[Senate Hearing 111-51]
[From the U.S. Government Publishing Office]
S. Hrg. 111-51
FINANCING FOR DEPLOYMENT OF CLEAN ENERGY
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
TO
RECEIVE TESTIMONY REGARDING LEGISLATION TO IMPROVE THE AVAILABILITY OF
FINANCING FOR DEPLOYMENT OF CLEAN ENERGY AND ENERGY EFFICIENCY
TECHNOLOGIES AND TO ENHANCE UNITED STATES COMPETITIVENESS IN THIS
MARKET THROUGH THE CREATION OF A CLEAN ENERGY DEPLOYMENT ADMINISTRATION
WITHIN THE DEPARTMENT OF ENERGY
__________
APRIL 28, 2009
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska
RON WYDEN, Oregon RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
EVAN BAYH, Indiana JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
----------
STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Denniston, John, Partner, Kleiner Perkins Caufield & Byers, Menlo
Park, CA....................................................... 13
Hezir, Joseph S., Vice President, EOP Group, Inc................. 27
Hull, Jeanine, Counsel, Dykema Gossett, PLLC..................... 20
McInnis, Michael J., Managing Director, The Erora Group, LLC..... 42
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
Reicher, Dan W., Director, Climate Change and Energy Initiatives,
Google.org, Mountain View, CA.................................. 7
Rogers, Matthew, Senior Advisor for the American Recovery and
Reinvestment Act, Office of the Secretary of Energy, Department
of Energy...................................................... 3
APPENDIX
Responses to additional questions................................ 45
FINANCING FOR DEPLOYMENT
OF CLEAN ENERGY
----------
TUESDAY, APRIL 28, 2009
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:02 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. OK. Why do we not get started here? Thank you
all for coming.
The purpose of today's hearing is to look at the latest
draft of the proposal that Senator Murkowski and I have put
together to improve the availability of financing for
deployment of clean energy and energy efficiency technologies.
Several of you who are testifying here today have been here
before to help us understand the challenges that clean energy
technologies face in reaching the broader commercial
marketplace and how we might address those challenges with this
legislation. You have all provided helpful guidance on the
proposal that we are considering today, and I look forward to
hearing your judgment on how our thinking has progressed over
the many months that we have been working on this.
Yesterday, the President spoke at the National Academy of
Sciences and recognized our country's proud heritage of
scientific discovery and innovation that is embodied in that
institution. He pledged his support for the continued
leadership of the United States in basic sciences and in the
pursuit of scientific discovery. Obviously, I think we all
share his commitment.
My experience with the national energy laboratories and
with the academic research institutions in the country gives me
great confidence that many of the important discoveries needed
to meet our energy and climate security challenges this century
will be made here in the United States. The key question that
we are here to discuss today is will those technologies see
their commercial fruition here in the United States as well.
I have said before and I believe that the world is at a
transition point in the way that we generate and use energy.
Advances in renewable energy, highly fuel efficient, and
electric drive vehicles, smart grid technology, ultra-efficient
lighting and appliances, all of those signal that
environmentally sustainable alternatives can be available to
us, but we will need to reach the point where they are
economically competitive with legacy technologies.
One part of the foundation for this transition is
recognizing the cost to our society and our children of
continuing down the current path of pricing carbon emissions. I
am glad that we are beginning to seriously engage in that
debate here in the Congress.
But another fundamental piece of the puzzle is to recognize
that even with a price of carbon, there are significant
barriers to rapidly deploying innovative energy technologies.
It is a capital-intensive business. New electricity generation
can easily cost into the billions. Investors are understandably
cautious to branch out beyond the technologies that they know
very well. The safer path is to wait for someone else to prove
the technology can work at a commercial scale before committing
to make a significant investment in that technology.
So this leads to a funding gap that stifles innovation,
impedes our ability to lead in the worldwide competitive
marketplace for clean energy technologies. The goal of this
legislation is to find ways to bridge that gap while
recognizing the difficulty in forecasting exactly which
technologies should be supported or in what precise way while
also avoiding the crowding out of private investment. We should
be careful not to lose sight of the fact that while the current
credit problems are holding back many technologies, this
problem of funding innovation was with us before the economic
downturn and will certainly remain once the economy recovers.
So the new entity that must be focused on here has to deal with
the problems of today, but also be able to be flexible in its
approach to account for changing circumstances.
