United States: Department Of Energy Solicits Comments On Proposed Loan Guarantee Program

Last Updated: August 18 2009
Article by Christopher L. Rissetto, Henry R. King and Steven D. Tibbets

On Aug. 7, 2009, the U.S. Department of Energy ("DOE"), Office of Chief Financial Officer, announced a proposed rule modifying procedures for the administration of a loan guarantee program to support projects that employ innovative energy technologies pursuant to section 1703 of the Energy Policy Act of 2005, as funds for the program have become available thanks to the American Recovery and Reinvestment Act of 2009 ("Recovery Act"). 74 F.R. 39569-82 (Aug. 7, 2009).* The DOE has invited parties to submit comments on the proposed rule. Interested parties now have an opportunity to help shape the rules under which the loan guarantee program will operate. Interested parties must submit comments by Sept. 8, 2009.

Background

Section 1703 of Title XVII authorizes the Secretary of Energy to make loan guarantees for projects that "avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued." Section 1703 of Title XVII also identifies 10 categories of technologies and projects that are potentially eligible for loan guarantees. The two principal goals of section 1703 of Title XVII are to encourage commercial use in the United States of new or significantly improved energy-related technologies and to achieve substantial environmental benefits.

Application Process

The proposed rule first sets out the application process, and the criteria that DOE will use to determine which projects are eligible for loan guarantees, and which, among competing projects, will be selected for award of loan guarantees. There is a qualification process, whereby applicants must first submit a "pre-application." DOE will evaluate "pre-applications" based on the following factors: DOE will conduct an initial review of the pre-application to determine whether (1) the proposal is for an "eligible project" as defined in the proposed rule; (2) the submission contains the information required by the pre-application provisions of the proposed rule; and (3) the submission meets all other requirements of the applicable solicitation. If a pre-application fails to meet the requirements, DOE may deem it nonresponsive and eliminate it from further review.

For projects that are found to be eligible after DOE's evaluation of the pre-application, DOE will evaluate them to determine whether, among a number of competing offers, they merit receipt of loan guarantees. DOE will then invite prospective applicants to submit an application for a loan guarantee. The application must include detailed and extensive information regarding the proposed project—particularly with respect to the project's financing, the project's commercial viability, and the history of the applicant. Applicants must be able to establish that an "Eligible Lender," as defined in the proposed rule, is willing to make a loan to support the project in the event that the applicant wins a loan guarantee.

Eligibility and Compliance Obligations

Applicants that receive loan guarantees must agree to a long list of terms and conditions relating to a number of issues, including accountability for the applicant's use of funds guaranteed by the federal government, and the applicant's compliance with federal labor and environmental laws and regulations. For example, loan guarantee recipients must comply with the National Environmental Policy Act, and proposed projects must pass a review by the U.S. Environmental Protection Agency prior to receipt of the guarantee. Similarly, guarantee recipients must comply with the Davis-Bacon Act, which requires that all laborers and mechanics employed by contractors or subcontractors on a project shall be paid wages at rates not less than those prevailing on similar construction in the locality as determined by the U.S. Secretary of Labor, regardless of the contractual relationship between the recipient and the workers. Moreover, guarantee recipients will be subject to audits and will be required to grant government inspectors ready access to its books and records before, during, and after the project for which the recipient receives the guarantee. If a recipient, for example, fails to properly account for costs incurred in the project and uses government funds to pay for impermissible costs, this error will likely be detected by the government and the recipient may be penalized as a result.

Projects eligible for section 1703 loan guarantees include: (1) renewable energy systems; (2) advanced fossil energy technology; (3) hydrogen fuel cell technology for residential, industrial, or transportation applications; (4) advanced nuclear energy facilities; (5) carbon capture and sequestration practices and technologies, including agricultural and forestry practices that store and sequester carbon; (6) efficient electrical generation, transmission, and distribution technologies; (7) efficient end-use energy technologies; (8) production facilities for fuel efficient vehicles, including hybrid and advanced diesel vehicles; (9) pollution control equipment; (10) refineries, meaning facilities at which crude oil is refined into gasoline; and (11) certain gasification projects. Thus, virtually any energy project is a potential loan guarantee applicant. Therefore, companies that should be interested in the loan guarantee program include any energy firms or utilities, as well as financial institutions or investment funds from which such companies seek financing.

The Importance of Definitions

While the entire proposed rule is vitally important to any parties interested in supporting innovative technology projects that might benefit from a loan guarantee, of particular interest are the definitions adopted by DOE and the criteria under which DOE will evaluate applications.

