuance. The commenters recommend
allowing the interest rates on the guaranteed and unguaranteed portions
to be fixed or floating without requiring both portions to be on the
same basis. An appropriate (and conventional) additional requirement to
minimize interest rate exposure for a given project would be to the
extent the project company borrows on a floating rate basis for all or
a portion of the loans, it will enter into interest rate management
agreements that reduce interest rate risk during the life of the
project.
One commenter states that, under the Commercial Loan Model, it is
likely that any portion of a loan purchased or funded by a commercial
bank will bear interest at a variable rate such as the Prime Rate or
the LIBOR, while any portion of the loan funded or purchased by an
institutional investor will likely bear interest at a fixed rate.
Accordingly, the commenter recommends amending Sec. 4279.231 to
provide as follows:
(2) The interest rate for both the guaranteed and unguaranteed
portions of the loan must be the same type (i.e., both fixed and
variable). For this purpose, a variable interest rate loan may be
converted to a fixed rate through the use of an interest rate hedge or
cap so long as such hedge or cap is for maturity of the obligation.
Response: The Agency has revised the interest rate provisions to
more closely match the requirements in Sec. Sec. 4279.125 and
4287.112, while providing lenders with some flexibility in establishing
loan type and terms on the unguaranteed portion. The rule identifies a
cap by requiring that the rate on unguaranteed portion of the loan not
exceed the rate on the guaranteed portion of the loan by more than 500
basis points.
Interest Rates (Sec. 4279.231(a)(3))
Comment: Several commenters recommend allowing the guaranteed
[[Page 8445]]
and unguaranteed portions of the loan to have different interest rates,
determined by the market and what is currently available to the
borrower and the lender, not an arbitrary blended rate of 1 percent.
There is tremendous risk associated with the unguaranteed portion of
the loan, and the borrower must be allowed to work with the lender to
provide an acceptable solution for all parties without artificial
constraints by the section 9003 regulations, including the ability to
further enhance the unguaranteed portion by the use of additional
equity, letters of credit, personal or corporate guarantees, warrants,
or any and all other credit enhancements.
Another commenter also recommends allowing different rates for the
guaranteed versus unguaranteed portions of the loan and allowing the
market to make the determination, given that the perceived risk for
guaranteed versus unguaranteed risk is a purely market-based
phenomenon, and changes from time to time. In the Loan Guarantee
Conditional Commitment agreement, a maximum percentage could be
specified and tolerated, with that percentage being determined by the
maximum rate that still allows the project to be financially successful
based on the submitted pro formas. The determination of this figure
could be a requirement of the application process to be determined by
the lender as part of the normal due diligence and sensitivity
analysis.
Response: As noted in a previous response, the Agency has removed
the proposed blended interest rate requirement from the rule. By
changing the minimum retention requirement and by allowing for a 90
percent guarantee for guaranteed loans of $125 million or less, the
Agency has eliminated the need for the other credit enhancements for
the unguaranteed portion of the loan.
Comment: One commenter notes that, as proposed, interest rates
charged must be in line with other similar guaranteed loans and blended
rates on the entire guaranteed loan cannot exceed the rate on the
guaranteed portion of the loan by more than 1 percent. The commenter
questions these stipulations and believes the question of what rates to
charge should be left to the marketplace, particularly given the lower
guarantee percentage envisioned of 60 percent for larger loans, the
high level of borrower equity required of 20 percent and the riskiness
of commercializing unproven technologies. The Agency should remove
interest rate requirements because the Agency will be able to review
the interest rate levels and make a determination down the road if
certain interest rates are too far out of line. Viable projects will
have strong competition among lenders, which will keep interest rates
as low as possible to cover the lender's costs and ensure adequate
returns.
Response: The Agency has revised the interest rate provisions to
more closely match the requirements in Sec. Sec. 4279.125 and
4287.112, while providing lenders with some flexibility in establishing
loan type and terms on the unguaranteed portion.
Comment: One commenter states that market-based interest rate
differentials on the guaranteed and unguaranteed portions of debt will
be significant, especially for the first-of-a-kind projects this
program seeks to promote (this differential reflecting the difference
between a AAA-rated, full faith and credit guarantee of the United
States on one hand and sub-investment grade-rated technology project
debt on the other). Any limitation on this spread will prevent the
market from properly pricing the unguaranteed portion of the debt and
may make placement impossible. The commenter believes the Agency should
eliminate the proposed 1 percent limitation on the interest rate
differential between the guaranteed debt and overall blended debt,
since it fails to reflect the wide difference in credit risk to the
holders of the guaranteed and unguaranteed portions.
One commenter notes that, over the 10-year period from May 2000
through May 2010, the spread between the AAA and B indices has been
approximately 532 basis points and the spread between the AAA and BB
indices has been approximately 335 basis points. The underlying credit
rating of a biorefinery is reflective of the lack of investment grade
off-takes or related purchase contracts that might otherwise elevate
the underlying credit level of the biorefinery to investment grade
(that is, BBB or greater). Consequently, the commenter suggests it
would be a rare occurrence that the blended rate on the entire
guaranteed loan would not exceed the rate on the guaranteed portion of
the loan by more than 1 percent. The commenter states that without
over-collateralizing the unguaranteed portion of the loan, it is not
likely that the spread differential on the guaranteed and unguaranteed
portions of the loan will ever be within 1 percent. Therefore, the
commenter recommends deleting Sec. 4279.231(a)(3).
Several other commenters recommend eliminating the current proposed
1 percent rate differential between guaranteed and non-guaranteed
portions of the debt.
One commenter states that banks have told them that the provisions
limiting the delta between the interest rate on the guaranteed portion
of the loan and the weighted average interest rate of the full loan
amount to 1 percent gives them significant pause in moving forward.
Lenders would like to be able to set the interest rate for the non-
guaranteed portion at market rates.
One commenter states that, because the guaranteed portion is
secured by the United States, it is unrealistic to expect market rates
for the guaranteed and non-guaranteed portions to be within 1 percent
of each other.
One commenter states market-based interest rate differentials on
the guaranteed and unguaranteed portions will be significant,
reflecting the difference between a AAA-rated, full faith and credit
guarantee of the United States on the one hand and sub-investment grade
rated technology project debt on the other. (Current market
differentials are estimated to be greater than 6.0 percent.)
One commenter states that the blended rate method also gives a
disadvantage for the larger loans; since the percentage of guarantee is
less, the difference in the interest rates between guarantee and
unguaranteed must be less than for the smaller loans with a higher
percentage of guarantee. The interest rate on the unguaranteed portion
will be influenced by many factors; lenders will have to price it on a
case by case basis; and it could vary substantially depending on the
financial strength, type of technology, size of loan, type of lender,
etc., so the government should let the market determine what that
interest rate difference should be on the unguaranteed portion.
Response: The Agency has revised the interest rate provisions to
more closely match the requirements in Sec. Sec. 4279.125 and
4287.112, while providing lenders with some flexibility in establishing
loan type and terms on the unguaranteed portion. The rule now states
that the rate on unguaranteed portion of the loan shall not exceed the
rate on the guaranteed portion of the loan by more than 500 basis
points.
Terms of Loan (Sec. 4279.232(a))
Comment: One commenter recommends that the maximum term be the
useful life of the project, not 20 years or 85 percent of its life as
set forth in Sec. 4279.232(a). The 9003 program should promote
financing, and setting shorter terms does not do this. A lender may
elect to use a more conservative term, but the program should at least
be
[[Page 8446]]
willing and able to go to the limit of the project's useful life.
Response: Due to the risk associated with these new and emerging
technologies, the Agency disagrees with using useful life solely. The
Agency considers 20 years an appropriate maximum term for loans under
this program. However, the Agency has revised the rule to allow either
20 years or useful life of the project (removing the ``85 percent''
provision associated with useful life), whichever is less.
Credit Evaluation (Proposed Sec. 4279.233)
Comment: Three commenters state that commodity projects, especially
fuels facilities, are typically able to obtain low cost, highly
efficient working capital loans from specialist lenders secured by
inventory and receivables. Two of the commenters also note that, as
proposed, a borrower is required to receive a first priority pledge of
collateral including, potentially, working capital. These loan/debt
facilities are usually entered into just prior to, or just after,
commencement of operations. The proposed rule making does not
contemplate the use of traditional working capital loans separately
secured by inventory or receivables. The commenter recommends allowing
collateral carve outs for inventory and receivables pledged to working
capital lenders.
Response: The Agency is agreeable to allowing working capital
loans, not guaranteed by the Agency, which are secured by the inventory
and accounts receivable. The Agency may consider a subordinate lien
position on inventory and accounts receivable for working capital loans
under certain conditions.
Comment: Two commenters recommend making the maintenance of
adequate working capital levels a post-completion requirement. In other
words, allow time during the construction period for complete analysis
and funding of the project's working capital requirements, including
negotiation of working capital loans from specialist lenders.
Response: The Agency disagrees with making maintenance of adequate
working capital levels a post-completion requirement. To minimize risk,
the Agency requires that all applicants are adequately capitalized at
the time of application. Subsequently, borrowers are free to seek
additional working capital sources post-application.
Construction Planning and Performing Development (Sec. 4279.256)
Comment: One commenter states that the traditional commercial
lending process for construction projects is different than that
providing either development or working capital funds, in that
construction lenders traditionally require a commitment for ``take-
out'' or permanent financing upon completion of the construction. The
commenter recommends amending the requirements for construction
projects to require ``take-out'' financing commitments for all
construction projects.
Response: The Agency agrees that a requirement for take-out
financing is needed, and has added a provision addressing permanent
financing as described in the interim rule at Sec. 4279.228(g)(1) in
the context of a refinance of interim construction financing under
certain conditions. Therefore, the Agency has revised the rule in
response to this comment.
Onsite Inspectors (Sec. 4279.256(b))
Comment: One commenter recommends that, instead of requiring
lenders to provide an onsite project inspector, the borrower provide an
onsite inspector, paid for if necessary from the loan proceeds with
verification that such a person is in place by the lender.
Response: The Agency disagrees with the commenter's recommendation.
In order to ensure proper oversight, the inspector needs to be a
``disinterested'' third party. Having the borrower provide the onsite
inspector does not ensure that an appropriate third party will be used
to conduct onsite inspections. Furthermore, the guarantee is affixed to
the lender's loan and having the lender provide the onsite inspector is
one way of managing project risk. Lastly, the Agency's relationship is
with the lender and the requirement for the lender to provide an onsite
inspector is one of the lender's servicing responsibilities. Therefore,
the lender needs to be responsible for providing the onsite inspector.
Changes and Cost Overruns (Sec. 4279.256(c))
Comment: One commenter states that the requirement that no
subsequent loans for cost overruns will be made, found in Sec.
4279.256(c), is overly strict. The Agency should be open to such
requests, while obviously retaining the right to approve them or not.
To simply say this will not be done may create loan servicing problems
if promising projects do end up needing additional financing. The
commenter believes that prudence dictates the Agency never say never on
this.
One commenter states that, in the event that construction cost
increases or changes in the proposed project design are required for
successful commercial operations, rather than not allowing any
restructuring of the loan and guarantee, as long as a revised budget
and financial plan meets the required criteria and would have qualified
for the loan and guarantee as adjusted if it were a new application,
such changes and restructuring should be allowed.
Response: The Agency agrees with the commenters that the proposed
rule was potentially too stringent. Therefore, the Agency has revised
the rule so that the Agency may consider modifying the current
guaranteed loan or a subsequent guaranteed loan after all other
financing options have been exhausted by the lender and borrower.
Comment: One commenter states that Change or Cost Overruns should
be handled by the lender pursuant to the terms of traditional
construction loan documents and restricted per the guarantee and other
agreements between the lender and the Agency. The commenter states that
all construction agreements should be standard AIA Fixed Cost
contracts, and that the lender should be responsible for administration
of draw requests. The Agency would, of course, have the option to not
guarantee the loan if it does not believe that the construction
documents provide adequate protection, and the documentation supporting
the loan guarantee should address situations such as this.
Response: The Agency does not agree that this suggestion needs to
be provided for in the rule, but rather will consider such matters on a
case-by-case basis and, where appropriate, add to the Conditional
Commitment. In other words, while this approach may be useful in some
cases, it does not need to be universally applied to all Biorefinery
Assistance Guaranteed Loan Program loans. Therefore, the Agency has not
revised the rule in response to this comment.
New Draw Certifications (Sec. 4279.256(d))
Comment: One commenter questions why the lender is required to
``certify'' the borrower is complying with the Davis-Bacon Act as this
was not required in Section 9003 NOFA and is an added burden. This
should be done by the Agency, not required of the lender.
Response: The Agency disagrees with the commenter. While omitted
from the NOFA, this requirement has been placed in each Conditional
Commitment under the NOFA and is required by the authorizing
legislation. Because our relationship is with the lender and not the
borrower and the lender has access to the requisite documentation, the
[[Page 8447]]
Agency believes this requirement needs to be completed by the lender.
Surety (Sec. 4279.256(e))
Comment: One commenter states that it may not be possible to
achieve surety from the construction contractor given that no
contractor will guarantee the performance of new technology unless they
own it (generally not the case). However, it is standard practice that
the contractor will guarantee that the work is performed according to
specifications. It will generally be necessary to pay the contractor as
work is completed and should be anticipated when the guarantee is in
place during construction.
Response: The Agency believes that the commenter is misinterpreting
surety. The intent of surety for construction projects is to guarantee
the completion of the project as designed for the intended purpose.
Surety cannot guarantee performance or prevent design failure. To avoid
such misinterpretation, the Agency has removed the definition of surety
and will rely on the use of the term as it is commonly used by the
industry.
Guarantee Applications--General (4279.260)
Comment: One commenter agrees with the position that financing
arrangements do not necessarily fit within prescribed application
windows and that the applications should be submitted upon individual
completion. However, the commenter believes there are some references
in the proposal to ``application deadlines'' which could be confusing
or misleading.
Response: The intent of the program is to accept applications year
round. The rule identifies two application deadlines. The applications
received under each deadline will be competed against each other to
determine funding priority. While the rule is clear, to the extent that
confusion arises, the Agency will take other action to address the
confusion such as supplementing its Web site.
Comment: Several commenters suggest that the section 9003 program
have an open year-round application process, similar in scope to the
B&I guaranteed loan program. The application process is arduous and
time consuming, and cannot be completed in 30 to 60 days. This will
encourage applications year-round, and will also ensure that applicants
will not have to wait a year or more to apply. It is extremely
important to not hinder the growth of this industry at this time
through the use of short windows and year-long waits to release
appropriated funds for each fiscal year. The experience and ``on-the-
ground'' support of the Agency state offices should be used to
administer the program to provide a greater level of service. An
experienced regional staff should be appointed to assist the state
offices in administering this program and work intra-state to develop
regional solutions and approaches for advanced biofuels.
Response: The Agency has an open application cycle, but competes
applications twice per year. This competition is necessary in order to
pick the best proposals. The Agency will assign adequate staff to
review applications and administer this program.
Application Submittal (Sec. 4279.260(a))
Comment: One commenter recommends that applications be submitted
electronically and that paper copies not be required at all. According
to the commenter, it is an anachronistic burden and environmentally
unsound to require paper copies.
Response: The Agency acknowledges the desirability of electronic
applications versus paper applications. The proposed rule required
paper copies because, at this time, the Agency is not able to accept
electronic copies. However, the Agency is working on having a system to
accept electronic applications, although when such a system will be in
place is unknown. To accommodate the future acceptability of electronic
applications, the Agency has revised the rule to remove reference to
paper copies and insert reference to the use of the annual Federal
Register notice to identify the applicable method of application
submittal.
Application Deadline (Sec. 4279.260(b))
Comment: One commenter states that the June 1 application deadline
specified in Sec. 4279.260(b) is too specific. The commenter believes
it should be left to the Federal Register process and Agency
administrative decisions and processes to establish the NOFA date.
Response: The Agency disagrees with the commenter. As discussed
above, the Agency intends to accept applications year round, but plans
to compete those applications on hand as of the two specific dates
stated in the rule (May 1 and November 1). Thus, May 1 would be
considered an ``application deadline'' only to the extent that
applications received after May 1 will be included in the evaluation
cycle that begins on the following November 1 rather than being
evaluated when received. The intent of establishing a specific
application deadline in the rule is to provide a default date, which
provides the public with a consistent and known date as to when to
submit applications. Because unforeseen events may cause a different
application date to be preferable, the rule allows the Agency to adjust
the application date through the publication of a Federal Register
notice.
Comment: One commenter recommends that, rather than requiring a
deadline for consideration within a given fiscal year, the Agency
commit to a short time response, such as two weeks from the date of
submittal. It should not matter when the application was submitted as
long as it is submitted within the fiscal year to qualify for that
year's allocation of funds as long as there are funds remaining in the
budget. It would be acceptable to have a response to an application
delivered in the next fiscal year when such application was delivered
near the end of the prior fiscal year. Also, rather than having two
competitions, applications should be considered and awarded as they are
received. Because the Agency has discretionary authority to expand the
funding for the program beyond the statutory minimum, in such a case
when the Agency were to receive many qualified projects throughout the
year, funding could be expanded to match the qualified projects. Hence,
there is no need for a two phase competition. The commenter further
states that, unlike with the NOFAs there should be no specific windows.
The program should be available at any time throughout the fiscal year
until no more funds are available, with applications accepted,
evaluated and loan guarantees authorized on a rolling basis. The Agency
needs to commit to respond, and preferably complete its review within
two (2) weeks of receiving an application.
Response: The Agency does not have the authority to expand funding
for the program beyond the amount appropriated by Congress. Because the
amount of funding is limited, the Agency may not be able to award funds
to all eligible projects. Therefore, applications need to be competed
in order to award the available funds to the highest scoring projects.
If the Agency were to award funds to projects on the basis of when
applications are received, the best projects may not be funded. Thus,
the Agency cannot make awards throughout the year as applications are
received. If a lender wishes to know the status of an application, the
lender can contact the Agency at any time for updates on application
review.
With regard to the commenter's suggestion that the Agency commit to
responding to and completing its review within 2 weeks of receiving an
[[Page 8448]]
application, the Agency cannot make such a commitment because of the
time needed to conduct the technical review (which is performed by
parties outside of the Agency) and such uncertainties as the number of
applications received at any one time and the availability of Agency
resources.
Feasibility Study (Sec. 4279.261(f))
Comment: Several commenters state that the feasibility study should
be modified to include or re-arrange its elements as follows:
Feasibility Study
Economic Feasibility--remove the requirement to document that all
woody biomass feedstock cannot be used as a higher value wood-based
product. Add a section on ``feedstock risks.''
Market Feasibility--redefine the risk section to specific market
risks, including competitive threats and advantages.
Technical Feasibility--Delete ``any constraints or limitations in
the financial projections'' and move to the Financial Feasibility
section. Add a category on ``design-related risks.'' Add a section on
permits required and other environmental or ecological constraints.
Financial Feasibility--add a section on ``sources and uses of
funds'' and ``matching funds.'' Add a section on ``borrower's business
strategy.'' Redefine the risk section to include only ``baseline
production outputs, borrower financing plan, tax issues, government
regulations, and borrower as a company.''
Management Feasibility--further define the three levels of
management: Ownership, management, and provide an organizational chart
showing all staff required to manage and operate the biorefinery with a
spreadsheet showing annual wage rates for each employee category.
Change the management risk category to include: Changes in management,
strengths and weaknesses of the management team, changes in ownership
of the company, conflicts of interest.
Business Plan--Eliminate the Business Plan requirement as all
elements are present in the Feasibility Study.
Economic Analysis--This criterion should be eliminated, and all
elements moved to the financial feasibility section of the feasibility
study.
Response: The Agency agrees with some of the commenters'
suggestions and disagrees with others as follows:
1. Economic Feasibility (Section B of Table 1). With regard to the
recommendation to remove the requirement to document that all woody
biomass feedstock cannot be used as a higher value wood-based product,
the Agency disagrees, but instead has revised the rule to clarify that
the ``higher value product'' only applies to woody biomass feedstock
from National Forest system lands or public lands.
With regard to the recommendation to add a section on ``feedstock
risks,'' the Agency agrees that these risks need to be addressed and
has revised the feasibility study accordingly.
2. Market Feasibility (Section C of Table 1). With regard to the
recommendation to redefine the risk section to specific market risks,
including competitive threats and advantages, the Agency agrees with
the comment and has revised the feasibility study accordingly.
3. Technical Feasibility (Section D of Table 1). With regard to the
recommendation to delete ``any constraints or limitations in the
financial projections'' from this section and move it to the Financial
Feasibility section, the Agency agrees with the comment and has revised
technical feasibility accordingly. The Agency notes that the remainder
of this element (and any other facility or design-related factors that
might affect the success of the enterprise) has been removed, but its
intent is covered by the addition of design-related risks as discussed
in the following paragraph.
With regard to the recommendation to add a category on ``design-
related risks,'' the Agency agrees with the comment. The Agency has
revised technical feasibility by adding ``risks related to design-
related factors that may affect project success'' and moving the
remaining segment of the fourth section under Section (D) of Table 1
(``Any constraints or limitations in the financial projections'') to
the Financial Feasibility section.
With regard to the recommendation to add a section on permits
required and other environmental or ecological constraints, the Agency
does not agree with commenter. The rule requires the lender to submit
Exhibit H of 7 CFR part 1940, subpart G, to address environmental
issues and permits. Section B of the feasibility study requires the
identification of project impacts on the environment.
4. Financial Feasibility (Section E of Table 1). With regard to the
recommendation to add a section on ``sources and uses of funds'' and
``matching funds,'' the Agency agrees with the suggestions to add
reference to the ``uses of project capital'' and has revised the rule
accordingly. However, the Agency disagrees with the suggestion to add a
section on matching funds because matching funds are already addressed
in Section E of Table 1.
With regard to the recommendation to add a section on ``borrower's
business strategy,'' the Agency disagrees because the borrower's
business strategy is sufficiently covered as part of the borrower's
business plan.
With regard to the recommendation to redefine the risk section to
include only ``baseline production outputs, borrower financing plan,
tax issues, government regulations, and borrower as a company,'' the
Agency disagrees with the commenter. The Agency requires the risk
categories identified to assist with the evaluation of the feasibility
of the project and technology.