We have set an audacious goal to not only address our past
under-investment in clean energy development but to move to a
leadership position in the world in developing these
technologies. I believe that these goals are all achievable. We
have tried to strike the necessary balances in this draft to
move us forward in an aggressive, yet prudent way, and I look
forward to hearing your views on what is now proposed.
Senator Murkowski, why do you not go ahead?
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman. I want to
welcome the witnesses here this morning, and I want to thank
you, Mr. Chairman. I always have my back to you and it is not
because I am not favorably inclined. I just have to put my leg
this way.
The Chairman. I understand.
Senator Murkowski. He understands it, but for those of you,
we have got a great working relationship here. I think that
that is demonstrated in the draft that we have before us today.
I think it is a pretty good bipartisan work product. I think it
is also the result of identifying a problem and developing a
solution to that problem.
The inability of clean energy technology and the project
developers to obtain financing, I think we all recognize, has
been a longstanding problem. Back in 2005, with the passage of
the Energy Policy Act, at that time we took a major step toward
addressing the problem by creating the loan guarantee program
there at DOE.
More recently, this committee considered two bills in the
110th Congress to build upon the loan guarantee authorities for
clean technology development, and at those hearings, we heard
frustration from the clean tech developers. They said that we
can get support from OPIC. We can go to ExIm for projects
overseas, but here in the United States, we cannot do that.
So finding a way to fix that problem is both necessary and
really very practical. I think through a collaborative process,
we have attempted to negotiate a solution, and I am confident
that we have developed one that can actually work.
There are two factors that underscore my support for
legislation to create this Clean Energy Deployment
Administration within DOE. First is a precedent that exists for
the Federal Government effectively providing credit support to
promising projects at the Rural Utility Service at OPIC and
ExIm and it also represents an opportunity to address the
emission of greenhouse gases in an aggressive way but, at the
same, does not impose new mandates or regulatory burdens.
I want my colleagues to understand that a great deal of
care has been taken to balance the deployment of clean energy
technologies with a requirement that this entity be responsible
and absolutely transparent in its operations.
At last year's hearing when we discussed the bill that you
had, Mr. Chairman, and that that Senator Domenici had, we were
looking at two bills at that time. I look forward to hearing
the witnesses' assessments of our attempt to have merged those
two bills together, any insights that you might have with that,
and look forward to your testimony.
Thank you.
The Chairman. Thank you very much.
Let me just introduce the panel and then we will hear from
each witness. Matt Rogers is the Senior Advisor to the
Secretary of Energy for the American Recovery and Reinvestment
Act now in the Department of Energy. Dan Reicher is, of course,
the Director of Climate Change and Energy Initiatives for
Google.org, which we are glad to have him back before the
committee. John Denniston is also a regular testifier here,
really as all these witnesses are. He is with Kleiner Perkins
Caufield & Byers in Menlo Park. Jeanine Hull is counsel with
Dykema Gossett, and Joe Hezir is Vice President of EOP Group.
Thank you all very much for coming to give us your
thoughts, and why do we not start with you, Matt? Take 5 or 6
minutes and tell us the main points that you think we need to
understand, please.
STATEMENT OF MATTHEW ROGERS, SENIOR ADVISOR FOR THE AMERICAN
RECOVERY AND REINVESTMENT ACT, OFFICE OF THE SECRETARY OF
ENERGY, DEPARTMENT OF ENERGY
Mr. Rogers. Chairman Bingaman, Senator Murkowski, and
members of the committee, thank you for this opportunity to be
before you today to discuss the Department of Energy's loan
guarantee and direct loan programs, our credit programs, as
well as the proposed legislation to establish the Clean Energy
Deployment Administration under the 21st Century Energy
Technology Deployment Act.
We appreciate your personal leadership in setting up the
title 17 loan guarantee program and in seeking the conditions
for its success.
As you know, the Department of Energy's credit programs are
an urgent priority for Secretary Chu. He is personally
reviewing the programs and is committed to giving the programs
the attention, departmental resources, and oversight they need
to succeed while ensuring that taxpayers' interests are
protected. Delivering on this opportunity to help drive
economic recovery and make a down payment on the Nation's
energy and environmental future represents an essential
leadership role for the Department of Energy.
The credit programs are comprised of a highly professional
and rapidly growing group of people. The staff has been
responsive to Secretary Chu's suggested changes to accelerate
and streamline procedures, where possible, to make the program
more user-friendly.