For example, under the proposed rule, "Project Costs" include:

  • Costs of acquisition, lease, or rental of real property, such as engineering fees, surveys, title insurance, recording fees, and legal fees incurred in connection with land acquisition, lease or rental, site improvements, site restoration, access roads, and fencing
  • Costs of engineering, architectural, legal and bond fees, and insurance paid in connection with construction of the facility; and materials, labor, services, travel and transportation for facility design, construction, startup, commissioning and shakedown
  • Costs of equipment purchases
  • Costs to provide equipment, facilities, and services related to safety and environmental protection
  • Financial and legal services costs, including other professional services and fees necessary to obtain required licenses and permits, and to prepare environmental reports and data
  • The cost of issuing project debt, such as fees, transaction and legal costs, and other normal charges imposed by eligible lenders and other holders
  • Costs of necessary and appropriate insurance and bonds of all types
  • Costs of design, engineering, startup, commissioning and shakedown
  • Costs of obtaining licenses to intellectual property necessary to design, construct, and operate the project
  • A reasonable contingency reserve for cost overruns during construction
  • Capitalized interest necessary to meet market requirements, reasonably required reserve funds, and other carrying costs during construction

"Project Costs" do not include:

  • Fees and commissions charged to borrower, including finder's fees, for obtaining federal or other funds
  • Parent corporation or other affiliated entity's general and administrative expenses, and nonproject-related parent corporation or affiliated entity assessments, including organizational expenses
  • Goodwill, franchise, trade, or brand name costs
  • Dividends and profit sharing to stockholders, employees, and officers
  • Research, development, and demonstration costs of readying the innovative energy or environmental technology for employment in a commercial project
  • Costs that are excessive or are not directly required to carry out the project, as determined by DOE, including but not limited to the cost of hedging instruments
  • Expenses incurred after startup, commissioning, and shakedown before the facility has been placed in service
  • Borrower-paid credit subsidy costs and administrative costs of issuing a loan guarantee
  • Operating costs

If a prospective loan guarantee applicant seeks a loan guarantee assuming that it can use loan proceeds guaranteed by the government to fund an item that falls outside the definition of "Project Cost," it can avoid wasting resources preparing a pre-application or final application by understanding this definition. Alternatively, such a prospective offeror could attempt to change the definition by submitting comments setting forth a rationale for why particular items should be included in the definition of Project Costs. The proposed rule contains myriad provisions that a prospective applicant might find problematic and seek to change.

Lender Qualifications and Other Aspects of the Proposed Rule

The proposed rule imposes limitations on "who can be a recipient," and also defines "who can be a lender." "Eligible lenders" include commercial banks and loan institutions, insurance companies, factoring companies, investment banks, institutional investors, venture capital investment companies, trusts, and the Federal Financing Bank. Otherwise, to be "eligible," a prospective lender must establish to the DOE's satisfaction that it meets a number of requirements regarding its compliance with certain federal laws, and its ability to access required capital.

An important aspect of the loan guarantee program is the consequences recipients face for default. The DOE loan guarantee imposes a number of requirements that would not be involved in a purely commercial loan guarantee. Failure to meet any of these requirements will result in the recipient defaulting on the loan. Under the proposed rule, upon a recipient's default, the entire loan amount can become due and payable. Accordingly, it is critical that recipients understand precisely what actions or omissions can trigger a default, and have policies and procedures in place to prevent them.

The proposed rule includes a provision that permits DOE to deviate from the rule's requirements when it would serve the purposes of section 1703 to do so. Therefore, where a prospective recipient determines that a requirement under the rule should not apply or would be too onerous to comply with, knowing that deviations are available and exploiting this knowledge could prove invaluable in maximizing the profitability of a project financed with a loan guarantee by avoiding expensive or onerous compliance obligations.

The proposed rule is a federal rulemaking subject to the requirements of the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq. Under the APA, federal agencies must allow at least 30 days for the submission of comments on a proposed rule, which is why the comment period for DOE's loan guarantee rule, which issued Aug. 7, 2009, closes Sept. 8, 2009. 74 F.R. 39569-82 (Aug. 7, 2009). In addition to the submission of comments, the APA permits interested parties to request hearings and take other actions to ensure that their interests are considered in rulemaking processes. Accordingly, parties affected by the DOE's loan guarantee program should understand and consider the range of options available to them.

Conclusion

It is important that companies undertaking projects involving innovating technologies, the financing of which could be enhanced by loan guarantees, consider commenting on the announcement and be prepared for the reporting and regulatory compliance they must observe upon receipt of loan guarantees. Again, comments must be submitted to DOE by Sept. 8, 2009.

* * * * *

Attorneys in Reed Smith's Public Policy & Infrastructure and Energy Groups are actively monitoring developments in the DOE's innovative technology loan guarantee program. We have experience in advising clients on the application criteria for such programs, and assembling the necessary policies and procedures to ensure compliance with the legal requirements that accompany federal funding. For further information, please contact one of the authors of this Client Alert.

* Separately, the DOE has issued a solicitation seeking applications for innovative technology loan guarantees under sections 1703 and 1705 of the Energy Policy Act of 2005 (the Recovery Act amended the Energy Policy Act to add section 1705). The solicitation is available for download at this website: http://www.lgprogram.energy.gov/ .

This article is presented for informational purposes only and is not intended to constitute legal advice.

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