5. Management Feasibility (Section F of Table 1). With regard to
the recommendation to further define the three levels of management,
the Agency is satisfied that sufficient disclosure of management and
ownership structures is provided for in the feasibility study and the
lender's written credit analysis.
With regard to the recommendation to change the management risk
category to include changes in management, strengths and weaknesses of
the management team, changes in ownership of the company, and conflicts
of interest, the Agency will add management's strengths and weaknesses
but disagrees with commenter's other suggestions. The Agency notes that
``Conflicts of Interest'' was already included in the proposed rule and
remains in this interim final rule.
6. Business Plan (proposed Sec. 4279.261(g)). With regard to the
recommendation to eliminate the Business Plan requirement as all
elements are present in the Feasibility Study, the Agency disagrees
with the commenter's suggestion. The business plan is prepared by the
borrower, while the feasibility study is prepared by a third-party
expert and is an evaluation of the project and the company. The Agency
notes that the rule allows a business plan to omit any information that
is included in the feasibility study.
7. Economic Analysis (proposed Sec. 4279.261(i)). With regard to
the recommendation that this section be eliminated and all elements
moved to the financial feasibility section of the feasibility study,
the Agency agrees with the commenter and has revised the rule to
incorporate the economic analysis into the feasibility study.
Comment: One commenter states that the Agency proposes to require
that applicants submit documentation in their feasibility study that
all woody biomass feedstock proposed to be utilized could not be used
as a higher
[[Page 8449]]
value wood-based product. The commenter states that a similar
restriction in the BCAP proposal was inconsistent with the Farm Bill
definition of ``renewable biomass.'' Under Section 9001 of the Farm
Bill, an advanced biofuel need only be derived from ``renewable biomass
other than corn kernel starch.'' Thus, a fuel is an advanced biofuel so
long as it is produced from materials meeting the definition of
renewable biomass and it falls within one of the seven types of listed
advanced biofuel categories. Looking to the definition of renewable
biomass in the Farm Bill, the only restriction relating to higher-value
products can be found in Section 9001(12)(A)(ii), relating to Federal
land. There, Congress included the higher-value product limitation with
regard to ``materials, pre-commercial thinnings, or invasive species
from National Forest System land and public lands * * *'' Section
9001(12)(B), governing the definition of renewable biomass as it
relates to biomass derived from non-Federal land, contains no such
value-added restriction. Indeed, this section refers to ``any organic
matter that is available on a renewable or recurring basis from non-
Federal land.'' However, the definition contains no such restriction as
it relates to non-Federal land, nor does it leave room for statutory
interpretation.
The commenter does not believe that the Agency has the statutory
authority to require that applicants document that their woody biomass
could not have been used in a higher-value product. The Farm Bill
definition makes clear that such a restriction could only apply to
applicants seeking payment for advanced biofuels derived from woody
biomass sourced from Federal land. The commenter urges the Agency not
to finalize a provision so clearly contrary to express statutory
language.
Statutory authority aside, if the Agency chooses to finalize such a
scheme, the commenter suggests that it not categorically exclude
biomass that could be used in higher-value products. The commenter
believes that there is some woody biomass that, while it could be used
as a higher-value wood based product, will not be for numerous reasons,
including market access. The rule should allow for loans for advanced
biofuel facilities using renewable biomass that could be used as inputs
for higher-value products, but that have not been previously utilized
on a facility-specific or regional basis.
Response: The Agency agrees with commenter's interpretation of the
statute with regard to higher-value products from wood sources from
Federal lands. The Agency has clarified the rule to reflect that the
``higher-value product'' documentation requirement only applies to wood
sourced from National Forest System lands or other public lands, as
specified in the authorizing statute.
Technical Assessment (Sec. 4279.261(h))
Comment: One commenter suggests that the Agency drop its technology
review from the application process. The commenter states that, given
that the Agency is open to all technologies, an in-depth technical
review will have already been completed by the investor group and so
the Agency will not need to do so.
Response: The Agency disagrees with commenter's suggestion. The
technology review allows the Agency to determine the commercial
viability and technical merit of the proposed project and provides
verification that the project has reached semi-work scale. Therefore,
the Agency has not revised the rule in response to this comment.
Lender Certifications (Sec. 4279.261(k))
Comment: One commenter states that the proposed rule requires
lenders to ``certify'' that the project is able to demonstrate
technical merit but then states that the Agency will determine the
project's technical merit. Lenders should not be required to determine
the technical merit of these projects particularly since these projects
may or will incorporate first-of-a-kind technology--technology never
before utilized. Such a requirement is unnecessary given that the
Agency will actually make this determination. Lenders should only be
required to verify that the borrower has provided a technology
assessment as part of the application.
Response: The purpose of the certification required under this
paragraph is neither to replace nor to duplicate the Agency's
determination of technical merit. The purpose of this certification is
to ensure that the lender performs its due diligence. To make this
clear, the Agency has recast the second sentence of this paragraph such
that the lender will now certify that, as a result of its due
diligence, the lender concludes that the project has technical merit.
Scoring Applications (Sec. 4279.265(d))
General
A number of commenters characterized the scoring criteria as
unrealistic, presenting obstacles or being contrary to the program's
goals, etc. Some of these commenters illustrated their concerns by
discussing specific scoring criteria. In such instances, such
discussions are included in the specific scoring criteria. Commenters
also suggested numerous additions to the scoring criteria. The general
comments and proposed additions are addressed first, followed by
comments associated with the specific scoring criteria.
Comment: Several commenters state that the scoring criteria are
unrealistic in several areas and must be reconstructed to recognize the
economic, environmental, technical, managerial, and financial strength
of the project as the first qualifying criteria. The points in the
current proposed rule do not correlate to the risks and rewards
involved in the development and successful implementation of a long-
term, sustainable project. The scoring criteria should be modified to
properly define the risk and reward of a project, including a review of
the technology, the financial strength of the project including equity
contribution, the strength of the management team, and then include the
required criteria with a point value of no more than 30 percent of the
total score. The funds must go to the projects that have the best
chance of sustainability and implementation in the long run. This will
properly provide a springboard for the industry for financing and long-
term implementation and success.
Response: The statute identifies the criteria the Secretary will
consider when scoring a project and the Agency incorporated the
criteria into the rule. In addition, in consideration of language
contained in the Managers Report, an additional criterion was
incorporated to give preference to projects that are first-of-a-kind.
As is true for all of the comments to this rule regarding how many
points the Agency assigned to the various scoring criteria, the points
for each of these criteria were assigned in a way that the Agency has
determined best meets the goal of supporting the advanced biofuel
industry and Congressional intent while minimizing the risk to public
funds.
Comment: One commenter states that one obstacle that is difficult
to overcome is inherent ``institutional biases'' that lead to specific
emphases in point scoring. For example, with respect to Financial
Participation, the text states: ``Regarding the fifth criterion, level
of financial participation, the proposed rule requires borrowers to
provide at least 20 percent cash equity into the project. It is the
Agency's intent to score applications higher that can demonstrate more
than this 20 percent minimum (30 percent or more).
[[Page 8450]]
Borrowers who meet the minimum 20 percent cash equity are still
eligible, but will not receive points under this criterion. Further, of
all the criteria used to score applications, the Agency continues to
believe that this criterion is the most important because it represents
the best commitment of the borrower to the project. Therefore, the
Agency continues to assign the highest potential points to this
criterion.''
The commenter disagrees that a higher equity percentage indicates a
higher and better commitment to the project. Given that the equity
investors in such projects do not invest with the expectation to lose
their investment, since these are not venture investors, a $100 million
project that requires $20 million in cash equity for example, is a
major commitment. A $30 million equity participation does not indicate
any more commitment. However, it does substantially increase the IRR
requirement from the cash investor and that can provide undue financial
burden on the project and make it financially unfundable for no real
benefit. A higher percentage for a much smaller project could represent
a more sincere commitment, but that is not true in this case.
Response: Cash equity is the metric used to show the commitment
level. The 20 percent requirement is the minimum level to be eligible
and is required by statute. The points awarded are intended to reflect
those who contribute more to the project, and not to reflect whether
one borrower is more committed than another.
Comment: One commenter refers to the proposed increase in the
scoring for novel feedstock as another obstacle presented by the
scoring criteria. According to the commenter, the requirement in Sec.
4279.265(d)(3) is in direct opposition to the needs of financing a pre-
commercial technology. Despite the Agency's extensive experience with
loan guarantee programs, it has yet to administer a program for such
large projects or for pre-commercial technologies. Although some of the
prior regulations and approaches can conveniently be adopted from B&I
and REAP, the section 9003 program is fundamentally different from
these commercially proven technology programs. There appears to be a
lack of awareness (possibly based on a lack of experience) within the
Agency to recognize the roadblocks that some of the proposed rules and
scoring criteria create for good projects where pre-commercial
technology is being deployed. The fact that we are engaging in pre-
commercial technologies is a game changer when it comes to what
criteria matter and the support that such projects need.
Response: The Agency recognizes the concern raised by the
commenter. However, the statute identifies this criterion. Therefore,
the Agency must include this criterion. The Agency notes that the
scoring criteria give preference; they do not determine eligibility.
Comment: One commenter states that, to maximize the rural economic
benefits of the Section 9003 Guaranteed Loan Program in furtherance of
the Rural Development's mission, a project's rural economic benefits be
added as an evaluation criterion to proposed Sec. 4279.265(d). Rural
Development's mission to enhance the quality of life and economic
foundation of rural communities would be furthered by a more
comprehensive evaluation of a project's potential rural economic
benefits. A project's rural economic impact is not only determined by
the location of the biorefinery, but by the origin of the feedstock as
well. Awarding points to projects based on their level of economic
impact to a rural community is consistent with the Agency's mission and
allows maximum opportunity for the commercialization of domestic
advanced biofuels in the U.S. Dedicated energy crops, such as
carnelian, are grown in rural areas. Thus, the commenter encourages the
Agency to consider a project's location in a rural area or its
feedstock's rural origins as plus factors in the evaluation criteria.
Many non-rural advanced biofuel refining projects can yield substantial
economic benefits for rural America, in addition to increasing energy
independence, decreasing greenhouse gas emissions, and diversifying
agricultural markets. Thus, a more inclusive approach would maximize
the impact of the section 9003 program.
Response: The Agency agrees that potential rural economic
development is an important metric for evaluating applications.
Consistent with one of the commenter's suggestions, the Agency has
added a rural location requirement for the project to this criterion to
accompany potential rural jobs to measure this metric, as found in
Sec. 4279.265(d)(8). To include other aspects suggested by the
commenter would make the scoring overly complicated and burdensome with
questionable benefit. Therefore, except for adding the rural location
requirement for the project, the Agency has not otherwise revised the
rule in response to this comment.
Comment: One commenter encourages the Agency to revise the
stipulation that ``specific feedstock should not receive preference
over other feedstock when evaluating applications.'' The commenter
believes that biorefinery feedstock should be evaluated according to a
comprehensive life-cycle analysis that accounts for all greenhouse gas
emissions, including those associated with indirect land use changes.
Additionally, the commenter believes that extra points should be given
for projects that provide clean, potable water for human use and/or
irrigation.
Response: The scoring criterion in Sec. 4279.265(d)(6) addresses
the positive impact of the project on resource conservation, public
health, and the environment. This can include each of the elements
identified by the commenter, including life-cycle analysis, water
impacts, and irrigation. The Agency encourages applicants to submit
data, analyses, etc. to support this criterion, including any life-
cycle analyses. As noted in previous responses, this scoring criterion
now contains a deduction when the feedstock can be used for human or
animal consumption. This provision further advances the positive impact
under this scoring criterion.
Established Market Criterion
Comment: One commenter agrees that it is appropriate to demonstrate
that there is a market for the product from the facility, but believes
that the Agency should apply this requirement flexibly in view of two
facts. First, unlike electricity which is typically contracted over a
multi-year time horizon, liquid fuels are traded almost entirely
through short-term spot markets. Second, it was due in part to
recognition of this basic structural feature of fuels markets that
Congress enacted, in 2005, and expanded, in 2007, an RFS that codifies
a purchase mandate in Federal law. The RFS establishes targeted levels
for purchases of cellulosic biofuel, as well as default pricing
mechanisms for credits when available quantities of that fuel are
insufficient to meet the needs of an obligated party under the law. The
existence of this mandate provides strong assurance that a market will
exist for cellulosic biofuels production, at a price up to the cost
that an obligated party under the RFS would incur to purchase
alternative supplies plus credits to fulfill its obligation.
To illustrate potential issues with the rule as proposed, the
biofuels industry has experienced significant road blocks when
navigating the Department of Energy loan guarantee program application
process in this regard. Therefore, the commenter is asking for the
following inclusion in The
[[Page 8451]]
Innovative Technology Loan Guarantee Program (Title XVII of EPAct):
``Loan guarantee applications for emerging technologies, such as
advanced biofuels, should not be evaluated against more mature
technologies, such as wind or solar. The liquid fuels marketplace does
not operate within a framework that lends itself to long-term, fixed-
price forward contracting mechanisms; therefore, DOE should not require
these contracts as evidence of `reasonable prospect of repayment' for
biofuels projects. The Committee recommends that this program also be
expanded to include eligibility for renewable chemicals and biobased
products in addition to biofuels.''
Another commenter encourages the Agency to consider the
appropriateness of off-take agreements in the fuels market. The
commenter states that their experience has indicated that such
requirements are much more challenging for renewable fuels than with
renewable electricity, which has been financed largely through long-
term power purchase agreements. The commenter urges the Agency to
broaden the scope of what it considers a demonstration of an
established market for a fuel. Off-take agreements are clearly one way
that such a market can be established. The commenter believes that
EPA's large RFS2 mandates represent ``legislated demand'' that should
sufficiently demonstrate that a market exists. RFS2 relies upon a
fungible, liquid market for renewable fuels that is fundamentally
inconsistent with a requirement that obligated parties actually
purchase the fuel and take delivery. Rather, obligated parties
demonstrate compliance through submission of ``RIN'' credits, which
renewable fuel producers generate when they produce qualifying fuels.
Demand for these RIN credits functions in the same way as an off-take
agreement, as both serve as a market outlet for the fuel. Given
forecasts on meeting RFS2 targets through 2022, it does not appear that
advanced biofuel production will exceed mandates. Thus, every gallon of
advanced biofuel produced up to the mandates will have a guaranteed
market outlet. Even absent the RFS2 (as well as low carbon fuel
standards in California and the northeastern states), the Agency should
consider drop-in fungible fuels to have an established market
(equivalent to a dedicated off-take agreement) at no less than the
value of the fossil-fuel which they replace. Indeed, since synthetic
hydrocarbons like BTL offer superior performance characteristics,
including lower conventional pollutant emissions than conventional
fuels, a market premium would be justified. While non-fungible fuels
such as ethanol that can only be blended up to certain levels with
conventional fuels have a demand ceiling (absent dedicated
infrastructure, such as that needed for E-85), fungible fuels such as
BTL that are fully compatible with existing fuels and infrastructure
will have access to existing fossil fuel markets. While the commenter
recognizes that future fossil fuel prices alone may not sufficiently
demonstrate the financial feasibility of a project, the commenter urges
the Agency to recognize this market ``floor'' in its scoring criteria
for demonstrating an established market for an advanced biofuel
project.
Response: With regard to the commenter's concern about spot market,
the Agency points out that the rule does not specify a timeframe
associated with the commitments. Therefore, this concern should not be
an issue.
With regard to the comments made concerning the Renewable Fuel
Standard program, the Agency acknowledges that the Renewable Fuel
Standard program may establish a commodity market for renewable fuel
standard biofuels as a whole. However, for the purposes of the
Biorefinery Assistance Guaranteed Loan Program, the Agency is looking
at whether the borrower has established a market for its biofuel and
byproducts; that is, the Agency is looking for the establishment of an
individual market for the borrower's biofuel and byproducts. The
commodity market created by the Renewable Fuel Standard program does
not ensure there will be revenue generated for the specific project in
the application. On the other hand, the Agency seeks to further the
renewable fuel provisions of the Section 9003 program by, as has been
noted previously, requiring the advanced biofuel to meet an applicable
renewable fuel standard as identified by the EPA in order to receive
points under this scoring criterion.
The Agency notes that it does not have the authority to modify the
Department of Energy's Innovative Technology Loan Guarantee Program as
requested by one commenter.
Comment: One commenter believes that this is a misinterpretation in
the proposed rule of the intent of Congress in the 2008 Farm Bill. To
``establish markets'' for the advanced biofuel and byproducts would
only apply for a new type of advanced biofuel. Ethanol and biodiesel
are traded as commodities and already have an ``established market.''
The same is true of distiller's grain from current ethanol
biorefineries. The commenter proposes that newer types of alcohol, such
as butanol or propanol, meet the requirement of establishing a market
with a signed off-take agreement. The same is true of the biobased
byproducts from new processes. Due to changing farm economics as well
as changes in farm policy, a feedstock agreement of more than 3 years
is very difficult to obtain. The commenter proposes the following
criterion with a maximum of 5 points:
1. If the application has a commitment for at least 40 percent of
the biofuel produced from the project; a commitment for at least 40
percent of the biobased byproduct produced from the project; and a
commitment for at least 60 percent of the feedstock to be used in the
project, then the application will be awarded 5 points.
2. All commitments must be for at least 3 years.
3. Notwithstanding other qualifications of this criterion, ethanol,
biodiesel, and distiller's grains shall be exempt from any purchase
commitment.
Response: With regard to the recommendation for how points will be
awarded, the Agency is revising the rule to require a 50 percent
commitment for each and, as noted previously, requiring the advanced
biofuel to meet an applicable renewable fuel standard as identified by
the EPA in order to receive points under this scoring criterion. The
Agency is also increasing the points for this scoring criterion from 5
to 10.
The Agency disagrees with the recommendation for including a
requirement that all commitments must be for at least three years,
because it could discourage the introduction of advanced biofuels
produced from new feedstock.
As noted in the previous response, the borrower needs to
demonstrate that the borrower has established a market for the
borrower's advanced biofuel and byproducts produced. Furthermore, the
selection criteria in the statute refer to ``the advanced biofuel and
the byproducts produced'' without distinguishing between new and
established biofuel. Therefore, the Agency disagrees with the
commenter's recommendation for providing an exemption from the purchase
commitments.
Comment: One commenter states that requiring feedstock supply
commitments in demonstrating establishment of a market favors existing
feedstock markets and, thus, does not encourage new solutions/feedstock
usage/technologies.
Response: All applicants must establish a market for the advanced
biofuel and byproducts produced per
[[Page 8452]]
the statute. While the Agency recognizes that it may be easier for a
borrower to obtain feedstock supply commitments in existing feedstock
markets, the Agency has reduced the requirement from 60 percent to 50
percent. Further, the Agency is not requiring a time commitment for
these commitments. Lastly, the scoring criteria at Sec. 4279.265(d)(3)
and (d)(11) are specifically designed to encourage new feedstock usage
and technologies.
Comment: One commenter recommends eliminating this scoring
criterion for supply and off-take agreements. The commenter states that
liquid fuels are a very fungible product and the industry practice is
to not have long term off-take agreements.
Response: As noted in the previous response, all applicants must
establish a market for the advanced biofuel and byproducts produced per
the statute. The Agency is satisfied that requiring demonstration of
such agreements is reasonable. Further, the Agency is not requiring
borrowers to demonstrate long-term off-take agreements.
Comment: One commenter states that the proposed scoring system and
the manner in which points are awarded in a number of categories seems
to contradict the purposes of the program. As a result, there is a
significant likelihood that the projects most likely to succeed (and
the best deal for the taxpaying public) will be outscored by niche
projects that will have limited impact on rural development or of
filling advanced biofuel voids. One commenter disagrees with awarding
zero points if 60 percent or less on feedstock commitments or finished
product marketing agreements. The commenter explains that a commercial
scale biorefinery is going to take two years to construct and require
significant volumes of feedstock. It is unrealistic to expect a company
to be able to contract over two years in advance for what could be
millions of dollars of feedstock. Forward pricing would be so
speculative and price risk would make a supply contracts unaffordable.
Points will only go to small producers of niche products with feedstock
sources that have no scalable impact on the rural community. An
alternative would be to score based on Ag Census statistics on the
agricultural capacity to grow the feedstock within a specified radius
of the project.
Response: The Agency disagrees that this scoring criterion will
provide a preference to smaller producers. First, not all projects
require a multi-year construction period. Second, even for projects
that require a multi-year construction period, it is the Agency's
experience that borrowers can reasonably obtain commitments in advance.
Further, the Agency notes that it has reduced the required percentage
of these commitments from 60 to 50 percent.
Presence of Other Biorefineries Criterion
Comment: One commenter believes this criterion should be changed to
10 points maximum. The commenter also suggests that the language be
changed, as follows, to clarify that it is based on the exclusivity of
a biorefinery using a particular feedstock:
1. If the area that will supply the feedstock to the proposed
biorefinery does not have any other advanced biofuel biorefineries
using the same or similar feedstock, award 10 points.
2. If there are other advanced biofuel biorefineries using the same
or similar feedstock located within the area that will supply the
feedstock to the proposed biorefinery, award 0 points.
Response: The Agency is satisfied that the weight provided for this
criterion is reasonable. With regard to adding to the scoring criterion
``using the same or similar feedstock,'' the Agency is clarifying the
language to read ``any other similar advanced biofuel biorefineries.''
The similarity is intended to refer to the facility and not to the
feedstock.
Feedstock Not Previously Used Criterion
Comment: One commenter states that financiers seek to reduce risk
as much as possible and, in general, wherever possible, the scoring
criteria to qualify for the program should be as flexible as possible
so as to allow proposed projects to reduce all non-technology risk as
much as possible. For example, the scoring criterion that awards more
points for ``novel feedstock'' is in direct opposition to what is
required to attract investors, both equity and debt. This might be a
reasonable hurdle for an alternative program that seeks to help finance
existing and commercially established technologies. For first-of-a-kind
projects, requiring novelty in feedstock supply will likely render most
proposed projects unfinancable because lenders will not take that type
of risk even when the technology is proven. Despite the value of the
loan guarantee, such a guarantee is insufficient in its own right to be
able to mitigate sufficient risk for lender, especially given the
requirement that the lender put itself at significant risk by holding
10 percent of the unguaranteed portion. The loan guarantee will only
help those projects that have reduced risk to the greatest degree
possible other than the technology risk.