Within the first 56 days of the administration, Secretary
Chu entered into a conditional commitment to guarantee a $535
million loan for Solyndra to support the company's construction
of a commercial-scale manufacturing plant for its proprietary
cylindrical solar photovoltaic technologies. The company
expects to create new U.S. jobs during construction and
operation of the plant, and while it deploys its solar panels
across the United States and Europe.
The credit programs have a strong set of applications from
5 title 17 solicitations and applications from the Advanced
Technology Vehicles Manufacturing Incentive Loan program. These
applications are currently under consideration.
We continue to greatly improve the processing of
applications and are looking to expedite evaluation and loan
and loan guarantee awards under the streamlined processes while
ensuring responsible stewardship of taxpayer funds, consistent
with the goals of the American Recovery and Reinvestment Act of
2009. We are also contemplating the development of new
solicitations.
I appreciate the opportunity to comment on the 21st Century
Energy Technology and Deployment Act as proposed by the U.S.
Senate Energy and Natural Resources Committee. The
administration is still evaluating the proposal and looks
forward to working with the committee to ensure efficient and
effective programs for providing assistance for energy
infrastructure investment.
Our task is to allocate credit assistance where it is most
effective, maximizes policy goals, and to demonstrate to
Congress and the American people that loan guarantee programs
can provide good value for money. DOE is working to implement
the title 17 program in line with the intent of the Recovery
Act and consistent with the priorities outlined through the
Presidential memoranda issued in February and March. DOE has
received applications from previous title 17 solicitation and
expects that funds will be utilized consistent with these
goals.
I will highlight four principal reactions to the proposed
legislation.
First, the experience from the first loan and loan
guarantees made under the existing credit programs will provide
a tangible track record and inform program design to make the
credit programs more effective. We want to make sure that any
program changes support the Department's ability to provide
credit assistance quickly, effectively, and transparently while
protecting the taxpayers.
Second, appropriations for credit subsidy and for operating
expenses through the loan guarantee program under the Recovery
Act were a very positive step forward, enabling the institution
to develop the appropriate scale organization and deliver a
consistent loan guarantee pipeline. Ensuring any future loan
programs have appropriate appropriations is a very important
design feature.
Third, we are committed to leveraging private capital,
including maintaining the requirement for significant equity
for credit assistance and seeking to engage additional debt
funding partners to bring private capital off the sidelines
through our financing activities. The first conditional loan
guarantee should show that sponsor equity is available for good
projects. The program will be successful if, and only if, the
Federal Government becomes a relatively secondary lender in the
markets, overall, over time where there is significant private
sector lender involvement and strong credit markets can take
the place of Federal assistance.
Right now, in these extreme market circumstances, we need
to provide loans to mature, renewable technology projects that
the market was considering funding in full as recently as last
summer. We will make these loans to spur rapid renewables
capacity additions in the market and to enhance economic
recovery.
But the goal should be to have the Federal Government focus
on its unique role in accelerating market development for
advanced technologies. Title 17 support should not be a long-
term financing solution for troubled energy companies, nor
should the Federal assistance crowd out private lenders who may
provide better commercial underwriting capabilities than the
Federal Government; and ultimately more efficient allocation of
the Nation's resources. The Department of Energy has a clear
role to play. We will provide strong returns to the American
taxpayer if we remain focused on our unique role in filling a
gap in advanced energy technology markets.
Fourth, the administration believes that the loan program
should conform to standard budget laws and controls, including
the Federal Credit Reform Act of 1990, as amended, and with
Federal credit policies. We would welcome discussions with the
committee on these and any additional issues that may come to
light during our review to ensure that any final legislation
successfully addresses the Nation's energy needs efficiently
and effectively.
Mr. Chairman, thank you for the opportunity to appear
before you today. This concludes my testimony, and I am happy
to answer any questions. Thank you.
[The prepared statement of Mr. Rogers follows:]
Prepared Statement of Matthew Rogers, Senior Advisor for the American
Recovery and Reinvestment Act, Office of the Secretary of Energy,
Department of Energy
Chairman Bingaman, Senator Murkowski and members of the Committee,
thank you for this opportunity to be before you today to discuss the
Department of Energy's Loan Guarantee and Direct Loan Programs (or
``Credit Programs'') as well as the proposed legislation to establish
the Clean Energy Deployment Administration under the ``21st Century
Energy Technology Deployment Act.'' We appreciate your personal
leadership in setting up the Title XVII loan guarantee program and
seeking conditions for success.
introductory statement
As you know, the Department of Energy's Credit Programs are an
urgent priority for Secretary Chu. He is personally reviewing the
programs, and has committed to giving the programs the attention,
departmental resources and oversight they need to succeed while
ensuring that taxpayer interests are protected. Delivering on this
opportunity to help drive economic recovery and make a down payment on
the Nation's energy and environmental future represents an essential
leadership role for the Department.
The Credit Programs are comprised of a highly professional and
rapidly growing group of people. The staff has been responsive to
Secretary Chu's suggested changes to accelerate and streamline
procedures where possible to make the program more userfriendly. Within
the first 56 days of the Obama Administration, Secretary Chu entered
into a conditional commitment to guarantee a $535 million loan for
Solyndra, Inc. to support the company's construction of a commercial-
scale manufacturing plant for its proprietary cylindrical solar
photovoltaic panels. The company expects to create new U.S. jobs during
construction and operation of the plant, while it deploys its solar
panels across the U.S. and in Europe.
The Credit Programs have an exceptionally strong set of
applications from five Title XVII solicitations, and applications from
the Advanced Technology Vehicles Manufacturing Incentive Program
currently under consideration. We continue to greatly improve the
processing of applications, and are looking to expedite evaluation and
loan and loan guarantee awards under streamlined processes, while
ensuring responsible stewardship of taxpayer funds, consistent with the
goals of the American Recovery and Reinvestment Act of 2009 (Recovery
Act). We are also contemplating the development of new solicitations.
21st century energy technology deployment act
I appreciate the opportunity to comment on the ``21st Century
Energy Technology Deployment Act'' (the Act) as proposed by the U.S.
Senate Energy and Natural Resources Committee. The Administration is
still evaluating the proposal, and looks forward to working with the
committee to ensure efficient and effective programs for providing
assistance for energy infrastructure investment.
Our task is to allocate credit assistance where it is most
effective, maximizes policy goals and to demonstrate to Congress and
the American people that loan guarantee programs can provide good value
for money. DOE is working to implement the Title XVII program in line
with the intent of the Recovery Act, and consistent with the priorities
outlined through Presidential Memoranda issued in February and March.
DOE has received applications from previous Title XVII solicitations
and expects the funds will be utilized consistent with these goals. I
will highlight four principal reactions:
First, the experience from the first loans and guarantees made
under the existing credit programs will provide tangible experience to
inform program design to make the Credit Programs more effective. We
want to make sure that any program changes support the Department's
ability to provide credit assistance, quickly, effectively, and
transparently, while protecting the taxpayers.
Second, appropriations for credit subsidy and for operating
expenses through the loan guarantee program under the Recovery Act was
a positive step forward, enabling the institution to develop the
appropriate scale organization and deliver a consistent loan guarantee
pipeline. Ensuring any future loan programs have appropriate
appropriations is an important design feature.
Third, we are committed to leveraging private capital, including
maintaining the requirement for significant equity for credit
assistance, and seeking to engage additional debt funding partners to
bring private capital off the sidelines through our financing
activities. The first conditional loan guarantees should show that
sponsor equity is available for good projects. The program will be
successful if and only if the federal government becomes a relatively
secondary lender in these markets over time--where there is significant
private sector lender involvement and strong credit markets take the
place of Federal assistance. Right now, in these extreme market
circumstances, we need to provide loans to mature renewable technology
projects that the market was considering funding in full as recently as
last summer. We will make these loans to spur rapid renewables capacity
additions in the market. The goal should be to have the federal
government focus on its unique role in accelerating market development
for advanced technologies. Title XVII support should not be a long-term
financing solution for troubled energy companies--nor should the
Federal assistance crowd out private lenders who provide better
commercial underwriting capabilities than the Federal government, and
ultimately a more efficient allocation of the nation's resources. The
Department of Energy has a clear role to play, and we will provide
strong returns to the American taxpayer if we remain focused on our
unique role in filling a gap in advanced energy technology markets.