Response: As stated previously in response to a similar comment,
the Agency recognizes the concern raised by the commenter. However, the
statute identifies this criterion. The Agency notes that the scoring
criteria give preference; they do not determine eligibility.
Comment: One commenter believes that the proposed rule weights this
criterion too heavily. The intent of the program is to increase the
production of advanced biofuels in rural America, which can be carried
out by not limiting the awarding of such a large number of points to
the first biorefinery to use a particular feedstock. Many groups want
to be the ``second'' biorefinery to learn from the mistakes of the
``first.'' The proposed rule should not carry such a hefty penalty for
not being first. The commenter proposes that this criterion be a
maximum of 5 points.
Several commenters state that the points awarded to this criterion
should be changed or given 3 to 5 points. Different technologies that
utilize the same biomass should not be excluded because another
applicant used it first.
Another commenter recommends revising the language to include some
threshold level instead of simply a ``first mover'' requirement. The
intent is to establish multiple energy crops on a commercial scale and
as written the first user of a new feedstock would qualify regardless
of the size of their biorefinery and second user would not. The
commenter states that, in addition, you want to encourage the further
expansion on the feedstock, preferably with even new and better
processes that make even more efficient use of the feedstock.
Response: As noted in the response to the previous comment, because
this criterion is identified in the statute, the Agency must include
this criterion.
Comment: One commenter agrees that no specific feedstock should be
preferred. The commenter states that there should also be no additional
points awarded for novelty. The commenter states that, under the NOFAs
and propose rule, more scoring points are to be awarded for ``novel
feedstock.'' The commenter states that if a prior project has been
approved for the program with a type of feedstock, any future
applications would not achieve maximum points because the proposed
feedstock would no longer be ``novel.'' The commenter believes this
scoring criterion is antithetical to the main goals of the program,
which is to assist commercially viable technologies to pass through the
``valley of death'' in terms of financing and should be removed as a
scoring criterion, and to the goals of the financiers and especially
[[Page 8453]]
the lenders and therefore the program. The most important criterion for
lenders is the reliability of the availability of the feedstock and the
reliability of the supplier(s). Lenders always look for a track record
and performance history. Hence, any feedstock that can be procured to
meet the needs of the project financiers should be rewarded equally.
The commenter states that it is unwise to increase the number of points
for this criterion given that doing so makes projects less financeable
and more risky.
Response: As noted in the previous response, the Agency must
include this criterion, because it is identified in the statute.
Comment: One commenter states that the proposed manner in which
points are awarded in a number of categories seems to contradict the
purposes of the program. The commenter states that, as a result, there
is a significant likelihood that the projects most likely to succeed
(and the best deal for the taxpaying public) will be outscored by niche
projects that will have limited impact on rural development or of
filling advanced biofuel voids. The commenter states that awarding zero
points for using a feedstock previously used in commercial production
places the lowest risk projects at the biggest disadvantage. The
commenter recommends that the Agency remain feedstock neutral and score
projects based on their outcomes (rural revitalization), not inputs
(type of feedstock).
Response: Except to the extent the scoring criteria required by the
statute result in favoring one feedstock over another, the Agency
agrees with the commenter in that the Agency wants to encourage all
advanced biofuels, except in very limited specific instances (e.g.,
feedstock that can be used for human or animal consumption). Beyond
such instances, the Agency does not want to limit specific feedstock
from participation in the program.
Working With Cooperatives and Producer Associations Criterion
Comment: One commenter believes the calculations representing the
60 percent level are incorrect and represent a 50 percent commitment.
Response: The Agency agrees that the example was incorrect, and the
example has been corrected.
Comment: While one commenter agrees with the percentage
requirements of the dollar value of feedstock being supplied by and
byproducts being produced and sold to local producers to ensure strong
local involvement, all other commenters express concern with this
criterion, as follows:
One commenter is concerned that the concept of providing points to
projects that purchase 60 percent or more of their feedstock from
producer associations or cooperatives and sell 60 percent or more of
the products precludes benefits associated with purchasing feedstock
from independent producers, farmers, etc., who stand to benefit
significantly from such purchases. It is also not practical to require
60 percent of revenue generated to be from selling products to producer
associations or cooperatives. Typical biorefinery products are sold to
obligated parties to generate maximum revenue. In general, this
criterion may favor projects that do not bring as much benefit to local
farmers and producers and may have higher risk through lower product
revenue.
One commenter suggests that this scoring criterion for supply and
off-take agreements through cooperatives be eliminated. Because of the
capital intensity of the first commercial projects, the entire
entrepreneurial community needs to be engaged. Also, because these
refineries utilize commodity inputs and are producing liquid fuel that
fluctuates daily in price, it is very difficult to get supply and off-
take agreements at fixed prices.
One commenter states that, given the challenges of achieving
financing for projects, it is unwise to limit scoring to projects that
are so heavily weighted to such transactions with producer associations
and cooperatives. It is more important to assist the commercialization
of new technologies and make the projects attractive to investors. In
many cases, biomass feedstock is not yet available by way of producer
associations and cooperatives. Hence, such a procurement plan would be
considered unduly risky to financiers. At the same time, there is no
guarantee that producer associations and cooperatives will provide the
best outlet market for products to be sold. It is more important to
make sure that these projects have the best possible chance of
succeeding financially so that they can be financed. Having the most
flexible sources of feedstock suppliers and off-take partners is the
smartest way to get projects off the ground. The proposed constraints
might make sense for a different program designed to support already
commercialized technologies where the quid pro quo for Agency
assistance would be to support such supply and off-take entities. The
commenter states that it is unwise to try to achieve too many Agency
goals in one program when the financing challenges are already very
high.
One commenter believes this criterion unfairly limits the sale of
biofuels and biofuel byproducts. The commenter believes that both
products should be able to be sold to individual farmers, community
residents, small local businesses, power generation facilities,
hospitals, educational institutions, municipalities, traditional oil
refineries, etc. Selling the biofuel to a larger and more diversified
number of users will help encourage faster acceptance and adoption of
biofuels by the public and industry thereby increasing demand for even
more locally produced biofuels.
This same commenter also states that the provision for 60 percent
of the dollar value of the feedstock will be supplied by producer
associations and cooperatives unfairly and unnecessarily limits it to
mainly producer associations and cooperatives. Small independent family
farms and landowners should be able to equally provide feedstock to a
biorefinery funded through this program. The number of small farms in
the United States, particularly in the East, is growing. Being able to
sell feedstock to the biorefinery would provide small farmers and
landowners an additional source of potential income. It would also help
keep land actively farmed in some communities.
One commenter states that waste material, as a feedstock, does not
lend itself to contracts with producer associations or cooperatives in
the same way that biomass from crop or plant residues do. The commenter
urges the Agency to adopt an alternative metric for feedstock that do
not ordinarily have a nexus with producer associations and
cooperatives, so that the investment in rural communities that the
Agency seeks to encourage can come from the broadest possible sources.
Response: The statute requires the Agency to consider whether the
borrower is proposing to work with producer associations or
cooperatives and, therefore, the Agency must include this as one of the
scoring criteria. In recognition of the concerns raised by the
commenters, the Agency has modified this criterion to award points if
the project can document working with cooperatives and producer
associations under one of the three criteria rather than all three. In
addition, the Agency has revised this scoring criterion with a two-
tiered system that begins awarding points at a 30 percent threshold.
The Agency considers the revised scoring methodology more workable,
allowing greater participation by independent producers, farmers, etc.
[[Page 8454]]
Comment: While working with producer associations and cooperatives
is important, one commenter believes that the requirements in the
proposed rule are not workable, especially regarding the purchase of
the biofuel by the producer association or cooperative. The commenter
proposes modification as follows with a maximum of 10 points that can
be awarded:
1. Award 2 points for an application with at least two support
letters from producer associations or cooperatives.
2. Award 4 points for an application with at least 20 percent of
the dollar value of the feedstock purchased from a producer association
or cooperative.
3. Award 4 points for an application with at least 20 percent of
the dollar value of the biobased byproducts sold to a producer
association or cooperative.
4. Notwithstanding other qualifications of this criterion, if the
applicant is a producer association or cooperative, award 10 points.
Response: The Agency disagrees with the specific recommendation.
However, as stated in the response to the previous comment, the Agency
has modified the criteria to award points if the project can document
working with cooperative and producer associations under one of the
three criteria rather than all three. In addition, the Agency has
revised this scoring criterion with a two-tiered system that begins
awarding points at a 30 percent threshold. The Agency considers the
revised scoring methodology more workable.
With regard to the request to award points based solely on the
borrower being a producer association or cooperative, the Agency
disagrees because the change in the rule to allow the borrower to meet
one of the three criteria allows such a borrower to be awarded points
under this criterion by working with another producer association or
cooperative.
With regard to the suggestion to increase the points awarded from 5
to 10, the Agency considers the points associated with this criterion
appropriate relative to the other scoring criteria and has not changed
the points awarded under this criterion.
Comment: Several commenters recommend giving a total score of 5
points for projects that incorporate any contract or business
relationship with producer associations and cooperatives, whether it
consists of feedstock purchases or product and byproduct sales and
should include any renewable electricity sold to a rural electric
cooperative, or electricity purchased from a rural electric
cooperative.
Response: The Agency agrees with the commenters and has revised the
rule to modify the scoring criteria to award points if any one of the
three criteria are met. With regard to the suggestions that this
criterion should include electricity sold to a rural electric
cooperative, the Agency agrees. Sale of an advanced biofuel converted
to electricity would qualify for points under Sec.
4279.265(d)(4)(i)(B) or (d)(4)(ii)(B). The Agency does not agree with
commenter to award points for purchasing electricity from an electric
cooperative. The Agency has determined that to make the criteria
meaningful, the Agency must limit the points awarded under this
criterion such that not all applicants score under this criterion.
Financial Participation Criterion
Comment: One commenter, while agreeing that this criterion should
remain the most important, recommends increasing the maximum points to
25 points. The commenter supports the exclusion of other direct Federal
funding in calculating the borrower's cash equity participation.
However, the commenter does not support the deduction of 10 points for
the use of other Federal direct funding in the project. The commenter
proposes the following:
1. If the borrower's cash equity injection plus other resources
results in a debt-to-tangible net worth ratio equal to or less than
3.00 to 1, but greater than 2.75 to 1, award 11 points.
2. If the borrower's cash equity injection plus other resources
results in a debt-to-tangible net worth ratio equal to or less than
2.75 to 1, but greater than 2.50 to 1, award 18 points.
3. If the borrower's cash equity injection plus other resources
results in a debt-to-tangible net worth ratio equal to or less than
2.50 to 1, award 25 points.
Response: With regard to the suggestion to increase points awarded
under this criterion from 20 to 25, the Agency disagrees and has
reduced the points from 20 to 15, which the Agency considers
appropriate relative to the other scoring criteria and changes in
points made to other criteria.
With regard to the suggestion to delete the deduction of 10 points
for the use of other Federal direct funding, the Agency wants to
encourage participation from non-Federal sources and to diversify risk
to Federal funds. Therefore, the Agency disagrees with the suggestion
to delete this deduction.
With regard to adding an additional level (i.e., 2.5 to 2.75 to 1)
for awarding points, the Agency disagrees this level of distinction is
necessary at this time because the scoring gradations are sufficient to
distinguish the priority of the projects. As the program matures, the
Agency may revise this criterion along the lines suggested by the
commenter in order to provide further distinction between competing
applications.
Comment: One commenter states that projects that have exceptional
economics and that can withstand higher percentages of debt should not
be penalized by an arbitrary bias in favor of lower debt percentages.
There should be no points specifically associated with this issue.
Either a project meets the financing criteria or it does not. Not all
projects can sustain low percent debt levels. Each project should be
evaluated on its own merits, but percent of equity versus debt should
not be a competitive decision making criterion. It is a false
assumption that lower debt percent is generally preferable. Some
products and markets may require high debt percent levels in order to
be competitive and should not be penalized for it. Because the goal is
to help projects prove commercial viability, projects that propose a
financing plan that matches the most likely replicable future
commercial financing scenario should be favored. It will be these
projects that not only prove that the technology is commercially
viable, but that the means of finance is also commercially viable.
Response: The Agency disagrees with the commenter. The statute
identifies financial participation of the borrower as a scoring
criterion. Therefore, the Agency has retained this scoring criterion.
The Agency notes that a loan guaranteed under the program may only
finance 80 percent of the eligible project costs. In addition, the
Agency's default and loss claim experience is that lower debt
percentage is generally preferable because those projects tend to be
more successful.
Comment: One commenter states that this scoring criterion unfairly
handicaps ``advanced technology biorefineries'' because they have the
highest capital funding requirements. While understanding the need to
get some biorefineries in production, the commenter believes the key is
to advance future biorefinery technology so that we have a large scale
commercial industry in the future.
Response: As stated in the response to the previous comment, the
statute requires the Agency to consider the level of financial
participation of the borrower as part of scoring applications, and the
Agency notes that a loan guaranteed under the program may only finance
80 percent of the eligible project costs.
[[Page 8455]]
Comment: Two commenters recommend, given the complexity and variety
of negotiation and business structures between the lender and equity
source, greater flexibility in the scoring requirement for projects
that demonstrate more than 20 percent cash equity in order to foster
increased use of the loan guarantee program.
Response: To the extent that the commenter is requesting ``more
levels'' for awarding points under this criterion, the Agency disagrees
that additional levels of distinction are necessary at this time. As
the program matures, the Agency may revise this criterion to provide
further distinction between competing applications.
Positive Effect on Resource Conservation, Public Health, and the
Environment Criterion
Comment: One commenter suggests increasing the points awarded for
this criterion from 5 to 10 and modifying how points are awarded as
follows:
1. If the production of advanced biofuels from the approval of the
application would have a positive impact in one of the three impact
areas (resource conservation, public health, and environment), award 2
points.
2. If the production of advanced biofuels from the approval of the
application would have a positive impact in two of the three impact
areas, award 6 points.
3. If the production of advanced biofuels from the approval of the
application would have a positive impact in all three of the impact
areas, award 10 points.
Response: The Agency has modified the rule to increase points and
distribute the points as recommended, except that 3 points will be
awarded if there is a positive impact on one of the three impact areas.
However, the Agency disagrees with the proposed rewording to use
``production of advanced biofuels from the approval of the
application'' in place of ``process adoption'' because ``process
adoption'' reflects the statutory language of the ``adoption of the
process proposed in the application.''
In addition, the Agency has added a provision to deduct 5 points if
the feedstock for the proposed project can be used for human or animal
consumption. The Agency is adding this provision because such
feedstocks are considered to have significant enough negative impacts
that the Agency seeks to discourage their use.
No Significant Negative Economic Impacts on Existing Facilities
Criterion
Comment: One commenter proposes no change to this criterion and
would award a maximum 5 points.
Response: The Agency disagrees, and, in the broader context of all
the scoring criteria, has revised the points awarded under this
criterion from 5 to 10, which the Agency has determined is reasonable
relative to the other criterion.
Comment: One commenter recommends that, as for local competition
for feedstock, the local area for procurement be considered to be not
more than 50 miles from the proposed project site. Given that biomass
is generally uneconomical to transport more than 50 miles from source
to site, using an area that is more than 50 miles will provide undue
protection to some existing projects and limit the scope and
possibility of many good projects. The commenter suggests that,
alternatively, total available supply of feedstock within the
competitive area be considered and whether there is sufficient
availability for the incumbents as well as the proposed project. In
general, by the time a project has been proposed to the Agency, this
issue will have been reviewed to the satisfaction of the financers and
will never be an issue. As a result, this review item can probably be
dropped in its entirety, other than asking whether such an analysis was
performed.
Response: The statute requires the Agency to consider whether the
proposed project will have any significant negative impacts on existing
facilities. As such, the Agency must include this criterion in the
rule. In order to determine if there will be any significant negative
impacts, the Agency needs sufficient evidence to make an evaluation--
simply asking whether such an analysis was performed is insufficient.
Therefore, the Agency has not revised the rule in response to this
comment.
However, the Agency has added a provision to this criterion that
would result in no points being awarded if the feedstock to be used is
wood pellets. While the Agency acknowledges the eligibility of wood
pellets, the emphasis of this program is new and emerging technologies.
The Agency further notes that wood pellets can be considered under
other programs.
Potential for Rural Economic Development Criterion
Comment: One commenter suggests increasing the points awarded for
this criterion from 5 to 15 and modifying how points are awarded as
follows:
1. If a project's average wage is above the median household wage
in the county and contiguous rural counties, award 15 points.
2. If a project's average wage is equal to or below the median
household wage in the county and contiguous rural counties, award 0
points.
Response: The Agency has reconsidered the points associated with
this criterion and increased them from 5 to 10, which is appropriate
relative to the other scoring criteria. Further, the Agency has added
the provision that the project must be located in a rural area in order
to be awarded points under this scoring criterion. As noted elsewhere
in this preamble, this provision replaces the proposed eligibility
requirement for a rural area location.
With the respect to commenter's suggestion to use the median
household wage in the county, the Agency agrees with the commenter that
it is appropriate to look at the median household wage for the county,
and not to include the median household wage for the state, because the
county median household wage is more reflective of local economic
conditions. The Agency has revised the rule accordingly.
With respect to the commenter's suggestion to include contiguous
rural counties, the Agency disagrees with the commenter because
economic conditions in the contiguous counties may differ significantly
from the project county. Thus, the Agency has not revised the rule with
respect to this specific comment.
Local Ownership Criterion
Comment: One commenter suggests decreasing the points awarded for
this criterion from 15 to 10 and modifying how points are awarded as
follows:
1. If more than 20 but less than or equal to 50 percent of the
biorefinery's owners are local owners, award 6 points.
2. If more than 50 percent of the biorefinery's owners are local
owners, award 10 points.
3. A biorefinery that has as its majority owner a publicly traded
entity would be awarded no points.
Response: Considering the points proposed for this criterion
relative to the other criteria, the Agency agrees with the
recommendation to reduce the points for this criterion, but has reduced
them from 15 to 5, in part because of the changes to the rural economic
development potential scoring criterion, which now incorporates a rural
area location requirement for the project to be awarded points and the
increase in points under that criterion from 5 to 10. However, the
Agency does not
[[Page 8456]]
specifically exclude majority ownership by publicly traded entities so
long as the entity can demonstrate local ownership. The Agency has not
made the recommended change regarding publicly traded owners because it
does not want to discriminate against applicants with publicly traded
owners. The Agency also notes that the calculations are based on
ownership interest, not the number of owners.
Comment: Four commenters suggest eliminating this scoring
criterion. One commenter believes that local ownership will be
difficult to obtain for these first-of-a-kind technologies that are
perceived to be risky because of the general conservative nature of
rural investors. This commenter believes that this criterion would be
acceptable for projects based on commercially proven technology as a
quid pro quo for Agency financial assistance, but is incompatible with
early stage pre-commercial technology projects. It is unwise to
increase the number of points for this criterion as a result.
One commenter states that, in many cases, these projects require
significant capital to complete and eliminating good projects because
they do not have local ownership does not seem to support the
objectives of creating a biorefinery industry.
One commenter states that these projects need to be able to take
full advantage of the entire range of investment opportunity. According
to the commenter, this criterion places limitations on where supporting
investment comes from. As a result, the commenter believes that there
is a significant likelihood that projects most likely to succeed (and
the best deal to the taxpaying public) will be outscored by niche
projects that will have limited impact on rural development or of
filling advanced biofuel voids. Such an outcome seems to contradict the
purposes of the program.
Response: The statute requires the Agency to consider local
ownership. As such, the Agency must include this criterion in the rule.
The Agency notes that the scoring criteria give preference; they do not
determine eligibility. Thus, local ownership is not an eligibility
criterion.
With regard to reducing the number of points awarded for this
criterion, the Agency has considered the points proposed for this
criterion relative to the other criteria and, as discussed in the
response to the previous comment, has reduced the points for this
criterion.
Project Replication Criterion
Comment: One commenter proposes no change in this criterion and
would award a maximum of 5 points.
Response: The Agency disagrees and has increased the points awarded
under this criterion from 5 to 10. The Agency, in considering all of
the scoring criterion and the relative points associated with each, has
determined that the ability of a project to be replicated, especially
first-of-a-kind technologies, is an important quality that the Agency
wishes to encourage. Thus, the Agency has increased the points
associated with this criterion.
Technology Not Currently Operating in Advanced Biofuel Market Criterion
Comment: One commenter recommends eliminating this criterion
because it is not explicitly stated in the 2008 Farm Bill. As stated
earlier, the commenter believes that the second biorefinery is
important as it learns from the first one. This criterion should not be
needed to encourage the production of advanced biofuels.
Response: The purpose of the program, as provided in the statute,
is to assist in the development of new and emerging technologies for
the development of advanced biofuels. This criterion gives priority to
such technologies. Therefore, the Agency is retaining this criterion.
However, in considering the points for this criterion relative to the
other criterion, the Agency has reduced the points from 15 to 5.
Comment: Several commenters state that points for a ``first-of-a-
kind technology'' should be changed to ``first commercial application
of the applicant's technology.''
Response: The Agency notes that the commenters are referring to
language (``first-of-a-kind technology'') that was used in a notice of
funding availability. The rule does not use that phrase, but instead
refers to ``a particular technology, system, or process that is not
currently operating in the advanced biofuel market as of October 1 of
the fiscal year for which funding is available.'' This is very similar
to the intent of the commenter's suggested ``first commercial
application of the applicant's technology,'' and the Agency has
retained the phrasing used in the proposed rule for the interim rule.
Comment: Two commenters state that the points available for ``first
of a kind technology'' category should be at least as high as
``feedstock not previously used'' in order to continue to encourage
innovation.
Response: As proposed, both criteria had the same maximum number of
points (15). However, the Agency is concerned that many new
technologies are also likely to use new feedstocks and that the
resulting 30 points was too high relative to the other criteria the
Agency must consider for making awards under this program. Therefore,
the Agency reduced the points under this criterion to 5, which would
still provide 20 points for new technologies using new feedstocks.
Comment: One commenter believes awarding points for unproven
technologies is counter-intuitive to the program mission. The commenter
states that technology risk is viewed by lenders and investors as one
of the biggest barriers to participating in a project. Loans and loan
guarantees should reflect preference towards projects with a declining
risk and points should be awarded to projects that overcome technology
risk.
Response: The purpose of the program, as provided in the statute,
is to assist in the development of new and emerging technologies for
the development of advanced biofuels. This criterion gives priority to
such technologies. Therefore, the Agency is retaining this criterion.
Comment: One commenter believes this scoring criterion provides
many opportunities for unclear scoring. For example, in the commenter's
case, there may be other biomass gasification technologies being used,
or under construction, for the production of advanced biofuels.
However, all gasification systems are not alike and, in the commenter's
case, the commenter is using oxygen vs. air plus a syngas yield
enhancement stage using a catalytic autothermal reformer vs. a cleanup
stage. This combination is considered a different and unique technology
within the field. Hence, unless a proposed project and its technology
are substantially identical to other technologies in deployment, at the
very detailed level, the commenter suggests that any proposed project
should be eligible and achieve the maximum possible points.
Response: The Agency recognizes the concerns raised by the
commenter. However, the Agency wants to continue to include this
criterion in order to encourage the development of truly different and
unique technologies. Thus, the Agency encourages the borrower to submit
detailed information to establish that the technology is unique for the
Agency to consider when scoring the project. As the program matures,
the Agency may revisit this criterion to determine if any changes
should be made.
[[Page 8457]]
Feedstock That Can Be Used for Human or Animal Consumption Criterion
Comment: One commenter recommends eliminating this criterion
because almost all feedstock ``can'' be used for human or animal
consumption under some circumstance. Further, this criterion was not
explicitly listed in the 2008 Farm Bill and will not further the intent
of increasing advanced biofuel production in rural America.
Response: While the Agency generally agrees with the commenter and
has removed this as a separate scoring criterion from the rule, the
Agency continues to believe that such feedstock should not be
encouraged. To that end, the Agency, as noted elsewhere in this
preamble, has incorporated a provision in the ``impacts on resource
conservation, public health, and environment'' criterion a deduction of
5 points if the feedstock can be used for human or animal consumption.
Comment: One commenter believes that the Agency should remain
feedstock neutral and award points based on the feedstock's ability to
create new food and fuel opportunities. According to the commenter,
just because feedstock could be used for food does not mean they would
be if they otherwise would not have been grown.
Response: As explained in the previous response, the Agency has
removed this as a separate scoring criterion from the rule and
incorporates it as a 5-point deduction under the ``impacts on resource
conservation, public health, and environment'' criterion.
Alternatives
Comment: One commenter recommends scoring feedstock based on their
ability to be easily integrated into current agricultural practices.
Response: The Agency agrees that it would be desirable to use
feedstock that can be easily integrated into current agricultural
practices. However, the Agency has determined that it would be
difficult to measure such integration. Furthermore, the Agency does not
want to include in the rule specific feedstock criteria, except in very
limited specific instances (e.g., feedstock that can be used for human
or animal consumption) that could limit the Agency's implementation of
the program and is concerned about establishing a lengthy inflexible
permanent list of specific scoring criteria not based directly on the
authorizing legislation. Therefore, for these reasons, the Agency has
not included the recommendation in the rule.
Comment: One commenter recommends that scoring should be weighted
towards avoidance of environmental consequences, ability to offer the
agricultural industry a compelling reason to produce (value-add to what
is already being done), and likelihood of leading to high capacity
volumes. The commenter states that systems that integrate winter crops
are an excellent example of this.
Response: With regard to the avoidance of environmental
consequences, the Agency is satisfied that this is sufficiently
addressed in Sec. 4279.265(d)(6), especially with the addition of the
provision to deduct points if the feedstock can be used for human or
animal consumption.
With regard to the ability to offer the agricultural industry a
compelling reason to produce feedstock, the Agency has determined that
it is not appropriate for this program to address this proposed
criterion because USDA has other programs that address this area.
With regard to including a criterion specific to the likelihood of
leading to high capacity volumes, the Agency is satisfied that this is
sufficiently addressed in Sec. 4279.265(d)(10). The ability of a
project to be replicated will increase the likelihood that future
facilities will be able to have high capacity volume.
Comment: One commenter states that rural development is the
ultimate goal, yet program rules, structure, and scoring system place
considerable limits on the opportunities. The commenter recommends
including the following metrics:
1. Demand for new feedstock. To what extent will the project drive
the development of new agricultural-related energy crops?
2. Revenue opportunity. What are the volume needs and expected
value of those crops in the vicinity of the project?
3. Job creation. How many additional rural jobs will result from
the project?
4. Ease of adoption. How fungible are the new crops with respect to
existing agricultural practices (use of existing equipment, storage and
handling, planting and cultivating, nutrient and moisture requirements,
etc.)?
5. Sustainability. To what extent is the plant and feedstock system
a longer term proposition? This includes carbon intensity, use of
marginal lands/double crop systems/use of waste or residue, and market
outlook for products.
The commenter also states that the scoring system could be a
program obstacle and recommends a more basic structure. The commenter
states that DOE seems content with promoting the high risk emerging
technology and niche application projects and that the Agency should
measure projects based upon the mission of revitalization of the rural
economy and promote projects with the greatest chance of success. The
commenter recommends a scoring system based on the following:
1. Ability to deploy unutilized crop options or create new energy
crops that offer new opportunities for rural America.
2. Ability to be scaled and replicated with limited technology
risk.
3. Ability to provide environmental benefits and avoid
environmental and social consequences.
4. Ability to be accepted into the farming community and be easily
integrated into current agricultural practices.
5. Ability for the finished products to be fungible in the current
marketplace, while also adding significant volumes to the market.
6. Ability to attract high ratios of equity or other investment.
7. Ability to generate attractive returns and to offer compelling
reasons for financing market participation.
Response: The Agency agrees that potential rural economic
development is an important metric for evaluating applications. In the
rule, the Agency is using both the location of the project in a rural
area and potential rural jobs to measure this metric, as found in Sec.
4279.265(d)(8). To include the other aspects suggested by the commenter
would make the scoring overly complicated and burdensome. The scoring
criteria identified in the rule are either statutory and or in the
Managers Report on the authorizing legislation. Statutory provisions
cannot be eliminated. Therefore, the Agency has not revised the rule in
response to this comment.
Comment: One commenter agrees that there should be strong
requirements and incentives for local ownership and local
participation, but believes that rural job growth is not given adequate
weight in the proposed scoring. The commenter recommends creating a
scoring criterion that would award 10 points if a certain level of new
job creation is projected. In addition, the commenter suggests that the
Agency consider lowering the annual or other fees if the projected job
creation level is exceeded by the project.
Response: As noted in a response to a previous comment, the Agency
reconsidered the points awarded for potential economic development and
increased them from 5 to 10, which the Agency considers appropriate
relative to the other scoring criteria.
[[Page 8458]]
With respect to the comment on the fees, the Agency disagrees with
the suggestion to lower annual or other fees if projected job creation
levels are exceeded. The fee structure is independent of the number of
jobs created and is based on the cost of implementing the program. Any
change in fees would have an impact on the subsidy rate for the
program, which determines dollars available. Further, if fees were tied
to number of jobs created exceeding projected jobs, applicants would
have an incentive to project fewer jobs being created.
Comment: One commenter suggests awarding points to proposed
biorefinery projects that intend to produce aviation fuels. According
to the commenter, unlike automobiles, power plants, and other energy
users who can turn to alternative energy sources for power, aviation
does not have alternatives to petroleum-based fuels other than
biofuels. Thus, to lower its carbon footprint beyond efficiency
measures, aviation must have access to a supply of biofuels. Given
these unique technological circumstances, the commenter believes that
points should be awarded for proposed biorefinery projects that intend
to produce aviation fuels. The commenter believes that declining to do
so is risky--should aviation be unable to secure a significant supply
of biofuels, the industry and Federal government's goal of carbon
reduction will not be achievable.
Response: The Agency wants to encourage all advanced biofuels
rather than giving preference to any one biofuel. Therefore, no points
have been awarded for production for any one area. It is expected that
increased production, in general, will increase the supply for all
areas.
Comment: Two commenters suggest modifying the scoring system to
award points to projects that benefit the national security needs of
the U.S. For example, a biorefinery producing jet fuel used in military
aircraft or aircraft used in homeland security-related missions
achieves dual goals of developing the biorefinery industry in the
United States and providing the Departments of Defense and Homeland
Security with a domestically-produced renewable critical resource.
Response: The Agency recognizes the importance of biofuels to
national security and has signed a MOU with the Navy. The MOU
encourages the development of advanced biofuels in order to secure the
strategic energy future of the United States. However, the purpose of
the program, as provided in the statute, is to assist in the
development of new and emerging technologies for the development of
advanced biofuels. Further, the Agency is concerned about establishing
a lengthy inflexible permanent list of specific scoring criteria not
based directly on the authorizing legislation. Instead, the Agency has
included in the rule a provision, for which it is seeking comment, to
allow the Administrator to award bonus points to applications that
promote partnerships and other activities that assist in the
development of new and emerging technologies for the development of
advanced biofuels that further the purpose of this Program, as stated
in the authorizing legislation. The Agency will identify these
partnerships and other activities in a Federal Register notice each
fiscal year. Therefore, the Agency has determined that it is
unnecessary to add the suggested scoring criterion to the rule.
Comment: Two commenters recommend awarding points for improved
feedstock, where ``improved'' is defined as having better per-acre
metrics, lower resource requirements, or otherwise great potential for
being adopted on a sustainable and viable widespread basis on U.S.
soil.
Response: The Agency disagrees with the comment, because it would
be difficult to quantify across all current and potential feedstocks.
Further, if all of these metrics are improved, the feedstock should
prove more appealing to the biorefineries that use the feedstock.
Comment: One commenter encourages the Agency to retain the use of
cellulosic feedstock as a scoring criterion. The commenter notes that
the EISA requires that 21 billion gallons of advanced biofuel (under
the EISA definition) be produced by 2022, and that 16 billion of those
gallons must be must be ``cellulosic biofuel.'' Thus, consistent with
the President's directive that executive departments and agencies work
together through the Biofuels Interagency Working Group to meet the
Administration's advanced biofuels goals, the commenter believes that
it would be appropriate for the Agency to steer loan guarantee program
funds to facilities that will help to meet the large cellulosic biofuel
mandate under EISA. If the Agency is concerned that algae and other
feedstock do not meet the definition of cellulosic, the commenter
suggests that the Agency utilize its scoring discretion to include
those feedstock as well.
On the other hand, one commenter agrees with the removal of
cellulosic feedstock as a scoring criterion. According to this
commenter, all advanced biofuels should compete on a ``level playing
field,'' and cellulosic ethanol has already received substantially
greater government investment when compared to other advanced biofuels
that could serve as ``drop-in'' replacements for existing petroleum
fuels.
One commenter points out that cellulosic biomass is the most
abundantly available renewable energy source in rural America and
should be favored in the scoring system.
Response: The Agency has decided not to reinsert the cellulosic
feedstock criterion. The Agency wants to encourage all advanced
biofuels, except in very limited specific instances (e.g., feedstock
that can be used for human or animal consumption). Beyond such
instances, the Agency does not want to limit specific feedstock from
participation in the program.
Selection of Applications for Funding (Sec. 4279.265(f))
Comment: While a scoring model such as the one proposed may be
helpful, one commenter questions whether the model alone is an
appropriate determiner of loan quality. The commenter suggests the
Agency consider additional flexibility in the loan approval process
based on the quality of the loan.
Response: The Agency considers factors other than the scoring
criteria in determining loan quality, such as various technical,
financial, and environmental factors. Identification of weaknesses
during the Agency's review of these additional factors may result in a
loan not being approved or they may be addressed in specific conditions
in the Conditional Commitment.
Comment: One commenter, who proposes a scoring system that allows
for a maximum of 100 points, believes that a score of 55 should be
necessary to move forward with an application.
Response: The Agency notes that the maximum score is 100 points,
and that a minimum score of 55 points is required in order to be
considered for guarantee.
Comment: One commenter recommends that, given that 50 percent of
the program budget must be reserved for each half of the fiscal year,
in the event that all budget for a given half has been allocated,
eligible applications that are received in such a half be held over to
the other half and funded in the order received, and not in a new batch
competition. The commenter further recommends that any budget unused in
any given fiscal year should be re-allocated in the following fiscal
year and applications already received should be funded in the order
they were
[[Page 8459]]
received from the prior fiscal year. According to the commenter, this
will reduce the burden and risk of applying for the program and will
encourage the maximum number of qualified applications to be submitted
as early as possible.
Response: As noted in the response to the following comment, the
Agency intends to consider an application for funding for two funding
competitions, which will result in some applications carrying over to
the subsequent fiscal year. This is reflected in the rule in Sec.
4279.265(e)(1). However, the Agency disagrees with the commenter's
suggestion that applications that are carried over should not be re-
competed. The Agency has determined that all applications that are
carried over will be re-competed in order to fund the highest scoring/
best qualified applications. To the extent allowed, the Agency may
carry over mandatory funding into the next fiscal year.
Ranked Application Not Funded (Sec. 4279.265(g))
Comment: One commenter is concerned that there could be situations
where Agency budgetary authority for a given fiscal year is
insufficient to fully fund strong, highly ranked projects. Given the
size of advanced biorefinery projects, it is possible that only one or
two projects could constitute the entirety of the Agency's budgetary
authority in any given year. Such projects could be stronger than any
future projects that are submitted in applications in subsequent fiscal
years and should not be competitively disadvantaged versus subsequent
submissions.
The commenter, therefore, recommends allowing ranked applications
that are not fully funded due to budgetary authority limitations to
roll over into subsequent fiscal year budget cycles, without requiring
a reapplication. Such applications could be re-ranked against new
applications to ensure they are still highly ranked, and that the
process remains competitive. They should not, however, be competitively
disadvantaged and forced to re-apply to subsequent application periods.
Response: The Agency acknowledges that funding in certain years may
not be sufficient to make awards to strong projects and that the
proposed rule was unnecessarily restrictive in limiting considerations
of an application to the fiscal year in which it was submitted.
Therefore, the Agency has revised the rule to allow an application to
be competed in two consecutive competitions, which would allow
applications submitted during the second application period of a fiscal
year to be carried over to the next fiscal year. However, if an
application is not funded after its second competition, the Agency will
not consider the application any further (the applicant would have to
submit a new application). The Agency has revised the rule (see Sec.
4279.265(e)(1) and (g)) to make this process clear.
Comment: Several commenters recommend that applicants not have to
re-apply from one funding cycle to the next, but, instead, that the
program operate in the same way as the B&I guaranteed loan program in
this regard.
Response: The Agency generally agrees and will consider an
application for one additional funding cycle. If an application still
has not been selected after a second funding cycle, the application
will not be considered further by the Agency because the information in
the application will no longer be current. Thus, the applicant would
need to submit a new application for the project.
Conditions Precedent to Issuance of Loan Note Guarantee (Sec.
4279.281(a))
Comment: One commenter questions why a lender needs to ``certify''
compliance with the Anti-Lobby Act because such information on these
activities may not be available to the lender. The commenter recommends
disclosing these activities in the application.
Response: The Agency disagrees. The lender is the applicant to the
Agency, and the Agency is requiring this from the lender to ensure that
the lender is sufficiently informed regarding the use of project fund,
which would be determined by the lender as part of its due diligence.
Introduction (Sec. 4287.301(b))
Comment: One commenter recommends modifying Sec. 4287.301(b) to
allow non-project related collateral to be pledged to secure the non-
guaranteed portion of the debt. Such segregated collateral or security
could be in the form of a letter of credit, a parent company
collateralized guaranty, or investment securities (or a combination).
Restrictions could be placed on the ability to access such security so
that it not be available unless and until payment is made on the USDA
Guaranty to the holders of the guaranteed debt. In addition, the
lender-of-record would not be allowed to access the security until it
has completed the foreclosure process on the project and has met the
requirements to collect on the USDA Guaranty on any debt held by it
that is so guaranteed. This will provide assurance that the lender-of-
record will meet its servicing responsibilities throughout the
collateral liquidation process.
Response: The Agency does not allow separate collateral for the
unguaranteed portion of the loan because the Agency wants the lender to
maintain a certain level of risk in connection with the project. This
makes the lender more likely to service the loan properly and take an
active interest in the success of the project. The Agency has
structured the program to ensure that project risk is being shared on a
pro rata basis commensurate with the percentage of the loan that is
guaranteed versus unguaranteed. Therefore, the Agency has not revised
the rule as suggested by the commenter.
Comment: One commenter states that the timing of project equity
funding under the proposed rule is under-addressed. The commenter
recommends pro rata funding of project equity with loan disbursements,
provided the underlying equity commitments are on a firm basis from
creditworthy entities (defined as investment grade or otherwise deemed
creditworthy by the lender). If the equity commitments are not from
creditworthy entities, then upfront equity funding from less than
creditworthy sponsors shall be required as a condition of closing.
Response: At closing, the lender must demonstrate the equity is
available. At project completion, the lender must certify funds were
disbursed in accordance with the Conditional Commitment. Between
closing and completion, there are no rule requirements regarding the
order in which equity funds and loan funds are disbursed. However, the
Agency agrees with the commenter's characterization that the timing of
project equity funding is under-addressed in rule. Therefore, the
Agency has clarified the rule (see Sec. 4279.234(c)(1)) that the
equity requirement must be demonstrated at the time the loan is closed.
Exception Authority (Sec. 4287.303)
Comment: One commenter recommends providing the Administrator with
the widest possible authority for every criterion except for those
specifically limited in the statute.
Response: The Agency disagrees that the exception authority needs
to be ``the widest possible authority for every criterion.'' The
exception authority provided is adequate, and the Agency only exercises
this authority when it is not inconsistent with applicable law and when
not making an exception
[[Page 8460]]
adversely affects the Federal Government's interest.
Other--Working Capital Loans
Comment: One commenter recommends that a portion of the funds
dedicated to loan guarantees be converted to working capital and
equipment loans for startup businesses. The commenter states that,
although several projects are prime for the commercialization of algae
as an alternate fuel, traditional funding sources are non-existent in
the current economy. If lenders are not making loans, there are no
loans to guarantee. The basics of the lending could mirror the
guarantee program with certain exceptions:
Commercial lending in the U.S. is virtually non-existent due to the
current economic conditions. The inability to obtain working capital
and construction funds has significantly slowed the progress of
development of alternate fuels. Funds have become available in terms of
grants for research and development (as opposed to the commercial
applications), and the current financing opportunities are based on
grants with milestone payments but no repayment obligation and has
primarily supported the academic community and government laboratories.
The commenter states that: (a) The technologies that have been created
have no value until there is a viable market for them, and (b)
laboratories and universities have not, to date, shown the ability to
commercialize the algae industry. Their purpose is restricted to
research. The commenter believes that a portion of the funds allocated
for loan guarantees should be converted to direct loans to individuals
and companies who plan to build products in the U.S. and employ U.S.
workers. The guidelines for required documentation have already been
stated; the only difference is that the Agency would be taking on the
role of the lender, subject to servicing arrangements which would
probably be handled by a third party service provider on behalf of the
Agency. The risk would be greater than with a loan guarantee, but the
rewards would include the ability to negotiate loans with shorter
terms, requiring the borrowers to generate revenue and loan repayment
history so that, when the economy strengthens, they are `bankable' or
investment-grade companies. The commenter believes that this program
will further support the concept that private companies and investors
will be attracted to invest in these companies once they have proven
themselves to be credit-worthy.
Response: The statute authorizing this program does not provide the
Agency with the authority to provide direct funding.
Other--Algae Related Projects
Comment: One commenter requests exemptions for algae-related
projects involving off-take contracts covering a significant percentage
of the biocrude with the two biggest users, the U.S. airlines and the
U.S. military, because of the urgent need to develop alternative fuel
sources and the lack of traditional lending sources. The governments of
many other countries are beginning to invest in commercialization,
following the commenter's belief that additional research will be
needed after actual commercial-scale production has begun, and the
funds need to be made available for construction of commercial
production facilities. The commenter states that sites could be built
out for production at an approximate cost of $1 million to $2 million
per acre and that, although the Agency is not a regulated or supervised
lender, it could oversee financing of loans structured with (a) first
lien positions, (b) fixed-cost contracts and take-out commitments, (c)
required off-take contracts from either the U.S. military or U.S.
airlines, (d) interest and repayment terms, and (e) all of the other
components of traditional short-term commercial loans.
Response: To the extent the commenter is asking for direct loan
financing, the statute authorizing this program does not provide the
Agency with the authority to provide direct funding. To the extent the
commenter is seeking preferential treatment for algae-related projects,
the Agency has adopted a policy of wanting to have a program that is,
in part, technologically neutral. Such preferential treatment for
algae-related projects would provide preferences for technologies
inconsistent with this policy. The Agency believes that technology
neutrality, along with feedstock and geographic neutrality, is critical
to meeting the purposes of the program, which is to encourage broad-
based advanced biofuel production practices, technologies, and
feedstock.
Other--Disbursement of Guaranteed and Unguaranteed Portions
Comment: Three commenters believe that requiring the simultaneous
disbursement of the guaranteed and unguaranteed portions will unduly
burden projects using bonds with excess ``negative carry'' costs (the
difference between the interest rate on the loans and money market
reinvestment rates earned while funds are held pending disbursement).
Construction periods for capital intensive projects of the type
envisioned under the program are generally very long. Most project
financings with long construction periods rely on bank lenders to
disburse funds over a construction loan period and thereby avoid
negative carry costs. However, when bonds are one of the funding
sources, bond market convention requires simultaneous closing and
funding of bond proceeds. In cases when bonds and bank loans are used
together for a project financing, bonds are generally placed first with
proceeds held in a disbursement account pending construction draws.
Once the bond proceeds have been used, the bank lender then funds its
share of the loans over the remainder of the construction period.
The commenters recommend allowing the guaranteed and unguaranteed
portions, whether capital markets offerings or bank loans, to be funded
disproportionally in order to reduce construction period interest costs
for the projects. To address the potential mismatch in exposure based
on differing funding schedules, the Intercreditor Agreement will
require that upon a default the under-funded lender (likely to be the
guaranteed bank lender) fund its pro rata share of the loans (or
purchase pro rata participations from the over-funded lender). As is
typical for project financings, a requirement that satisfactory debt
and equity commitments for the full funding of the project budget are
entered into at closing should also be added to the list of program
requirements.