Fourth, the Administration believes that loan programs should
conform to standard budget laws and controls, including the Federal
Credit Reform Act of 1990, as amended, and with Federal credit
policies. We would welcome discussions with the committee on these and
any additional issues that come to light during our review, in order to
ensure that any final legislation successfully addresses the Nation's
energy needs efficiently and effectively.
conclusion
Mr. Chairman, thank you for the opportunity to appear before you
today. This concludes my testimony and I am happy to answer questions.
Thank you.
The Chairman. Thank you very much.
Mr. Reicher.
STATEMENT OF DAN W. REICHER, DIRECTOR, CLIMATE CHANGE AND
ENERGY INITIATIVES, GOOGLE.ORG, MOUNTAIN VIEW, CA
Mr. Reicher. Chairman Bingaman, Senator Murkowski, and
members of the committee, thank you for the opportunity to
testify. I am Dan Reicher and I serve as Director of Climate
Change and Energy Initiatives for Google.org, a unit of Google
which has been capitalized with more than $1 billion of Google
stock to make investments in advanced policy and technology in
several areas, including energy and climate change.
Prior to my position with Google, I was President of New
Energy Capital, a private equity firm that invests in clean
energy projects. Prior to this position, I was Executive Vice
President of Northern Power Systems, one of the Nation's oldest
renewable energy companies. Prior to my roles in the private
sector, I served in the Clinton administration in several
positions, including as Assistant Secretary of Energy for
Energy Efficiency and Renewable Energy.
Mr. Chairman, as I testified last summer at a hearing in
this committee, there is an established pathway for investment
in clean energy. It generally starts with Government investment
in early stage, high-risk research. It moves to corporate and
venture capital funding of technology development. It then
proceeds to large-scale deployment of technologies through
project finance.
The bill being reviewed today is focused on the final
stage, the deployment of clean energy technologies at a scale
significant enough to actually address our energy-related
challenges like climate change, energy security, economic
competitiveness, and job creation. However, the bill has an
even more particular and critical focus: the point at which an
energy technology is ready for scale-up from a pilot project to
a full-scale plant. This problematic moment is often when many
promising energy technologies die. In the clean energy
business, we call it the ``valley of death'' and it looms
large. Failing to bridge it has cost us serious progress in
many clean energy technologies. In some cases, investors from
other countries have stepped into the breach, but we have lost
the tax and employment benefits of a U.S.-based company.
Looking ahead, the valley of death will be a particular
challenge for scale-up of promising technologies, including,
for example, concentrating solar power, enhanced geothermal
systems, various onshore and offshore wind technologies,
advanced batteries, and biomass power and fuels. Today's bill
would increase the capital available for clean energy projects,
thereby helping critical technologies cross the valley of death
and get to scale. We welcome the bill and its innovative and
focused approach.
There are typically two elements of financing in energy
projects: equity and debt. Federal tax credits have stimulated
equity investment in clean energy projects. Securing loans for
projects has been more problematic, especially for higher-risk
projects. Bankers are generally reluctant to provide a loan for
a project involving a technology that has not been proven at
commercial scale. A common refrain from the bankers is: ``We'd
be delighted to finance your third or fourth project. Come see
us after you have built the first couple of full-scale plants
and you've got solid operating data proving that your
technology works.''
Bank financing plays a critical role because a commercial-
scale energy project can often cost hundreds of millions or
billions of dollars, generally beyond the capacity of venture
capital investors who have often advanced the technology
through the pilot stage. The projects also generally have rates
of return below what the venture community expects.
Let me provide a bit of perspective. Over the last 5 years,
venture capital investment in the broad array of renewable
energy technology companies was roughly $12 billion worldwide.
In contrast, investment in projects deploying these renewable
energy technologies was more than 20 times this, at about $275
billion. In very rough terms, venture investors expect average
returns on a per-transaction basis to be 35 to 40 percent in a
basket of deals ranging from home runs to total losses. In
contrast, returns for equity investors on individual energy
projects are roughly 8 to 12 percent and 6 to 8 percent for
banks providing debt, with the expectation that most energy
projects will perform as promised and none will be outright
failures.
Mr. Chairman and Senator Murkowski, the key point is that
the valley of death projects sit precariously between the
venture capital and project finance worlds. They are generally
too big in terms of required capital and too small in terms of
returns for the venture capital community. They are often too
risky for project finance players, especially for the banks
which typically provide the great majority of a project
investment. This is why the legislation you are proposing is so
critical.