Response: The Agency is not adopting this comment. The lender is
required to proportionally disburse the guaranteed and unguaranteed
funding to reduce Agency risk and maintains the lender's financial
stake in the project.
IV. Request for Comments
The Agency is interested in receiving comments on all aspects of
the interim rule. The area in which the Agency is seeking specific
comments is identified below. All comments should be submitted as
indicated in the ADDRESSES section of this preamble.
1. Local owner definition. The Agency is seeking comments on the
best mechanism for defining a local owner. Should it reflect a uniform
distance? If not, should we define differently for different regions?
Should we reflect different distances based on the type of technology?
Are there any other factors the Agency should consider? Should this be
established by notice or by
[[Page 8461]]
regulation? Please be sure to include your rationale for your
suggestions.
2. Administrator bonus points. The Agency is seeking comment on
whether this is an appropriate use of Administrator bonus points. The
Agency is also seeking comment on whether there is a mechanism more
suitable than Administrator bonus points to adopt this program to the
dynamic nature of the biorefinery industry. Please be sure to include
your rationale for your suggestions.
List of Subjects in 7 CFR Parts 4279 and 4287
Biorefinery assistance, Loan programs--Business and industry, Rural
development assistance, Rural areas.
For the reasons set forth in the preamble, title 7, chapter XLII of
the Code of Federal Regulations, is amended as follows:
CHAPTER XLII--RURAL BUSINESS-COOPERATIVE SERVICE AND RURAL UTILITIES
SERVICE, DEPARTMENT OF AGRICULTURE
PART 4279--GUARANTEED LOANMAKING
0
1. The authority citation for part 4279 is amended to read as follows:
Authority: 5 U.S.C. 301; and 7 U.S.C. 1989.
0
2. Part 4279 is amended by adding a new subpart C to read as follows:
Subpart C--Biorefinery Assistance Loans
Sec.
4279.201 Purpose and scope.
4279.202 Compliance with Sec. Sec. 4279.1 through 4279.84.
4279.203-4279.223 [Reserved]
4279.224 Loan processing.
4279.225 Ineligible loan purposes.
4279.226 Fees.
4279.227 Borrower eligibility.
4279.228 Project eligibility.
4279.229 Guaranteed loan funding.
4279.230 [Reserved]
4279.231 Interest rates.
4279.232 Terms of loan.
4279.233 [Reserved]
4279.234 Credit evaluation.
4279.235-4279.236 [Reserved]
4279.237 Financial statements.
4279.238-4279.243 [Reserved]
4279.244 Appraisals.
4279.245-4279.249 [Reserved]
4279.250 Feasibility studies.
4279.251-4279.254 [Reserved]
4279.255 Loan priorities.
4279.256 Construction planning and performing development.
4279.257-4279.258 [Reserved]
4279.259 Borrower responsibilities.
4279.260 Guarantee applications--general.
4279.261 Application for loan guarantee content.
4279.262-4279.264 [Reserved]
4279.265 Guarantee application evaluation.
4279.266-4279.278 [Reserved]
4279.279 Domestic lamb industry adjustments assistance program.
4279.280 Changes in borrowers.
4279.281 Conditions precedent to issuance of loan note guarantee.
4279.282-4279.289 [Reserved]
4279.290 Requirements after project construction.
4279.291-4279.300 [Reserved]
Subpart C--Biorefinery Assistance Loans
Sec. 4279.201 Purpose and scope.
The purpose and scope of this subpart is to provide financial
assistance for the development and construction of commercial-scale
biorefineries or for the retrofitting of existing facilities using
eligible technology for the development of advanced biofuels.
Sec. 4279.202 Compliance with Sec. Sec. 4279.1 through 4279.84.
Except as specified in paragraphs (a) through (l) of this section,
all loans guaranteed under this subpart shall comply with the
provisions found in Sec. Sec. 4279.1 through 4279.84 of this title.
(a) Definitions. The terms used in this subpart are defined in
either Sec. 4279.2 or in this paragraph. If a term is defined in both
Sec. 4279.2 and this paragraph, it will have, for purposes of this
subpart only, the meaning given in this section.
Advanced biofuel. Fuel derived from renewable biomass, other than
corn kernel starch, to include:
(i) Biofuel derived from cellulose, hemicellulose, or lignin;
(ii) Biofuel derived from sugar and starch (other than ethanol
derived from corn kernel starch);
(iii) Biofuel derived from waste material, including crop residue,
other vegetative waste material, animal waste, food waste, and yard
waste;
(iv) Diesel-equivalent fuel derived from renewable biomass,
including vegetable oil and animal fat;
(v) Biogas (including landfill gas and sewage waste treatment gas)
produced through the conversion of organic matter from renewable
biomass;
(vi) Butanol or other alcohols produced through the conversion of
organic matter from renewable biomass; and
(vii) Other fuel derived from cellulosic biomass.
Agricultural producer. An individual or entity directly engaged in
the production of agricultural products, including crops (including
farming); livestock (including ranching); forestry products;
hydroponics; nursery stock; or aquaculture, whereby 50 percent or
greater of their gross income is derived from the operations.
Association of agricultural producers. An organization that
represents agricultural producers and whose mission includes working on
behalf of such producers and the majority of whose membership and board
of directors is comprised of agricultural producers.
Biobased product. A product determined by the Secretary to be a
commercial or industrial product (other than food or feed) that is
either:
(i) Composed, in whole or in significant part, of biological
products, including renewable domestic agricultural materials and
forestry materials; or
(ii) An intermediate ingredient or feedstock.
Biofuel. A fuel derived from renewable biomass.
Biorefinery. A facility (including equipment and processes) that
converts renewable biomass into biofuels and biobased products and may
produce electricity.
Borrower. Any party that borrows or seeks to borrow money from the
lender, including any party or parties liable for the guaranteed loan
except guarantors.
Business plan. A comprehensive document that includes a clear
description of the borrower's ownership structure and management
experience, including, if applicable, discussion of a parent,
affiliates, and subsidiaries, and a discussion of how the borrower will
operate the proposed project, including, at a minimum, a description of
the business and project; the products and services to be provided; the
availability of the resources necessary to provide those products and
services; and pro forma financial statements for a period of 2 years,
including balance sheet, income and expense, and cash flows.
Byproduct. Any and all biobased products generated under normal
operations of the proposed project that can be reasonably measured and
monitored. Byproducts may or may not have a readily identifiable
commercial use or value.
Default. The condition that exists when a borrower is not in
compliance with the promissory note, the loan agreement, or other
related documents evidencing the loan.
Eligible project costs. Those expenses approved by the Agency for
the project.
Eligible technology. Eligible technology is defined as either:
(i) A technology that is being adopted in a viable commercial-scale
operation of a biorefinery that produces an advanced biofuel; or
(ii) A technology not described in paragraph (i) of this definition
that has been demonstrated to have technical and economic potential for
commercial
[[Page 8462]]
application in a biorefinery that produces an advanced biofuel.
Existing business. A business that has been in operation for at
least one full year. Businesses that have undergone mergers, changes in
the business name, changes in the legal type of entity, or expansions
of product lines are considered to be existing businesses as long as
there is not a significant change in operations.
Farm cooperative. A business owned and controlled by agricultural
producers that is incorporated, or otherwise recognized by the state in
which it operates, as a cooperatively operated business.
Farmer Cooperative Organization. An organization whose membership
is composed of farm cooperatives.
Feasibility study. An analysis by an independent qualified
consultant of the economic, market, technical, financial, and
management feasibility of a proposed project or business in terms of
its expectation for success.
Indian tribe. This term has the meaning as defined in 25 U.S.C.
450b.
Institution of higher education. This term has the meaning as
defined in 20 U.S.C. 1002(a).
Loan classification. The assigned score or metric reflecting the
lender's analysis of the degree of potential loss in the event of
default.
Local owner. An individual who owns any portion of an eligible
advanced biofuel biorefinery and whose primary residence is located
within in a certain distance from the biorefinery as specified by the
Agency in a Notice published in the Federal Register.
Market value. The amount for which a property will sell for its
highest and best use at a voluntary sale in an arm's length
transaction.
Material adverse change. Any change in the purpose of the loan, the
financial condition of the borrower, or the collateral that would
likely jeopardize loan performance.
Negligent loan origination. The failure of a lender to perform
those services that a reasonably prudent lender would perform in
originating its own portfolio of unguaranteed loans. The term includes
the concepts of failure to act, not acting in a timely manner, or
acting in a manner contrary to the manner in which a reasonably prudent
lender would act.
Off-take agreement. The terms and conditions governing the sale and
transportation of biofuels, biobased products, and electricity produced
by the borrower to another party.
Project. The facility or portion of a facility producing eligible
advanced biofuels and any eligible biobased product receiving funding
under this subpart.
Protective advances. Advances made by the lender for the purpose of
preserving and protecting the collateral where the debtor has failed
to, and will not or cannot, meet its obligations to protect or preserve
collateral.
Renewable biomass.
(i) Materials, pre-commercial thinnings, or invasive species from
National Forest System land or public lands (as defined in section 103
of the Federal Land Policy and Management Act of 1976 (43 U.S.C. 1702))
that:
(A) Are byproducts of preventive treatments that are removed to
reduce hazardous fuels; to reduce or contain disease or insect
infestation; or to restore ecosystem health;
(B) Would not otherwise be used for higher-value products; and
(C) Are harvested in accordance with applicable law and land
management plans and the requirements for old-growth maintenance,
restoration, and management direction of paragraphs (2), (3), and (4)
of subsection (e) of section 102 of the Healthy Forests Restoration Act
of 2003 (16 U.S.C. 6512) and large-tree retention of subsection (f) of
that section; or
(ii) Any organic matter that is available on a renewable or
recurring basis from non-Federal land or land belonging to an Indian or
Indian tribe that is held in trust by the United States or subject to a
restriction against alienation imposed by the United States, including:
(A) Renewable plant material, including feed grains; other
agricultural commodities; other plants and trees; and algae; and
(B) Waste material, including crop residue; other vegetative waste
material (including wood waste and wood residues); animal waste and
byproducts (including fats, oils, greases, and manure); and food waste
and yard waste.
Retrofitting. The modification of a building or equipment to
incorporate functions not included in the original design that allow
for the production of advanced biofuels.
Rural or rural area. Any area of a State not in a city or town that
has a population of more than 50,000 inhabitants, according to the
latest decennial census of the United States, or in the urbanized area
contiguous and adjacent to a city or town that has a population of more
than 50,000 inhabitants, and any area that has been determined to be
``rural in character'' by the Under Secretary for Rural Development, or
as otherwise identified in this definition.
(1) An area that is attached to the urbanized area of a city or
town with more than 50,000 inhabitants by a contiguous area of
urbanized census blocks that is not more than 2 census blocks wide.
Applicants from such an area should work with their Rural Development
State Office to request a determination of whether their project is
located in a rural area under this provision.
(2) For the purposes of this definition, cities and towns are
incorporated population centers with definite boundaries, local self
government, and legal powers set forth in a charter granted by the
State.
(3) For the Commonwealth of Puerto Rico, the island is considered
rural and eligible for Business Programs assistance, except for the San
Juan Census Designated Place (CDP) and any other CDP with greater than
50,000 inhabitants. CDPs with greater than 50,000 inhabitants, other
than the San Juan CDP, may be determined to be eligible if they are
``not urban in character.''
(4) For the State of Hawaii, all areas within the State are
considered rural and eligible for Business Programs assistance, except
for the Honolulu CDP within the County of Honolulu.
(5) For the purpose of defining a rural area in the Republic of
Palau, the Federated States of Micronesia, and the Republic of the
Marshall Islands, the Agency shall determine what constitutes rural and
rural area based on available population data.
(6) The determination that an area is ``rural in character'' will
be made by the Under Secretary of Rural Development. The process to
request a determination under this provision is outlined in paragraph
(6)(ii) of this definition.
(i) The determination that an area is ``rural in character'' under
this definition will apply to areas that are within:
(A) An urbanized area that has two points on its boundary that are
at least 40 miles apart, which is not contiguous or adjacent to a city
or town that has a population of greater than 150,000 inhabitants or
the urbanized area of such a city or town; or
(B) An urbanized area contiguous and adjacent to a city or town of
greater than 50,000 inhabitants that is within one-quarter mile of a
rural area.
(ii) Units of local government may petition the Under Secretary of
Rural Development for a ``rural in character'' designation by
submitting a petition to both the appropriate Rural Development State
Director and the Administrator on behalf of the Under Secretary. The
petition shall document how the area meets the requirements of
paragraph
[[Page 8463]]
(6)(i)(A) or (B) above and discuss why the petitioner believes the area
is ``rural in character,'' including, but not limited to, the area's
population density, demographics, and topography and how the local
economy is tied to a rural economic base. Upon receiving a petition,
the Under Secretary will consult with the applicable Governor or leader
in a similar position and request comments to be submitted within 5
business days, unless such comments were submitted with the petition.
The Under Secretary will release to the public a notice of a petition
filed by a unit of local government not later than 30 days after
receipt of the petition by way of publication in a local newspaper and
posting on the Agency's Web site, and the Under Secretary will make a
determination not less than 15 days, but no more than 60 days, after
the release of the notice. Upon a negative determination, the Under
Secretary will provide to the petitioner an opportunity to appeal a
determination to the Under Secretary, and the petitioner will have 10
business days to appeal the determination and provide further
information for consideration.
Semi-work scale. A manufacturing plant operating on a limited
commercial scale to provide final tests of a new product or process.
Startup business. A business that has been in operation for less
than one full year. Startup businesses include newly formed entities
leasing space or constructing facilities in a new market area, even if
the owners of the startup business own affiliated businesses doing the
same kind of business. Newly formed entities that are buying existing
businesses or facilities will be considered an existing business as
long as the business or facility being bought remains in operation and
there is no significant change in operations.
Tangible net worth. Tangible assets minus liabilities.
Technical and economic potential. A technology not described in
paragraph (i) of the definition of ``eligible technology'' is
considered to have demonstrated ``technical and economic potential''
for commercial application in a biorefinery that produces an advanced
biofuel if each of the following conditions is met:
(i) The advanced biofuel biorefinery's likely financial and
production success is evidenced in a thorough evaluation including, but
not limited to:
(A) Feedstocks;
(B) Process engineering;
(C) Siting;
(D) Technology;
(E) Energy production; and
(F) Financial and sensitivity review using a banking industry
software analysis program with appropriate industry standards.
(ii) The evaluation in paragraph (i) of this definition is
completed by an independent third-party expert in a feasibility study,
technical report, or other analysis, which must be satisfactory to the
Agency, that demonstrates the potential success of the project.
(iii) The advanced biofuel technology has successfully completed at
least a 12 -month (four seasons) operating cycle at semi-work scale.
Tier 1 capital. This term has the meaning given it under applicable
Federal Deposit Insurance Corporation regulations.
Tier 2 capital. This term has the meaning given it under applicable
Federal Deposit Insurance Corporation regulations.
Tier 1 leverage capital ratio. This term has the meaning given it
under applicable Federal Deposit Insurance Corporation regulations.
Tier 1 risk-based capital ratio. This term has the meaning given it
under applicable Federal Deposit Insurance Corporation regulations.
Total project costs. The sum of all costs associated with a
completed project.
Total qualifying capital. This term has the meaning given to it
under applicable Federal Deposit Insurance Corporation regulations.
Total risk-based capital ratio. This term has the meaning given it
under applicable Federal Deposit Insurance Corporation regulations.
Viable commercial-scale operation. An operation is considered to be
a viable commercial-scale operation if it demonstrates that:
(i) Its revenue will be sufficient to recover the full cost of the
project over the term of the loan and result in an anticipated annual
rate of return sufficient to encourage investors or lenders to provide
funding for the project;
(ii) It will be able to operate profitably without public and
private sector subsidies upon completion of construction (volumetric
excise tax is not included as a subsidy);
(iii) Contracts for feedstocks are adequate to address proposed
off-take from the biorefinery;
(iv) It has the ability to achieve market entry, suitable
infrastructure to transport the advanced biofuel to its market is
available, and the advanced biofuel technology and related products are
generally competitive in the market;
(v) It can be easily replicated and that replications can be sited
at multiple facilities across a wide geographic area based on the
proposed deployment plan; and
(vi) The advanced biofuel technology has at least a 12-month (four
seasons) successful operating history at semi-work scale, which
demonstrates the ability to operate at a commercial scale.
Working capital. Current assets available to support a business's
operations and growth. Working capital is calculated as current assets
less current liabilities.
(b) Exception authority. The exception authority provisions of this
paragraph apply to this subpart instead of those in Sec. 4279.15. The
Administrator may, with the concurrence of the Secretary of
Agriculture, make an exception, on a case-by-case basis, to any
requirement or provision of this subpart that is not inconsistent with
any authorizing statute or applicable law, if the Administrator
determines that application of the requirement or provision would
adversely affect the Federal government's interest.
(c) Lender eligibility requirements. The requirements specified in
Sec. 4279.29 do not apply to this subpart. Instead, a lender must meet
the requirements specified in paragraphs (c)(1) through (c)(5) of this
section in order to be approved for participation in this program.
(1) An eligible lender is any Federal or State chartered bank, Farm
Credit Bank, other Farm Credit System institution with direct lending
authority, and Bank for Cooperatives. These entities must be subject to
credit examination and supervision by either an agency of the United
States or a State. Credit unions subject to credit examination and
supervision by either the National Credit Union Administration or a
State agency, and insurance companies regulated by a State or National
insurance regulatory agency are also eligible lenders. The National
Rural Utilities Cooperative Finance Corporation is also an eligible
lender. Savings and loan associations, mortgage companies, and other
lenders as identified in 7 CFR 4279.29(b) are not eligible.
(2) The lender must demonstrate the minimum acceptable levels of
capital specified in paragraphs (c)(2)(i) through (c)(2)(iii) of this
section at the time of application and at time of issuance of the loan
note guarantee. This information may be identified in Call Reports and
Thrift Financial Reports. If the information is not identified in the
Call Reports or Thrift Financial Reports, the lender will be required
to calculate
[[Page 8464]]
its levels and provide them to the Agency.
(i) Total Risk-Based Capital ratio of 10 percent or higher;
(ii) Tier 1 Risk-Based Capital ratio of 6 percent or higher; and
(iii) Tier 1 Leverage Capital ratio of 5 percent or higher.
(3) The lender must not be debarred or suspended by the Federal
government.
(4) If the lender is under a cease and desist order from a Federal
agency, the lender must inform the Agency. The Agency will evaluate the
lender's eligibility on a case-by-case basis given the risk of loss
posed by the cease and desist order.
(5) The Agency, in its sole determination, will approve
applications for loan guarantees only from lenders with adequate
experience and expertise, from similar projects, to make, secure,
service, and collect loans approved under this subpart.
(d) Independent credit risk analysis. The Agency will require an
evaluation and credit rating of the total project's indebtedness,
without consideration for a government guarantee, from a nationally-
recognized rating agency for loans of $125,000,000 or more.
(e) Environmental responsibilities. The provisions of this
paragraph shall be used instead of the provisions specified in Sec.
4279.30(c) for determining a lender's environmental responsibilities
under this subpart. Lenders have a responsibility to become familiar
with Federal environmental requirements; to consider at the earliest
planning stages, in consultation with the prospective borrower, the
potential environmental impacts of their proposals; and to develop
proposals that minimize the potential to adversely impact the
environment.
(1) Lenders must alert the Agency to any controversial
environmental issues related to a proposed project or items that may
require extensive environmental review.
(2) Lenders must help the borrower prepare Form RD 1940-20,
``Request for Environmental Information,'' (when required by 7 CFR part
1940, subpart G, or successor regulations); assist in the collection of
additional data when the Agency needs such data to complete its
environmental review of the proposal; and assist in the resolution of
environmental problems.
(3) Lenders must ensure that the borrower has:
(i) Provided the necessary environmental information to enable the
Agency to undertake its environmental review process in accordance with
7 CFR part 1940, subpart G, or successor regulations, including the
provision of all required Federal, State, and local permits;
(ii) Complied with any mitigation measures required by the Agency;
and
(iii) Not taken any actions or incurred any obligations with
respect to the proposed project that will either limit the range of
alternatives to be considered during the Agency's environmental review
process or which will have an adverse effect on the environment.
(f) Additional lender functions and responsibilities. In addition
to the requirements in Sec. 4279.30, the requirements specified in
paragraphs (f)(1) through (f)(3) apply.
(1) Any action or inaction on the part of the Agency does not
relieve the lender of its responsibilities to originate and service the
loan guaranteed under this subpart.
(2) The lender must compile a complete application for each
guaranteed loan and maintain such application in its files for at least
3 years after the final loss has been paid.
(3) The lender must report to the Agency all conflicts of interest
and appearances of conflicts of interest.
(g) Certified lender program. Section 4279.43 does not apply to
this subpart.
(h) Oversight and monitoring. In addition to complying with
requirements specified in Sec. 4279.44, the lender will cooperate
fully with Agency oversight and monitoring of all lenders involved in
any manner with any guarantee under the Biorefinery Assistance program
to ensure compliance with this subpart. Such oversight and monitoring
will include, but is not limited to, reviewing lender records and
meeting with lenders (in accordance with Sec. 4287.107(c)).
(i) Conditions of guarantee. All loan guarantees under this subpart
are subject to the provisions of Sec. 4279.72, except for Sec.
4279.72(b), and the provisions specified in paragraphs (i)(1) through
(i)(5) of this section.
(1) The entire loan, the guaranteed and unguaranteed portions, must
be secured by a first lien on all collateral necessary to run the
project. The Agency may consider a subordinate lien position on
inventory and accounts receivable for working capital loans provided:
The Agency determines the working capital is necessary for the
operation; with the subordination, the Agency remains adequately
secured; and the subordination is in the best interests of the
Government.
(2) The holder of a guaranteed portion shall have all rights of
payment, as defined in the loan note guarantee, to the extent of the
portion purchased. Even if all or a portion of the loan note guarantee
has been sold to a holder, the lender will remain bound by all
obligations under the loan note guarantee, Lender's Agreement, and
Agency program regulations.
(3) The lender must be shown as an additional insured on insurance
policies (or other risk sharing instruments) that benefit the project
and must be able to assume any contracts that are material to running
the project, including any feedstock or off-take agreements, as may be
applicable.