The bill is an improvement over the approach you and
Senator Domenici took last year in two different bills.
First, there is specific focus in the bill on breakthrough
technology, i.e., a technology with significant potential to
advance critical national energy goals but that is not
commercially ready.
Second, the Clean Energy Development Administration will
have a board of directors and an advisory council to help
ensure consideration of financial and technical risks.
Third, the bill provides this administration with a broad
array of tools, including loans, loan guarantees, letters of
credit, bonds, as well as profit participation.
Fourth, the Clean Energy Development Administration would
use a portfolio investment approach to mitigate risk and
diversify investments.
Overall, the bill takes the absolutely right approach to
moving critical technologies across the valley of death to
full-scale commercialization, but there are some areas for
further improvement. Critical is ensuring that CEDA, the Clean
Energy Development Administration, ends up successfully funding
the right set of projects.
In addition to reaching out to private financiers on every
transaction, CEDA might also work to prearrange financing for
subsequent plants in partnership with private financiers,
conditional on the initial couple of plants meeting performance
criteria. Alternatively, CEDA could reserve a senior position
in the capital structure of the first project.
Once a project has been selected, the next task is
structuring the deal and determining the degree to which CEDA
can benefit from a successful project. The bill provides for
profit participation, allowing CEDA to be compensated for risk
with upside and successful projects, thereby helping to make
the Clean Energy Investment Fund self-sustaining.
This provision could be further improved if CEDA were
allowed to take equity positions through purchase of warrants
in the underlying technology companies or of the right to
invest in future projects on favorable terms.
In conclusion, Mr. Chairman and Senator Murkowski, your
legislation obviously comes in the midst of an economic crisis,
but this is precisely when clean energy projects are facing
increasing difficulty in getting finance and your proposal is
so important. This is especially so for projects involving
innovative technologies with higher associated risk, the very
technologies that may well hold the keys to addressing the
climate crisis, oil dependence, a deteriorating electric grid,
and the struggling economy. When the economy improves, these
valley of death projects will continue to need the critical
financial support that this bill provides, hopefully also
driven by robust Federal support for the R&D which created them
and economy-wide limits on carbon emissions that would make
them so compelling.
At Google, we stand ready to help you advance this
important legislation. Thank you very much.
[The prepared statement of Mr. Reicher follows:]
Prepared Statement of Dan W. Reicher, Director, Climate Change and
Energy Initiatives, Google.org, Mountain View, CA
Mr. Chairman and members of the committee, my name is Dan Reicher
and I am pleased to share my perspective on legislation to improve the
availability of financing for the deployment of clean energy and energy
efficiency technologies. I serve as Director of Climate Change and
Energy Initiatives for Google.org, a unit of Google which has been
capitalized with more than $1 billion of Google stock to make
investments and advance policy and technology in the areas of climate
change and energy, global poverty and global health.
At Google we have been working to lower the cost and increase the
deployment of renewable energy through our Renewable Electricity
Cheaper than Coal (RE It often starts with government investment in early stage
high risk technology research;
It moves to corporate and venture capital funding of
technology development;
It then proceeds to actual deployment of technologies
through project finance and other mechanisms.
The bill being reviewed today--the 21st Century Energy Technology
Deployment Act--is focused on the final stage of this continuum--the
deployment of clean energy technologies at a scale significant enough
to actually address our energy-related challenges like climate change,
energy security, economic competitiveness, and job creation. However,
the bill has an even more particular and critical focus: the point at
which an energy technology is ready for scale-up from a pilot project
to a full-scale plant. This problematic moment is often when many
promising energy technologies falter--and a significant number die. In
the clean energy technology industry it is known as the ``Valley of
Death''. Helping cutting-edge technologies survive this difficult phase
is an element of our RE First, we must significantly increase public funding of
research and development of advanced energy technologies.
Second, the federal government must put a price on
greenhouse gas emissions in order to internalize the costs of
climate change and move energy investments toward lower carbon
and more efficient technologies.
Third, we must remove barriers to cleaner and more efficient
technologies and establish rigorous standards to move these
technologies to market.
And fourth, the federal government must, in partnership with
the private sector, help increase the capital available to move
immature and often higher risktechnologies to commercial scale.