(4) If a lender does not satisfactorily comply with the provision
found in Sec. 4279.256(c) and such failure leads to losses, then such
losses may not be recoverable under the guarantee.
(5) When a guaranteed portion of a loan is sold to a holder, the
holder shall succeed to all rights of the lender under the Loan Note
Guarantee to the extent of the portion purchased. The lender will
remain bound to all obligations under the Loan Note Guarantee, Lender's
Agreement, and the Agency program regulations. A guarantee and right to
require purchase will be directly enforceable by a holder
notwithstanding any fraud or misrepresentation by the lender or any
unenforceability of the guarantee by the lender, except for fraud or
misrepresentation of which the holder had actual knowledge at the time
it became the holder or in which the holder participates or condones.
The lender will reimburse the Agency for any payments the Agency makes
to a holder of lender's guaranteed loan that, under the Loan Note
Guarantee, would not have been paid to the lender had the lender
retained the entire interest in the guaranteed loan and not conveyed an
interest to a holder.
(j) Sale or assignment of guaranteed loan. The provisions of Sec.
4279.75 apply to this subpart.
(k) Minimum retention. The provisions of Sec. 4279.77 apply to
this subpart, except that the lender is required to hold in its own
portfolio a minimum of 7.5 percent of the total loan amount.
(l) Replacement of document. Documents must be replaced in
accordance with Sec. 4279.84, except, in Sec. 4279.84(b)(1)(v), a
full statement of the circumstances of any defacement or mutilation of
the Loan Note Guarantee or Assignment Guarantee Agreement would also
need to be provided.
Sec. Sec. 4279.203-4279.223 [Reserved]
Sec. 4279.224 Loan processing.
Processing of Biorefinery Assistance Guaranteed loans under this
subpart shall comply with the provisions found
[[Page 8465]]
in Sec. Sec. 4279.107 through 4279.187 of this chapter, except as
provided in the following sections.
Sec. 4279.225 Ineligible loan purposes.
For the purposes of this subpart, the ineligible purposes
identified in Sec. 4279.114(b), (c), and (p) do not apply to this
subpart.
Sec. 4279.226 Fees.
Fees will be determined according to the provisions of this section
in lieu of Sec. 4279.107.
(a) Guarantee fee. The guarantee fee will be paid to the Agency by
the lender and is nonrefundable. The fee may be passed on to the
borrower. Issuance of the Loan Note Guarantee is conditioned on payment
of the guarantee fee by closing. The guarantee fee will be the
percentage specified in paragraphs (a)(1) or (a)(2) of this section, as
applicable, unless otherwise specified by the Agency in a notice
published in the Federal Register, multiplied by the principal loan
amount multiplied by the percent of guarantee and will be paid one time
only at the time the Loan Note Guarantee is issued.
(1) For loans receiving a 90 percent guarantee, the guarantee fee
is three percent.
(2) For loans receiving less than a 90 percent guarantee, the
guarantee fee is:
(i) Two percent for guarantees on loans greater than 75 percent of
total project costs.
(ii) One and one-half percent for guarantees on loans of greater
than 65 percent but less than or equal to 75 percent of total project
costs.
(iii) One percent for guarantees on loans of 65 percent or less of
total project costs.
(b) Annual renewal fee. The annual renewal fee, which may be passed
on to the borrower, will be paid to the Agency for as long as the
guaranteed loan is outstanding and is payable during the construction
period. Unless otherwise specified by the Agency in a notice published
in the Federal Register, the annual renewal fee shall be as follows:
(1) One hundred basis points (1 percent) for guarantees on loans
that were originally greater than 75 percent of total project costs.
(2) Seventy five basis points (0.75 percent) for guarantees on
loans that were originally greater than 65 percent but less than or
equal to 75 percent of total project costs.
(3) Fifty basis points (0.50 percent) for guarantees on loans that
were originally for 65 percent or less of total project costs.
Sec. 4279.227 Borrower eligibility.
Borrower eligibility will be determined according to the provisions
of this section in lieu of Sec. 4279.108.
(a) Eligible entities. To be eligible, a borrower must meet the
requirements specified in paragraphs (a)(1) and (a)(2) of this section,
as applicable.
(1) Type of borrower. The borrower must be one of the following:
(i) An individual;
(ii) An entity;
(iii) An Indian tribe;
(iv) A unit of State or local government;
(v) A corporation;
(vi) A farm cooperative;
(vii) A farmer cooperative organization;
(viii) An association of agricultural producers;
(ix) A National Laboratory;
(x) An institution of higher education;
(xi) A rural electric cooperative;
(xii) A public power entity; or
(xiii) A consortium of any of the above entities.
(2) Legal authority and responsibility. Each borrower must have, or
obtain before loan closing, the legal authority necessary to construct,
operate, and maintain the proposed facility and services and to obtain,
give security for, and repay the proposed loan.
(b) Ineligible entities. A borrower will be considered ineligible
for a guarantee if the borrower, any owner with more than 20 percent
ownership interest in the borrower, or any owner with more than 3
percent ownership interest in the borrower if there is no owner with
more than 20 percent ownership interest in the borrower:
(1) Has an outstanding judgment obtained by the U.S. in a Federal
Court (other than U.S. Tax Court),
(2) Is delinquent on the payment of Federal income taxes,
(3) Is delinquent on a Federal debt, or
(4) Is debarred or suspended from receiving Federal assistance.
Sec. 4279.228 Project eligibility.
In lieu of the requirements specified in Sec. 4279.113, to be
eligible for a guaranteed loan under this subpart, at a minimum, a
borrower and project, as applicable, must meet each of the requirements
specified in paragraphs (a) through (g) of this section.
(a) The project must be located in a State, as defined in Sec.
4279.2.
(b) The project must be for either:
(1) The development and construction of commercial-scale
biorefineries using eligible technology or
(2) The retrofitting of existing facilities, including, but not
limited to, wood products facilities and sugar mills, with eligible
technology.
(c) The project must use an eligible feedstock for the production
of advanced biofuels and biobased products. Eligible feedstocks
include, but are not limited to, renewable biomass, including municipal
solid waste consisting of renewable biomass, biosolids, treated sewage
sludge, and byproducts of the pulp and paper industry. For the purposes
of this subpart, recycled paper is not an eligible feedstock.
(d) The majority of the biorefinery production must be an advanced
biofuel. Unless otherwise approved by the Agency, and determined to be
in the best financial interest of the government, the advanced biofuel
must be sold as a biofuel. The following will be considered in
determining what constitutes the majority of production:
(1) When the biorefinery produces a biobased product and, if
applicable, byproduct that has an established BTU content from a
recognized Federal source, majority biofuel production will be based on
BTU content of the advanced biofuel, the biobased product, and, if
applicable, the byproduct, or
(2) When the biorefinery produces a biobased product or, if
applicable, byproduct that does not have an established BTU content,
then majority biofuel production will be based on output volume, using
parameters announced by the Agency in periodic Notices in the Federal
Register, of the advanced biofuel, the biobased product, and, if
applicable, the byproduct.
(e) An advanced biofuel that is converted to another form of energy
for sale will still be considered an advanced biofuel.
(f) The project must provide funds (e.g., cash, subordinate
financing, non-federal grant) of not less than 20 percent of eligible
project costs. All projects must meet the equity requirements specified
in Sec. 4279.234(c)(1).
(g) The Agency will consider refinancing only under either of the
two conditions specified in paragraphs (g)(1) and (g)(2) of this
section.
(1) Permanent financing used to refinance interim construction
financing of the proposed project only if the application for the
guaranteed loan under this subpart was approved prior to closing the
interim loan for the construction of the facility.
(2) Refinancing that is no more than 20 percent of the loan for
which the Agency is guaranteeing and the purpose of the refinance is to
enable the Agency to establish a first lien position with respect to
pre-existing collateral subject to a pre-existing lien and the
refinancing would be in the best financial interests of the Federal
Government.
[[Page 8466]]
Sec. 4279.229 Guaranteed loan funding.
Instead of the provisions found in Sec. 4279.119, the provisions
of this section apply to loans guaranteed under this subpart.
(a) In administering this program's budgetary authority each fiscal
year, the Agency will allocate up to, but no more, than 50 percent of
its budgetary authority to fund applications received by the end of the
first application window, including those carried over from the
previous application period. Any funds not obligated to support
applications submitted by the end of the first application window will
be available to support applications received by the end of the second
window, including those carried over from the previous application
period. The Agency, therefore, will have a minimum of 50 percent of
each fiscal year's budgetary authority for this program available to
support applications received by the end of the second application
window.
(b) The amount of a loan guaranteed for a project under this
subpart will not exceed 80 percent of total eligible project costs.
Total Federal participation will not exceed 80 percent of total
eligible project costs. The borrower needs to provide the remaining 20
percent from other non-Federal sources to complete the project.
Eligible project costs are specified in paragraph (e) of this section.
(c) The maximum principal amount of a loan guaranteed under this
subpart is $250 million to one borrower; there is no minimum amount. If
an eligible borrower receives other direct Federal funding (i.e.,
direct loans and grants) for a project, the amount of the loan that the
Agency will guarantee under this subpart must be reduced by the same
amount of the other direct Federal funding that the eligible borrower
received for the project. For example, an eligible borrower is applying
for a loan guarantee on a $1 million project. The borrower provides the
minimum matching requirement of 20 percent, or $200,000. This leaves
$800,000 in other funding needed to implement the project. If the
borrower receives no other direct Federal funding for this project and
requests a guarantee for the $800,000, the Agency will consider a
guarantee on the $800,000. However, if this borrower receives $100,000
in other direct Federal funding for this project, the Agency will only
consider a guarantee on $700,000.
(d) The maximum guarantee on the principal and interest due on a
loan guaranteed under this subpart will be determined as specified in
paragraphs (d)(1) through (d)(4) of this section.
(1) If the loan amount is equal to or less than $125 million, 80
percent for the entire loan amount unless all of the conditions
specified in paragraphs (d)(1)(i) through (d)(1)(iii) of this section
are met, in which case 90 percent for the entire loan amount.
(i) Equity of 40 percent, excluding qualified intellectual
property;
(ii) Feedstock and off-take contracts of at least 1 year in
duration; and
(iii) Collateral coverage ratio, total discounted collateral value
divided by total loan request, exceeding 1.5 to 1.
(2) If the loan amount is more than $125 million and less than $150
million, 80 percent for the entire loan amount.
(3) If the loan amount is equal to or more than $150 million but
less than $200 million, 70 percent on the entire loan amount.
(4) If the loan amount is $200 million up to and including $250
million, 60 percent on the entire loan amount.
(e) Eligible project costs are only those costs associated with the
items listed in paragraphs (e)(1) through (e)(7) of this section, as
long as the items are an integral and necessary part of the total
project, as determined by the Agency.
(1) Purchase and installation of equipment (new, refurbished, or
remanufactured), except agricultural tillage equipment, used equipment,
and vehicles.
(2) Construction or retrofitting.
(3) Permit and license fees.
(4) Working capital.
(5) Land acquisition.
(6) Cost of financing, excluding guarantee and renewal fees.
(7) Any other item identified by the Agency in a notice published
in the Federal Register.
(f) Loans made with the proceeds of any obligation the interest on
which is excludable from income under the Internal Revenue Code are
ineligible. Funds generated through the issuance of tax-exempt
obligations cannot be used to purchase the guaranteed portion of any
Agency guaranteed loan and an Agency guaranteed loan cannot serve as
collateral for a tax-exempt issue. The Agency may guarantee a loan with
respect to a project at a facility that has received, or will receive,
tax-exempt financing only when the guaranteed loan funds are used to
finance a project that is separate and distinct from the activities at
the facility that have been or will be financed by the tax-exempt
obligation, and the guaranteed loan has at least a parity security
position with the tax-exempt obligation.
Sec. 4279.230 [Reserved]
Sec. 4279.231 Interest rates.
The provisions found in Sec. 4279.125 apply to loans guaranteed
under this subpart, except as provided in paragraphs (a) through (c) of
this section. Lenders are encouraged to pass interest-rate savings
realized through the secondary market on to the borrower.
(a) The rate on the unguaranteed portion of the loan shall not
exceed the rate on the guaranteed portion of the loan by more than 500
basis points;
(b) Variable rate loans will not provide for negative amortization
nor will they give the borrower the ability to choose its payment among
various options.
(c) Both the guaranteed and unguaranteed portions of the loan must
be amortized over the same term, as provided in Sec. 4279.232(a).
Sec. 4279.232 Terms of loan.
Instead of the provisions found in Sec. 4279.126, the provisions
of this section apply to loans guaranteed under this subpart, except as
provided in Sec. 4279.232(e).
(a) The repayment term for a loan under this subpart will be for a
maximum period of 20 years or the useful life of the project, as
determined by the lender and confirmed by the Agency, whichever is
less. The length of the loan term shall be the same for both the
guaranteed and unguaranteed portions of the loan.
(b) Guarantees shall be provided only after consideration is given
to the borrower's overall credit quality and to the terms and
conditions of any applicable subsidies, tax credits, and other such
incentives.
(c) All loans guaranteed under this subpart must be financially
sound and feasible, with reasonable assurance of repayment.
(d) A loan's maturity will take into consideration the use of
proceeds, the useful life of assets being financed, and the borrower's
ability to repay the loan.
(e) Repayment of the loan shall be in accordance with Sec.
4279.125(a) and Sec. 4279.126(b) and (c).
Sec. 4279.233 [Reserved]
Sec. 4279.234 Credit evaluation.
Instead of the provisions found in Sec. 4279.131, the provisions
of this section apply to loans guaranteed under this subpart. For all
applications for guarantee, the lender must prepare a credit
evaluation. An acceptable credit evaluation must:
(a) Use credit documentation procedures and an underwriting process
[[Page 8467]]
that are consistent with generally accepted commercial lending
practices, and
(b) Include an analysis of the credit factors associated with each
guarantee application, including consideration of each of the following
five elements.
(1) Credit worthiness. Those financial qualities that generally
make the borrower more likely to meet its obligations as demonstrated
by its credit history.
(2) Cash flow. A borrower's ability to produce sufficient cash to
repay the loan as agreed.
(3) Capital. The financial resources that the borrower currently
has and those it is likely to have when payments are due. The borrower
must be adequately capitalized.
(4) Collateral. The assets pledged by the borrower in support of
the loan, including processing technology owned by the borrower and
excluding assets acquired with other Federal funds. Collateral must
have documented value sufficient to protect the interest of the lender
and the Agency, and the discounted collateral value must be at least
equal to the loan amount. Lenders will discount collateral consistent
with sound loan-to-value policy. The Agency may consider the value of
qualified intellectual property, as defined in Sec. 4279.2, arrived at
in accordance with GAAP standards. The value of the intellectual
property may not exceed 30 percent of the total value of all
collateral.
(i) If there is an established market for the intellectual
property, the value of the intellectual property will be valued
according to the lender's standard discounting practice for
intellectual property for determining adequacy of collateral.
(ii) If there is no established market for the intellectual
property, the value of the intellectual property will be valued not
greater than 25 percent, as determined by the Agency, for determining
adequacy of collateral.
(5) Conditions. The general business environment and status of the
borrower's industry.
(c) When determining the credit quality of the borrower, the lender
must include the following in its analysis:
(1) The borrower shall demonstrate that it will be able to provide
equity in the project of not less than 20 percent of eligible project
costs at the time the loan is closed. For existing biorefineries, the
fair market value of project equity (including the guaranteed loan
being applied for) in real property and equipment and the value of
qualified intellectual property based on the audited financial
statements in accordance with Generally Accepted Accounting Principles
may be substituted in whole or in part to meet the equity requirement.
However, the appraisal completed to establish the fair market value of
the real property and equipment must not be more than 1 year old. The
Agency may require the lender to provide a more recent appraisal in
order to reflect current market conditions. The appraisal used to
establish fair market value of the real property and equipment must
conform to the requirements of Sec. 4279.244. Otherwise, equity must
be in the form of cash and cannot include other direct Federal funding
(i.e., loans and grants).
(2) The credit analysis must also include spreadsheets of the
balance sheets and income statements of the borrower for the 3 previous
years (for existing businesses), pro forma balance sheets at startup,
and projected yearend balance sheets and income statements for a period
of not less than 3 years of stabilized operation, with appropriate
ratios and comparisons with industrial standards (such as Dun &
Bradstreet or Robert Morris Associates) to the extent industrial
standards are available.
(3) All data must be shown in total dollars and also in common size
form, obtained by expressing all balance sheet items as a percentage of
assets and all income and expense items as a percentage of sales.
Sec. Sec. 4279.235-4279.236 [Reserved]
Sec. 4279.237 Financial statements.
The provisions of Sec. 4279.137 do not apply to this subpart.
Instead, the submittal of financial statements with the loan guarantee
application must meet the requirements specified in Sec. 4279.261(c).
Sec. Sec. 4279.238-4279.243 [Reserved]
Sec. 4279.244 Appraisals.
All appraisals must be in accordance with Sec. 4279.144 and each
appraisal must be a complete, self-contained appraisal. Lenders must
complete at least a Transaction Screen Questionnaire for any
undeveloped sites and a Phase I Environmental Site Assessment on
existing business sites in accordance with ASTM International
Standards, which should be provided to the appraiser for completion of
the self-contained appraisal. Specialized appraisers will be required
to complete appraisals under this section. The Agency may approve a
waiver of this requirement only if a specialized appraiser does not
exist in a specific industry or hiring one will cause an undue
financial burden to the borrower.
Sec. Sec. 4279.245-4279.249 [Reserved]
Sec. 4279.250 Feasibility studies.
The provisions of Sec. 4279.150 do not apply to this subpart.
Instead, feasibility studies must meet the requirements specified in
Sec. 4279.261(f).
Sec. Sec. 4279.251-4279.254 [Reserved]
Sec. 4279.255 Loan priorities.
The provisions of Sec. 4279.155 do not apply to this subpart.
Sec. 4279.256 Construction planning and performing development.
The lender must comply with Sec. 4279.156(a) through (c), except
as otherwise provided in paragraphs (a) through (f) of this section.
(a) Architectural and engineering practices. Under paragraph Sec.
4279.156(a), the lender must also ensure that all project facilities
are designed utilizing accepted architectural and engineering practices
that conform to the requirements of this subpart.
(b) Onsite inspector. The lender must provide an onsite project
inspector.
(c) Changes and cost overruns. The borrower shall be responsible
for any changes or cost overruns. If any such change or cost overrun
occurs, then any change order must be expressly approved by the Agency,
which approval shall not be unreasonably withheld, and neither the
lender nor borrower will divert funds from purposes identified in the
guaranteed loan application approved by the Agency to pay for any such
change or cost overrun without the express written approval of the
Agency. In no event will the current loan be modified or a subsequent
guaranteed loan be approved to cover any such changes or costs. In the
event of any of the aforementioned increases in cost or expenses, the
borrower must provide for such increases in a manner that does not
diminish the borrower's operating capital. Failure to comply with the
terms of this paragraph will be considered a material adverse change in
the borrower's financial condition, and the lender must address this
matter, in writing, to the Agency's satisfaction.
(d) New draw certifications. The following three certifications are
required for each new draw:
(1) Certification by the project engineer to the lender that the
work referred to in the draw has been successfully completed;
(2) Certification from the lender that all debts have been paid and
all mechanics' liens have been waived; and
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(3) Certification from the lender that the borrower is complying
with the Davis-Bacon Act.
(e) Surety. Surety, as the term is commonly used in the industry,
will be required in cases when the guarantee will be issued prior to
completion of construction unless the contractor will receive a lump
sum payment at the end of work. Surety will be made a part of the
contract if the borrower requests it or if the contractor requests
partial payments for construction work. In such cases where no surety
is provided and the project involves pre-commercial technology,
technology that is first of its type in the U.S., or new designs
without sufficient operating hours to prove their merit, a latent
defects bond may be required by the Agency to cover the work.
(f) Reporting during construction. During the construction of the
project, lenders shall submit quarterly construction progress reports
to the Agency. These reports must contain, at a minimum, planned and
completed construction milestones, loan advances, and personnel hiring,
training, and retention. This requirement applies to both the
development and construction of commercial-scale biorefineries and to
the retrofitting of existing facilities using eligible technology for
the development of advanced biofuels. The lender must expeditiously
report any problems in project development to the Agency.
Sec. Sec. 4279.257-4279.258 [Reserved]
Sec. 4279.259 Borrower responsibilities.
(a) Federal, State, and local regulations. Borrowers must comply
with all Federal, State, and local laws and rules that are in existence
and that affect the project including, but not limited to:
(1) Land use zoning;
(2) Health, safety, and sanitation standards as well as design and
installation standards; and
(3) Protection of the environment and consumer affairs.
(b) Permits, agreements, and licenses. Borrowers must obtain all
permits, agreements, and licenses that are applicable to the project.
(c) Insurance. The borrower is responsible for maintaining all
hazard, flood, liability, worker compensation, and personal life
insurance, when required, on the project.
(d) Access to borrower's records. Except as provided by law, upon
request by the Agency, the borrower will permit representatives of the
Agency (or other Federal agencies as authorized by the Agency) to
inspect and make copies of any of the records of the borrower
pertaining to any Agency-guaranteed loan. Such inspection and copying
may be made during regular office hours of the borrower or at any other
time agreed upon between the borrower and the Agency.
(e) Access to the project. The borrower must allow the Agency
access to the project and its performance information until the loan is
repaid in full and permit periodic inspections of the project by a
representative of the Agency.
Sec. 4279.260 Guarantee applications--general.
Unless otherwise noted, the provisions of Sec. 4279.161 do not
apply to this subpart. Instead, the application provisions of this
section and Sec. 4279.261 apply to the preparation of Biorefinery
Assistance Guaranteed loan applications.
(a) Application submittal. For each guarantee request, the lender
must submit to the Agency an application that is in conformance with
Sec. 4279.261. The methods of application submittal will be specified
in the annual Federal Register notice.
(b) Application deadline. Unless otherwise specified by the Agency
in a notice published in the Federal Register, complete applications
must be received by the Agency on or before May 1 of each year to be
considered for funding for that fiscal year. If the application
deadline falls on a weekend or a Federally observed holiday, the
deadline will be the next Federal business day.
(c) Incomplete applications. Incomplete applications will be
rejected. Lenders will be informed of the elements that made the
application incomplete. If a resubmitted application is received by the
applicable application deadline, the Agency will reconsider the
application.
(d) Application withdrawal. During the period between the
submission of an application and the execution of documents, the lender
must notify the Agency, in writing, if the project is no longer viable
or the borrower is no longer requesting financial assistance for the
project. When the lender so notifies the Agency, the selection will be
rescinded or the application withdrawn.
Sec. 4279.261 Application for loan guarantee content.
Approved lenders must submit an Agency-approved application form
for each loan guarantee sought under this subpart. Loan guarantee
applications from approved lenders must contain the information
specified in paragraphs (a) through (n) of this section, organized
pursuant to a table of contents in a chapter format, and in paragraph
(o) of this section as applicable.
(a) Project Summary. Provide a concise summary of the proposed
project and application information, project purpose and need, and
project goals, including the following:
(1) Title. Provide a descriptive title of the project.
(2) Borrower eligibility. Describe how the borrower meets the
eligibility criteria identified in Sec. 4279.227.
(3) Project eligibility. Describe how the project meets the
eligibility criteria identified in paragraph (c) of this section.
Clearly state whether the application is for the construction and
development of a biorefinery or for the retrofitting of an existing
facility. Provide results from demonstration or pilot facilities that
prove that the technology proposed to be used meets the definition of
eligible technology. Additional project description information will be
needed later in the application process.
(4) Matching funds. Submit a spreadsheet identifying sources,
amounts, and availability of matching funds. The spreadsheet must also
include a directory of matching funds source contact information.
Attach any applications, correspondence, or other written communication
between borrower and matching fund source.
(b) Lender's analysis and credit evaluation. This analysis shall
conform to Sec. 4279.232(b) and shall include:
(1) A summary of the technology to be used in the project;
(2) The viability of such technology for the particular project
application;
(3) The development type (e.g., installation, construction,
retrofit);
(4) The credit reports of the borrower, its principals, and any
parent, affiliate, or subsidiary as follows:
(i) A personal credit report from an Agency-approved credit
reporting company for individuals who are key employees of the
borrower, as determined by the Agency, and for individuals owning 20
percent or more interest in the borrower or any owner with more than 10
percent ownership interest in the borrower if there is no owner with
more than 20 percent ownership interest in the borrower, except for
when the borrower is a corporation listed on a major stock exchange
unless otherwise determined by the Agency; and
(ii) Commercial credit reports on the borrower and any parent,
affiliate, and subsidiary firms;
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(5) The credit analysis specified in Sec. 4279.232(b);
(6) For loans of $125 million or more, an evaluation and credit
rating of the total project's indebtedness, without consideration for a
government guarantee, from a nationally-recognized rating agency; and
(7) Whether the loan note guarantee is requested prior to
construction or after completion of construction of the project.
(c) Financial statements. Financial statements as follows:
(1) For businesses that have been in existence for one or more
years,
(i) The most recent audited financial statements of the borrower if
the guaranteed loan is $3 million or more, unless alternative financial
statements are authorized by the Agency; or
(ii) The most recent audited or Agency-acceptable financial
statements of the borrower if the guaranteed loan is less than $3
million.
(2) For businesses that have been in existence for less than one
year, the most recent Agency-authorized financial statements of the
borrower regardless of the amount of the guaranteed loan request.
(3) For all businesses, a current (not more than 90 days old)
balance sheet; a pro forma balance sheet at startup; and projected
balance sheets, income and expense statements, and cash flow statements
for a period of not less than 3 years of stabilized operation.
Projections should be supported by a list of assumptions showing the
basis for the projections.
(4) Depending on the complexity of the project and the financial
condition of the borrower, the Agency may request additional financial
statements and additional related information.
(d) Environmental information. Environmental information required
by the Agency to conduct its environmental reviews (as specified in
Exhibit H of 7 CFR part 1940, subpart G).
(e) Appraisals. An appraisal conducted as specified under Sec.
4279.244.
(f) Feasibility study. Elements in an acceptable feasibility study
include, but are not limited to, the elements outlined in Table 1. In
addition, as part of the feasibility study, a technical assessment of
the project is required, as specified in paragraph (h) of this section.
Table 1--Feasibility Study Components
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(A) Executive Summary:
Introduction/Project Overview (Brief general overview of project
location, size, etc.).
Economic feasibility determination.
Market feasibility determination.
Technical feasibility determination.
Financial feasibility determination.
Management feasibility determination.
Recommendations for implementation.
(B) Economic Feasibility:
Information regarding project site;
Availability of trained or trainable labor;
Availability of infrastructure, including utilities, and rail, air
and road service to the site.
Feedstock:
Feedstock source management;
Estimates of feedstock volumes and costs;
Collection, Pre-Treatment, Transportation, and Storage; and
Feedstock risks.
Documentation that woody biomass feedstock from National Forest
system lands or public lands cannot be used for a higher-value
product.
Impacts on existing manufacturing plants or other facilities that
use similar feedstock if the borrower's proposed biofuel production
technology is adopted.
Projected impact on resource conservation, public health, and the
environment.
Detailed analysis of project costs including:
Project management and professional services;
Resource assessment;
Project design and permitting;
Land agreements and site preparation;
Equipment requirements and system installation;
Startup and shakedown; and
Warranties, insurance, financing, and operation and maintenance
costs.
Overall economic impact of the project, including any additional
markets created for agricultural and forestry products and
agricultural waste material and the potential for rural economic
development.
Feasibility/plans of project to work with producer associations or
cooperatives, including estimated amount of annual feedstock,
biofuel, and byproduct purchased from or sold to producer
associations and cooperatives.
(C) Market Feasibility:
Information on the sales organization and management;
Nature and extent of market and market area;
Marketing plans for sale of projected output--principal products and
byproducts;
Extent of competition, including other similar facilities in the
market area;
Commitments from customers or brokers--principal products and
byproducts.
Risks related to the Advanced Biofuel industry, including
Industry status;
Specific market risks; and
Competitive threats and advantages.
(D) Technical Feasibility:
Suitability of the selected site for the intended use.
Scale of development for which the process technology has been
proven (i.e., lab or bench, pilot, demonstration, or semi-work
scale).
Specific volume of the process (expressed either as volume of
feedstock processed [tons per unit of time] or as product [gallons
per unit of time]).
Identification and estimation of project operation and development
costs. Specify the level of accuracy of these estimates and the
assumptions on which these estimates have been based.
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Ability of the proposed system to be commercially replicated.
Risks related to:
Construction of the Biorefinery;
Advanced Biofuel production;
Regulation and governmental action; and
Design-related factors that may affect project success.
(E) Financial Feasibility:
Reliability of the financial projections and the assumptions on
which the financial statements are based, including all sources and
uses of project capital, private or public, such as Federal funds.
Provide detailed analysis and description of projected balance
sheets, income and expense statements, and cash flow statements
over the useful life of the project.
A detailed description of:
Investment incentives;
Productivity incentives;
Loans and grants; and
Other project authorities and subsidies that affect the project.
Any constraints or limitations in the financial projections.
Ability of the business to achieve the projected income and cash
flow.
Assessment of the cost accounting system.
Availability of short-term credit or other means to meet seasonal
business costs.
Adequacy of raw materials and supplies.
Sensitivity analysis, including feedstock and energy costs and
product and byproduct prices.
Risks related to:
The project;
Borrower financing plan;
The operational units; and
Tax issues.
(F) Management Feasibility:
Borrower and/or management's previous experience concerning:
Biofuel production;
Acquisition of feedstock;
Marketing and sale of off-take; and
The receipt of Federal financial assistance, including amount of
funding, date received, purpose, and outcome.
Management plan for procurement of feedstock and labor, marketing of
the off-take, and management succession.
Risks related to:
Borrower as a company (e.g., development-stage);
Conflicts of interest; and
Management strengths and weaknesses.
(G) Qualifications:
A resume or statement of qualifications of the author of the
feasibility study, including prior experience, must be submitted.
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(g) Business plan. The lender must submit a business plan that
includes the information specified in paragraphs (g)(1) through (g)(10)
of this section. Any or all of this information may be omitted if it is
included in the feasibility study specified in paragraph (f) of this
section.
(1) The borrower's experience;
(2) The borrower's succession planning, addressing both ownership
and management;
(3) The names and a description of the relationship of the
borrower's parent, affiliates, and subsidiaries;
(4) The borrower's business strategy;
(5) Possible vendors and models of major system components;
(6) The availability of the resources (e.g., labor, raw materials,
supplies) necessary to provide the planned products and services;
(7) Site location and its relation to product distribution (e.g.,
rail lines or highways) and any land use or other permits necessary to
operate the facility;
(8) The market for the product and its competition, including any
and all competitive threats and advantages;
(9) Projected balance sheets, income and expense statements, and
cash flow statements for a period of not less than 3 years of
stabilized operation; and
(10) A description of the proposed use of funds.
(h) Technical Assessment. As part of the feasibility study required
under paragraph (f) of this section, a detailed technical assessment is
required for each project. The technical assessment must demonstrate
that the design, procurement, installation, startup, operation and
maintenance of the project will permit it to operate or perform as
specified over its useful life in a reliable and a cost effective
manner, and must identify what the useful life of the project is. The
technical assessment must also identify all necessary project
agreements, demonstrate that those agreements will be in place at or
before the time of loan closing, and demonstrate that necessary project
equipment and services will be available over the useful life of the
project. The technical assessment must be based upon verifiable data
and contain sufficient information and analysis so that a determination
can be made on the technical feasibility of achieving the levels of
income or production that are projected in the financial statements.
All technical information provided must follow the format specified in
paragraphs (h)(1) through (h)(9) of this section. Supporting
information may be submitted in other formats. Design drawings and
process flow charts are required as exhibits. A discussion of a topic
identified in paragraphs (h)(1) through (h)(9) of this section is not
necessary if the topic is not applicable to the specific project.
Questions identified in the Agency's technical review of the project
must be answered to the Agency's satisfaction before the application
will be approved. All projects require the services of an independent,
third-party professional engineer.
(1) Qualifications of project team. The project team will vary
according to the complexity and scale of the project. The project team
must have demonstrated expertise in similar advanced biofuel technology
development, engineering,
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installation, and maintenance. Authoritative evidence that project team
service providers have the necessary professional credentials or
relevant experience to perform the required services for the
development, construction, and retrofitting, as applicable, of
technology for producing advanced biofuels must be provided. In
addition, authoritative evidence that vendors of proprietary components
can provide necessary equipment and spare parts for the biorefinery to
operate over its useful life must be provided. The application must:
(i) Discuss the proposed project delivery method. Such methods
include a design-bid-build method, where a separate engineering firm
may design the project and prepare a request for bids and the
successful bidder constructs the project at the borrower's risk, and a
design-build method, often referred to as ``turnkey,'' where the
borrower establishes the specifications for the project and secures the
services of a developer who will design and build the project at the
developer's risk;
(ii) Discuss the manufacturers of major components of advanced
biofuels technology equipment being considered in terms of the length
of time in business and the number of units installed at the capacity
and scale being considered;
(iii) Discuss the project team members' qualifications for
engineering, designing, and installing advanced biofuels refineries,
including any relevant certifications by recognized organizations or
bodies. Provide a list of the same or similar projects designed,
installed, or supplied and currently operating, with references if
available; and
(iv) Describe the advanced biofuels refinery operator's
qualifications and experience for servicing, operating, and maintaining
such equipment or projects. Provide a list of the same or similar
projects designed, installed, or supplied and currently operating, with
references if available.
(2) Agreements and permits. The application must identify all
necessary agreements and permits required for the project and the
status and schedule for securing those agreements and permits,
including the items specified in paragraphs (h)(2)(i) through
(h)(2)(vi) of this section.
(i) Advanced biofuels refineries must be installed in accordance
with applicable local, State, and national codes and applicable local,
State, and Federal regulations. Identify zoning and code requirements
and necessary permits and the schedule for meeting those requirements
and securing those permits.
(ii) Identify licenses where required and the schedule for
obtaining those licenses.
(iii) Identify land use agreements required for the project, the
schedule for securing those agreements, and the term of those
agreements.
(iv) Identify any permits or agreements required for solid, liquid,
and gaseous emissions or effluents and the schedule for securing those
permits and agreements.
(v) Identify available component warranties for the specific
project location and size.
(vi) Identify all environmental issues, including environmental
compliance issues, associated with the project.
(3) Resource assessment. The application must provide adequate and
appropriate evidence of the availability of the feedstocks required for
the advanced biofuels refinery to operate as designed. Indicate the
type and quantity of the feedstock, and discuss storage of the
feedstock, where applicable, and competing uses for the feedstock.
Indicate shipping or receiving methods and required infrastructure for
shipping, and other appropriate transportation mechanisms. For proposed
projects with an established resource, provide a summary of the
resource.
(4) Design and engineering. The application must provide
authoritative evidence that the advanced biofuels refinery will be
designed and engineered so as to meet its intended purposes, will
ensure public safety, and will comply with applicable laws,
regulations, agreements, permits, codes, and standards. Projects shall
be engineered by a qualified entity. Each biorefinery must be
engineered as a complete, integrated facility. The engineering must be
comprehensive, including site selection, systems and component
selection, and systems monitoring equipment. Biorefineries must be
constructed by a qualified entity.
(i) The application must include a concise but complete description
of the project, including location of the project; resource
characteristics, including the kind and amount of feedstocks;
biorefinery specifications; kind, amount, and quality of the output;
and monitoring equipment. Address performance on a monthly and annual
basis. Describe the uses of or the market for the advanced biofuels
produced by the biorefinery. Discuss the impact of reduced or
interrupted feedstock availability on the biorefinery's operations.
(ii) The application must include:
(A) A description of the project site that addresses issues such as
site access, foundations, and backup equipment when applicable;
(B) A completed Form RD 1940-20 and an environmental assessment
prepared in accordance with Exhibit H of 7 CFR part 1940, subpart G;
and
(C) Identification of any unique construction and installation
issues.
(iii) Sites must be controlled by the eligible borrower for at
least the financing term of the loan note guarantee.
(5) Project development schedule. The application must describe
each significant task, its beginning and end, and its relationship to
the time needed to initiate and carry the project through startup and
shakedown. Provide a detailed description of the project timeline
including resource assessment, project and site design, permits and
agreements, equipment procurement, and project construction from
excavation through startup and shakedown.
(6) Equipment procurement. The application must demonstrate that
equipment required by the biorefinery is available and can be procured
and delivered within the proposed project development schedule.
Biorefineries may be constructed of components manufactured in more
than one location. Provide a description of any unique equipment
procurement issues such as scheduling and timing of component
manufacture and delivery, ordering, warranties, shipping, receiving,
and on-site storage or inventory.
(7) Equipment installation. The application must provide a full
description of the management of and plan for site development and
systems installation, details regarding the scheduling of major
installation equipment needed for project construction, and a
description of the startup and shakedown specification and process and
the conditions required for startup and shakedown for each equipment
item individually and for the biorefinery as a whole.
(8) Operations and maintenance. The application must provide the
operations and maintenance requirements of the biorefinery necessary
for the biorefinery to operate as designed over its useful life. The
application must also include:
(i) Information regarding available biorefinery and component
warranties and availability of spare parts;
(ii) A description of the routine operations and maintenance
requirements of the proposed biorefinery, including maintenance
schedules for the mechanical, piping,
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and electrical systems and system monitoring and control requirements,
as well as provision of information that supports expected useful life
of the biorefinery and timing of major component replacement or
rebuilds;
(iii) A discussion of the costs and labor associated with operating
and maintaining the biorefinery and plans for in-sourcing or
outsourcing. A description of the opportunities for technology transfer
for long-term project operations and maintenance by a local entity or
owner/operator; and
(iv) Provision and discussion of the risk management plan for
handling large, unanticipated failures of major components.
(9) Decommissioning. A description of the decommissioning process,
when the project must be uninstalled or removed. A description of any
issues, requirements, and costs for removal and disposal of the
biorefinery.
(i) Scoring information. The application must contain information
in a format that is responsive to the scoring criteria specified in
Sec. 4279.265(d).
(j) Loan Agreement. A proposed loan agreement or a sample loan
agreement with an attached list of the proposed loan agreement
provisions as specified in Sec. 4279.161(b)(11).
(k) Lender certifications. The lender must provide certification in
accordance with Sec. 4279.161(b)(16). In addition, the lender must
certify that the lender concludes that the project has technical merit.
(l) Intergovernmental consultation. Intergovernmental consultation
comments in accordance with RD Instruction 1940-J and 7 CFR part 3015,
subpart V.
(m) DUNS Number. For borrowers other than individuals, a Dun and
Bradstreet Universal Numbering System (DUNS) number, which can be
obtained online at http://fedgov.dnb.com/webform.
(n) Bioenergy experience. Identify borrower's, including its
principals', prior experience in bioenergy projects and the receipt of
Federal financial assistance, including the amount of funding, date
received, purpose, and outcome, for such projects.
(o) Other information. Any other information determined by the
Agency to be necessary to evaluate the application.
Sec. Sec. 4279.262-4279.264 [Reserved]
Sec. 4279.265 Guarantee application evaluation.
Instead of evaluating applications using the provisions of Sec.
4279.165, the Agency will evaluate and award applications according to
the provisions specified in paragraphs (a) through (h) of this section.
(a) Application processing. Upon receipt of a complete application,
the Agency will conduct a review to determine if the borrower, lender,
and project are eligible; if the project has technical merit as
determined under paragraph (b) of this section; and if the minimum
financial metric criteria under paragraph (c) of this section are met.
(1) If the borrower, lender, or the project is determined to be
ineligible for any reason, the Agency will inform the lender, in
writing, of the reasons. No further evaluation of the application will
occur.
(2) If the Agency determines it is unable to guarantee the loan,
the lender will be informed in writing. Such notification will include
the reasons for denial of the guarantee.
(b) Technical merit determination. The Agency's determination of a
project's technical merit will be based on the information in the
application. Projects determined by the Agency to be without technical
merit will not be selected for funding.
(c) Financial metric criteria. The borrower must meet the financial
metric criteria specified in paragraphs (c)(1) through (c)(3) of this
section. These financial metric criteria shall be calculated from the
realistic information in the pro forma statements or borrower financial
statements, submitted in accordance with Sec. 4279.261(c), of a
typical operating year after the project is completed and stabilized.
(1) A debt coverage ratio of 1.0 or higher.
(2) A debt-to-tangible net worth ratio of 4:1 or lower for startup
businesses and of 9:1 or lower for existing businesses.
(3) A discounted loan-to-value ratio of no more than 1.0.
(d) Scoring applications. The Agency will score each complete and
eligible application it receives on or before May 1 in the fiscal year
in which it was received. The Agency will score each eligible
application that meets the minimum requirements for financial and
technical feasibility using the evaluation criteria identified below. A
maximum of 100 points is possible.
(1) Whether the borrower has established a market for the advanced
biofuel and the byproducts produced and whether the advanced biofuel
meets an applicable renewable fuel standard. A maximum of 10 points can
be awarded. Points to be awarded will be determined as follows:
(i) If the business has less than or equal to a 50 percent
commitment for each of the following: feedstocks, marketing agreements
for the advanced biofuel, and the byproducts produced or if the project
does not produce an advanced biofuel that meets an applicable renewable
fuel standard, 0 points will be awarded.
(ii) If the business has a greater than 50 percent commitment for
any one or two of the following: feedstocks, marketing agreements for
the advanced biofuel, and the byproducts produced and if the project
produces an advanced biofuel that meets an applicable renewable fuel
standard, 5 points will be awarded.
(iii) If the business has a greater than 50 percent commitment for
each of the following: Feedstocks, marketing agreements for the
advanced biofuel, and the byproducts produced and if the project
produces an advanced biofuel that meets an applicable renewable fuel
standard, 10 points will be awarded.
(2) Whether the area in which the borrower proposes to place the
biorefinery, defined as the area that will supply the feedstock to the
proposed biorefinery, has any other similar advanced biofuel
facilities. A maximum of 5 points can be awarded. Points to be awarded
will be determined as follows:
(i) If the area that will supply the feedstock to the proposed
biorefinery does not have any other similar advanced biofuel
biorefineries, 5 points will be awarded.
(ii) If there are other similar advanced biofuel biorefineries
located within the area that will supply the feedstock to the proposed
biorefinery, 0 points will be awarded.
(3) Whether the borrower is proposing to use a feedstock not
previously used in the production of advanced biofuels. A maximum of 15
points can be awarded. Points to be awarded will be determined as
follows:
(i) If the borrower proposes to use a feedstock previously used in
the production of advanced biofuels in a commercial facility, 0 points
will be awarded.
(ii) If the borrower proposes to use a feedstock not previously
used in production of advanced biofuels in a commercial facility, 15
points will be awarded.
(4) Whether the borrower is proposing to work with producer
associations or cooperatives. A maximum of 5 points can be awarded.
Points to be awarded will be determined as follows:
(i) Five (5) points will be awarded if any one of the three
conditions specified in paragraphs (d)(4)(i)(A) through (d)(4)(i)(C) of
this section is met.
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(A) At least 60 percent of the dollar value of feedstock to be used
by the proposed biorefinery will be supplied by producer associations
and cooperatives;
(B) At least 60 percent of the dollar value of the advanced biofuel
to be produced by the proposed biorefinery will be sold to producer
associations and cooperatives; or
(C) At least 60 percent of the dollar value of the biobased
products to be produced by the proposed biorefinery will be sold to
producer associations and cooperatives.
(ii) Three (3) points will be awarded if any one of the three
conditions specified in paragraphs (d)(4)(ii)(A) through (d)(4)(ii)(C)
of this section is met.
(A) At least 30 percent of the dollar value of feedstock to be used
by the proposed biorefinery will be supplied by producer associations
and cooperatives;
(B) At least 30 percent of the dollar value of the advanced
biofuel, or an advanced biofuel converted to electricity, to be
produced by the proposed biorefinery will be sold to producer
associations and cooperatives; or
(C) At least 30 percent of the dollar value of the biobased
products to be produced by the proposed biorefinery will be sold to
producer associations and cooperatives.
For example, consider a proposed biorefinery that will purchase
$1,000,000 of feedstock and produce $5,000,000 worth of biofuel and
$2,000,000 worth of biobased products. In order to receive the 5 points
under this criterion, at least $600,000 worth of feedstock purchases
must be from producer associations or cooperatives, at least $3,000,000
worth of biofuel must be sold to producer associations or cooperatives,
or at least $1,200,000 worth of biobased products must be sold to
producer associations or cooperatives.
(5) The level of financial participation by the borrower, including
support from non-Federal government sources and private sources. Other
direct Federal funding (i.e., direct loans and grants) will not be
considered as part of the borrower's equity participation. A maximum of
15 points can be awarded. Points to be awarded will be determined as
follows:
(i) If the borrower's equity plus other resources results in a
debt-to-tangible net worth ratio equal to or less than 3 to 1, but
greater than 2.5 to 1, 8 points will be awarded.
(ii) If the borrower's equity plus other resources results in a
debt-to-tangible net worth ratio equal to or less than 2.5 to 1, 15
points will be awarded.
(iii) If a project uses other Federal direct funding, 10 points
will be deducted.
(6) Whether the borrower has established that the adoption of the
process proposed in the application will have a positive effect on
three impact areas: resource conservation (e.g., water, soil, forest),
public health (e.g., potable water, air quality), and the environment
(e.g., compliance with an applicable renewable fuel standard,
greenhouse gases, emissions, particulate matter). A maximum of 10
points can be awarded. Based on what the borrower has provided in
either the application or the feasibility study, points to be awarded
will be determined as follows:
(i) If process adoption will have a positive impact on any one of
the three impact areas (resource conservation, public health, or the
environment), 3 points will be awarded.
(ii) If process adoption will have a positive impact on two of the
three impact areas, 6 points will be awarded.
(iii) If process adoption will have a positive impact on all three
impact areas, 10 points will be awarded.
(iv) If the project proposes to use a feedstock that can be used
for human or animal consumption as a feedstock, 5 points will be
deducted from the score.
(7) Whether the borrower can establish that, if adopted, the
biofuels production technology proposed in the application will not
have any economically significant negative impacts on existing
manufacturing plants or other facilities that use similar feedstocks. A
maximum of 10 points can be awarded. Points to be awarded will be
determined as follows:
(i) If the borrower has not established, through an independent
third party feasibility study, that the biofuels production technology
proposed in the application, if adopted, will not have any economically
significant negative impacts on existing manufacturing plants or other
facilities that use similar feedstocks, 0 points will be awarded.
(ii) If the borrower has established, through an independent third
party feasibility study, that the biofuels production technology
proposed in the application, if adopted, will not have any economically
significant negative impacts on existing manufacturing plants or other
facilities that use similar feedstocks, 10 points will be awarded.
(iii) If the feedstock is wood pellets, no points will be awarded
under this criterion.
(8) The potential for rural economic development. If the project is
located in a rural area and the business creates jobs with an average
wage that exceeds the County median household wages where the
biorefinery will be located, 10 points will be awarded.
(9) The level of local ownership of the biorefinery proposed in the
application. A maximum of 5 points can be awarded. Points to be awarded
will be determined as follows:
(i) If local owners have an ownership interest in the biorefinery
of more than 20 percent but less than or equal to 50 percent, 3 points
will be awarded.
(ii) If local owners have an ownership interest in the biorefinery
of more than 50 percent, 5 points will be awarded.
(10) Whether the project can be replicated. A maximum of 10 points
can be awarded. Points to be awarded will be determined as follows:
(i) If the project can be commercially replicated regionally (e.g.,
Northeast, Southwest, etc.), 5 points will be awarded.
(ii) If the project can be commercially replicated nationally, 10
points will be awarded.
(11) If the project uses a particular technology, system, or
process that is not currently operating in the advanced biofuel market
as of October 1 of the fiscal year for which the funding is available,
5 points will be awarded.
(12) The Administrator can award up to a maximum of 10 bonus points
to applications that promote partnerships and other activities that
assist in the development of new and emerging technologies for the
development of advanced biofuels so as to increase the energy
independence of the United States; promote resource conservation,
public health, and the environment; diversify markets for agricultural
and forestry products and agriculture waste material; and create jobs
and enhance the economic development of the rural economy. These
partnerships and other activities will be identified in a Federal
Register notice each fiscal year. However, the Administrator's bonus
points may not raise an applicant's score to more than 100 points.
(e) Ranking of applications. The Agency will rank all scored
applications to create a priority list of scored applications for the
program. Unless otherwise specified in a notice published in the
Federal Register, the Agency will rank applications by approximately
January 31 for complete and eligible applications received on or before
November 1 and by approximately July 31 for complete and eligible
applications received on or before May 1.
(1) All applications received on or before November 1 and May 1
will be ranked by the Agency and will be
[[Page 8474]]
competed against the other applications received on or before such
date. All applications that are ranked will be considered for selection
for funding for that application cycle.
(2) When an application scored in first set of applications is
carried forward into the second set of applications, it will be
competed against all of the applications in the second set using its
score from the first set of applications.
(f) Selection of applications for funding. Using the priority list
created under paragraph (e) of this section, the Agency will select
applications for funding based on the criteria specified in paragraphs
(f)(1) through (f)(3) of this section. The Agency will notify, in
writing, lenders whose applications have been selected for funding.
(1) Ranking. The Agency will consider the score an application has
received compared to the scores of other applications in the priority
list, with higher scoring applications receiving first consideration
for funding. A minimum score of 55 points is required in order to be
considered for a guarantee.
(2) Availability of budgetary authority. The Agency will consider
the size of the request relative to the budgetary authority that
remains available to the program during the fiscal year.
(i) If there is insufficient budgetary authority during a
particular funding period to select a higher scoring application, the
Agency may elect to select the next highest scoring application for
further processing. Before this occurs, the Agency will provide the
borrower of the higher scoring application the opportunity to reduce
the amount of its request to the amount of budgetary authority
available. If the borrower agrees to lower its request, it must certify
that the purposes of the project can be met, and the Agency must
determine the project is financially feasible at the lower amount.
(ii) If the amount of funding required is greater than 25 percent
of the program's outstanding budgetary authority, the Agency may elect
to select the next highest scoring application for further processing,
provided the higher scoring borrower is notified of this action and
given an opportunity to revise their application and resubmit it for an
amount less than or equal to 25 percent of the program's outstanding
budgetary authority.
(3) Availability of other funding sources. If other financial
assistance is needed for the project, the Agency will consider the
availability of other funding sources. If the lender cannot demonstrate
that funds from these sources are available at the time of selecting
applications for funding or potential funding, the Agency may instead
select the next highest scoring application for further processing
ahead of the higher scoring application.
(g) Ranked applications not funded. A ranked application that is
not funded in the application cycle in which it was submitted will be
carried forward one additional application cycle, which may be in the
next fiscal year. The Agency will notify the lender in writing. If an
application has been selected for funding, but has not been funded
because additional information is needed, the Agency will notify the
lender of what information is needed, including a timeframe for the
lender to provide the information. If the lender does not provide the
information within the specified timeframe, the Agency will remove the
application from further consideration and will so notify the lender.
(h) Wage rates. As a condition of receiving a loan guaranteed under
this subpart, each borrower shall ensure that all laborers and
mechanics employed by contractors or subcontractors in the performance
of construction work financed in whole or in part with guaranteed loan
funds under this subpart shall be paid wages at rates not less than
those prevailing on similar construction in the locality as determined
by the Secretary of Labor in accordance with sections 3141 through
3144, 3146, and 3147 of title 40, U.S.C. Awards under this subpart are
further subject to the relevant regulations contained in title 29 of
the Code of Federal Regulations.
Sec. Sec. 4279.266-4279.278 [Reserved]
Sec. 4279.279 Domestic lamb industry adjustment assistance program.
The provisions of Sec. 4279.175 do not apply to this subpart.
Sec. 4279.280 Changes in borrowers.
All changes in borrowers must be in accordance with Sec. 4279.180,
but the eligibility requirements of this program apply.
Sec. 4279.281 Conditions precedent to issuance of loan note
guarantee.
The loan note guarantee will not be issued until the lender
certifies to the conditions identified in Sec. 4279.181(a) through (o)
of subpart B of this part and paragraphs (a) through (h) of this
section. If the lender is unable to provide any of the certifications
required under this section, the lender must provide an explanation
satisfactory to the Agency as to why the lender is unable to provide
the certification. The lender can request the guarantee prior to
construction, but must still certify to all conditions in this section.
(a) For loans exceeding $150,000, the lender has certified its
compliance with the Anti-Lobby Act (18 U.S.C. 1913). Also, if any funds
have been, or will be, paid to any person for influencing or attempting
to influence an officer or employee of any agency, a Member of
Congress, an officer or employee of Congress, or an employee of a
Member of Congress in connection with this commitment providing for the
United States to guarantee a loan, the lender shall completely disclose
such lobbying activities in accordance with 31 U.S.C. 1352.
(b) Where applicable, the lender must certify that the borrower has
obtained:
(1) A legal opinion relative to the title to rights-of-way and
easements. Lenders are responsible for ensuring that borrowers have
obtained valid, continuous, and adequate rights-of-way and easements
needed for the construction, operation and maintenance of a facility.
(2) A title opinion or title insurance showing ownership of the
land and all mortgages or other lien defects, restrictions, or
encumbrances, if any. It is the responsibility of the lender to ensure
that the borrower has obtained and recorded such releases, consents, or
subordinations to such property rights from holders of outstanding
liens or other instruments as may be necessary for the construction,
operation and maintenance of the facility and to provide the required
security. For example, when a site is for major structures for utility-
type facilities (such as a gas distribution system) and the lender and
borrower are able to obtain only a right-of-way or easement on such
site rather than a fee simple title, such a title opinion must be
provided.
(c) The minimum financial criteria, including those financial
criteria contained in the Conditional Commitment, have been maintained
through the issuance of the loan note guarantee. Failure to maintain
these financial criteria shall result in an ineligible application.
(d) Each borrower shall certify to the lender that all laborers and
mechanics employed by contractors or subcontractors in the performance
of construction work financed in whole or in part with guaranteed loan
funds under this subpart shall be paid wages at rates not less than
those prevailing on similar construction in the locality as determined
by the Secretary of Labor in accordance with sections 3141 through
3144, 3146, and 3147 of title 40 U.S.C.
[[Page 8475]]
Awards under this subpart are further subject to the relevant
regulations contained in title 29 of the Code of Federal Regulations.
(e) The lender certifies that it has reviewed all contract
documents and verified compliance with Sections 3141 through 3144,
3146, and 3147 of title 40 U.S.C., and title 29 of the Code of Federal
Regulations. The lender will certify that the same process will be
completed for all future contracts and any changes to existing
contracts.
(f) The lender certifies that the proposed facility complies with
all Federal, State, and local laws and regulatory rules that are in
existence and that affect the project, the borrower, or lender
activities.
(g) The lender will notify the Agency in writing whenever there has
been a change in the classification of a loan within 15 calendar days
of such change.
(h) The lender certifies that the borrower has provided the equity
in the project identified in the Conditional Commitment.
Sec. Sec. 4279.282-4279.289 [Reserved]
Sec. 4279.290 Requirements after project construction.
Once the project has been constructed, the lender must:
(a) Provide the Agency annual reports from the borrower commencing
the first full calendar year following the year in which project
construction was completed and continuing for the life of the
guaranteed loan. The borrower's reports will include, but not be
limited to, the information specified in the following paragraphs, as
applicable.
(1) The actual amount of advanced biofuels, biobased products, and,
if applicable, byproducts produced in order to assess whether project
goals related to majority production are being met;
(2) If applicable, documentation that identified health and/or
sanitation problems have been solved;
(3) A summary of the cost of operating and maintaining the
facility;
(4) A description of any maintenance or operational problems
associated with the facility;
(5) Certification that the project is and has been in compliance
with all applicable State and Federal environmental laws and
regulations;
(6) The number of jobs created;
(7) A description of the status of the project's feedstock
including, but not limited to, the feedstock being used, outstanding
feedstock contracts, feedstock changes and interruptions, and quality
of the feedstock;
(8) The results of the annual inspections conducted under paragraph
(b) of this section; and
(b) For the life of the guaranteed loan, conduct annual
inspections.
Sec. Sec. 4279.291-4279.300 [Reserved]
PART 4287--SERVICING
0
3. The authority citation for part 4287 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
0
4. Part 4287 is amended by adding a new subpart D to read as follows:
Subpart D--Servicing Biorefinery Assistance Guaranteed Loans
Sec.
4287.301 Introduction.
4287.302 Definitions.
4287.303 Exception authority.
4287.304-4287.305 [Reserved]
4287.306 Appeals.
4287.307 Servicing.
4287.308 Fiscal Year 2009 and Fiscal Year 2010 loan guarantees.
4287.309-4287.400 [Reserved]
Subpart D--Servicing Biorefinery Assistance Guaranteed Loans
Sec. 4287.301 Introduction.
(a) This subpart supplements 7 CFR part 4279, subparts A and C, by
providing additional requirements and instructions for servicing and
liquidating all Biorefinery Assistance Guaranteed Loans.
(b) The lender will be responsible for servicing the entire loan
and will remain mortgagee and secured party of record notwithstanding
the fact that another party may hold a portion of the loan. The entire
loan will be secured by the same security with equal lien priority for
the guaranteed and unguaranteed portions of the loan. The unguaranteed
portion of a loan will neither be paid first nor given any preference
or priority over the guaranteed portion of the loan.
(c) Copies of all forms, regulations, and Instructions referenced
in this subpart are available in any Agency office. Whenever a form is
designated in this subpart, that designation includes predecessor and
successor forms, if applicable, as specified by the field or National
Office.
Sec. 4287.302 Definitions.
The definitions and abbreviations contained in Sec. 4279.2 of
subpart A and in Sec. 4279.202 of subpart C of part 4279 of this
chapter apply to this subpart.
Sec. 4287.303 Exception authority.
The exception authority provisions of this paragraph apply to this
subpart instead of those in Sec. 4279.15 of subpart A of part 4279 of
this chapter. The Administrator may, with the concurrence of the
Secretary of Agriculture, make an exception, on a case-by-case basis,
to any requirement or provision of this subpart that is not
inconsistent with any authorizing statute or applicable law, if the
Administrator determines that application of the requirement or
provision would adversely affect the Federal government's interest.
Sec. Sec. 4287.304-4287.305 [Reserved]
Sec. 4287.306 Appeals.
Section 4279.16 of subpart A of part 4279 of this chapter applies
to this subpart.
Sec. 4287.307 Servicing.
Except as specified in paragraphs (a) through (m) of this section,
all loans guaranteed under this subpart shall comply with the
provisions found in Sec. Sec. 4287.101 through 4287.180 of this
chapter. If the Agency determines that the lender is not in compliance
with its servicing responsibilities, the Agency reserves the right to
take any action the Agency determines necessary to protect the Agency's
interests with respect to the loan. If the Agency exercises this right,
the lender must cooperate with the Agency. Any cost to the Agency
associated with such action will be assessed against the lender.
(a) Periodic reports. Each lender shall submit quarterly reports,
unless more frequent ones are needed as determined by the Agency to
meet the financial interests of the United States, regarding the
condition of its Agency guaranteed loan portfolio (including borrower
status and loan classification) and any material adverse change in the
general financial condition of the borrower since the last report was
submitted.
(b) Default reports. Lenders shall submit monthly default reports,
including borrower payment history, for each loan in monetary default
using a form approved by the Agency.
(c) Financial reports. The financial report requirements specified
in Sec. 4287.107(d) apply except as follows:
(1) The financial reports required under Sec. 4287.107(d) may be
specified in either the loan agreement or the Conditional Commitment;
(2) The lender must submit to the Agency quarterly financial
statements within 45 days of the end of each quarter; and
(3) The annual financial statements required under Sec.
4287.107(d) must be audited financial statements and must be submitted
within 180 days.
(d) Additional loans. Instead of complying with the additional
[[Page 8476]]
expenditures provisions specified in Sec. 4287.107(e), the lender may
make additional expenditures or new loans to a borrower with an
outstanding loan guaranteed only with prior written Agency approval.
The Agency will only approve additional expenditures or new loans where
the expenditure or loan will not violate one or more of the loan
covenants of the borrower's loan agreement. In all instances, the
lender must notify the Agency when they make any additional
expenditures or new loans. Any additional expenditure or loan made by
the lender must be junior in priority to the loan guaranteed under 7
CFR part 4279 except for working capital loans for which the Agency may
consider a subordinate lien provided it is consistent with the
conditional provisions specified in Sec. 4279.202(i)(1).
(e) Interest rate adjustments. The provisions of Sec. 4287.112
apply, except for Sec. 4287.112(a)(2).
(f) Collateral inspection and release. In lieu of complying with
Sec. 4287.113, lenders must comply with the provisions of this
paragraph. The lender must inspect the collateral as often as necessary
to properly service the loan. The Agency must give prior approval for
the release of collateral, except as specified in paragraph (f)(1) of
this section or where the release of collateral is made under the
abundance of collateral provision of the applicable security agreement,
subject to the provisions of paragraph (f)(3) of this section.
Appraisals on the collateral being released are required on all
transactions exceeding $250,000 and will be at the expense of the
borrower. The appraisal must meet the requirements of Sec. 4279.244.
The sale or release of collateral must be based on an arm's length
transaction, unless otherwise approved by the Agency in writing.
(1) Lenders may, over the life of the guaranteed loan, release
collateral with a cumulative value of up to 20 percent of the original
loan amount without Agency concurrence (subject to the provisions of
paragraph (f)(3) of this section) if the proceeds generated are used to
pay down secured debt in order of lien priority or to buy replacement
collateral.
(2) Release of collateral with a cumulative value in excess of 20
percent of the original loan or when the proceeds will not be used to
pay down secured debt in order of lien priority or to buy replacement
collateral, must be requested, in writing, by the lender and concurred
by the Agency, in writing, in advance of the release. A written
evaluation will be completed by the lender to justify the release.
(3) Lenders may not release collateral with a value of more than 10
percent of the original loan amount at any one time and within any one
calendar year without Agency concurrence.
(4) Any release of collateral must not adversely affect the
project's operation or financial condition.
(g) Subordination of lien position. In addition to complying with
the provisions found in Sec. 4287.123, a subordination must not extend
the term of the guaranteed loan.
(h) Transfers and assumptions. Transfers and assumptions shall
comply with Sec. 4287.134, except as specified in paragraphs (h)(1)
through (h)(3) of this section, and with paragraphs (h)(4) and (h)(5)
of this section.
(1) In complying with Sec. 4287.134(a), eligible applicants shall
be determined in accordance with subpart C of part 4279 of this chapter
instead of subpart B of part 4279.
(2) Any new loan terms under Sec. 4287.134(b) must be within the
terms authorized by Sec. 4279.232 of subpart C of part 4279 of this
chapter instead of Sec. 4279.126 of subpart B of part 4279.
(3) Additional loans under Sec. 4287.134(e) will be considered as
a new loan application under subpart C of part 4279 of this chapter
instead of subpart B of part 4279.
(4) The Agency may charge the lender a nonrefundable transfer fee
at the time of a transfer application. The Agency will set the amount
of the transfer fee in an annual notice of funds availability published
in the Federal Register.
(5) Assumption shall be deemed to occur in the event of a change in
the control of the borrower. For purposes of the loan, change of
control means the merger of the borrower, sale of all or substantially
all of the assets of the borrower, or the sale of more than 25 percent
of the stock or other equity interest of either the borrower or its
corporate parent.
(6) The Agency will not approve any change in terms that results in
an increase in the cost of the loan guarantee, unless the Agency can
secure any additional budget authority that would be required and the
change otherwise conforms with applicable regulations.
(i) Substitution of lender after issuance of the Loan Note
Guarantee. All substitutions of lenders must comply with Sec. 4287.135
except that, instead of approving a new lender as a substitute lender
using the provisions of Sec. 4287.135(a), the Agency may approve the
substitution of a new lender if the proposed substitute lender:
(1) Is an eligible lender in accordance with Sec. 4279.202(b);
(2) Is able to service the loan in accordance with the original
loan documents; and
(3) Acquires title to the unguaranteed portion of the loan held by
the original lender and assumes all original loan requirements,
including liabilities and servicing responsibilities.
(j) Default by borrower. The provisions of Sec. 4287.145 apply to
this subpart, except that:
(1) Instead of complying with Sec. 4287.145(b)(2), in the event a
deferment, rescheduling, reamortization, or moratorium is accomplished,
it will be limited to the remaining life of the collateral or remaining
limits as contained in Sec. 4279.232(a) of part 4279 of this chapter;
and
(2) If a loan goes into default, the lender must provide the
notification required under Sec. 4287.145(a) to the Agency within 15
calendar days of when a borrower is 30 days past due on a payment or is
otherwise in default of the Loan Agreement.
(k) Protective advances. All protective advances made by the lender
must comply with Sec. 4287.156 and the provisions of paragraphs (k)(1)
and (k)(2) of this section.
(1) Instead of the $5,000 specified in Sec. 4287.156(c), the
Agency's written authorization is required when cumulative protective
advances exceed $100,000, unless otherwise specified by the Agency at a
lesser amount.
(2) The lender must obtain written Agency approval for any
protective advance that will singularly or cumulatively amount to more
than $100,000 or 10 percent of the guaranteed loan, whichever is less.
(l) Liquidation. Liquidations shall comply with Sec. 4287.157,
except that, in complying with Sec. 4287.157(d)(13), lenders are to
obtain an independent appraisal report meeting the requirements of
Sec. 4279.244, instead of Sec. 4279.144, when the outstanding balance
of principal and accrued interest is $200,000 or more.
(m) Determination of loss and payment. In addition to complying
with Sec. 4287.158, if a lender receives a final loss payment, the
lender must submit to the Agency an annual report on its collection
activities for each unsatisfied account for 3 years following payment
of the final loss claim.
Sec. 4287.308 Fiscal Year 2009 and Fiscal Year 2010 loan guarantees.
Any loan guarantee application that has been submitted to the
Agency under this program prior to March 16, 2011 may submit to the
Agency a written request for an irrevocable election to
[[Page 8477]]
have the guaranteed loan serviced in accordance with this subpart. Such
an election must be made by October 1, 2011.
Sec. Sec. 4287.309-4287.400 [Reserved]
Dated: January 31, 2011.
Dallas Tonsager,
Under Secretary, Rural Development.
[FR Doc. 2011-2473 Filed 2-11-11; 8:45 am]
BILLING CODE 3410-XY-P