Mr. Chairman, this fourth role is illustrated by the bill you and
Senator Murkowski have recently introduced, the 21st Century Energy
Technology Deployment Act. The bill, if enacted, would increase the
capital available for clean energy projects, thereby helping to mature
the underlying technologies and move them to scale. We welcome your
bill and its innovative and attractive approach to improving clean
energy project finance. In this testimony we provide our thoughts on
some of the bill's important elements and how the legislation might be
further strengthened.
2. the 21st century energy technology deployment act
There are typically two elements of energy project finance: equity
and debt. Federal tax credits have stimulated equity investment in
wind, solar, geothermal and other clean energy projects. Securing loans
for projects has been more problematic, especially for higher risk
projects. Bankers are generally reluctant to provide a loan for a
project involving a technology that has not been proven at commercial
scale. A common refrain from the bankers is: ``We'd be delighted to
finance your third or fourth project. Come see us after you've built
the first couple of full-scale plants and you've got solid operating
data proving that your technology works.''
Bank financing plays a critical role because a commercial-scale
energy project can often cost hundreds of millions or billions of
dollars, generally beyond the capacity of venture capital investors who
have often advanced the technology through pilot scale. The projects
also generally have rates of returns well below what the venture
community expects. There are other sources of private equity beyond
venture capital but these players generally require the lower cost debt
provided by the banks to be part of the project finance deal in order
to meet their return thresholds.
Let me provide a bit of perspective on the scale of energy project
transactions and expected rates of return. Over the last five years
venture capital investment in wind, solar, biofuels, biomass,
geothermal, small hydro and marine energy companies was roughly $12
billion worldwide. In contrast, investment in projects deploying these
technologies was more than twenty times this, at about $275 billion.
And in very rough terms, venture investors expect average returns on a
per transaction basis to be 35-40% in a basket of deals ranging from
``home runs'' to total losses. In contrast, returns for equity
investors on individual energy projects are roughly in the 8-12% range
and 6-8% for the banks providing debt, with the expectation that most
energy projects will perform as promised--and none will be outright
failures.
The key point is that the Valley of Death projects sit precariously
between the venture capital and project finance worlds. They are
generally too big in terms of required capital and too small in terms
of returns for the venture capital community. And they are often too
risky for the project finance players, especially for the banks which
typically provide the great majority of a project investment. Mr.
Chairman, this is why the CEDA is so critical.
Mr. Chairman, the bill you introduced last year, S. 3233 was
designed to increase the willingness of banks to make loans for clean
energy projects by providing a secondary market for their loans through
the 21st Century Energy Deployment Corporation. I concluded last year
that if implemented well this secondary market should increase the
capital available for the scale-up of clean energy technologies with
lower risk profiles. The question I raised, however, was whether the
Corporation in its operation would also purchase loans from higher risk
Valley of Death projects. I was concerned that the bill as drafted last
year would fail to address precisely the kind of higher risk Valley of
Death projects--as part of a larger portfolio of projects--that most
need a smart push from the government.
I was also concerned that last year's bill did not include critical
tools, including loan guarantees, letters of credit, direct loans and
related mechanisms, which could directly address higher risk projects.
Loan guarantees, for example, help borrowers obtain access to credit
with more favorable terms than they might otherwise obtain in private
lending markets because the federal government guarantees to pay
lenders if the borrowers default. By doing so we could help leverage
the vast amounts of private sector capital that is so critical to
taking clean energy technologies to scale.
The new bill, the 21st Century Energy Technology Deployment Act,
deals precisely with these issues in several respects and includes a
number of important provisions to ensure effective and efficient
financing of clean energy projects. The legislation would incorporate
the existing DOE loan guarantee program into a new Clean Energy
Investment Fund. Importantly, it would also create a new financing
entity called the Clean Energy Deployment Administration (CEDA) housed
within DOE but with a degree of independence like the Federal Energy
Regulatory Commission enjoys. The Clean Energy Investment Fund would
become the seed fund for CEDA.
The bill is an improvement over last year's approach for several
reasons:
First, there is specific focus in the bill on ``breakthrough
technology'', i.e. technology with significant potential to
advance critical national energy goals but that ``has generally
not been considered a commercially ready technology as a result
of high perceived technology risk or other similar factors''.
It is this breakthrough technology, with its significant risk
profile, that faces difficulties raising capital for the first
few commercial-scale plants.
Second, CEDA will have a board of directors and an advisory
council that will have the background and skills to help ensure
that the financial and technical risks of the agency's clean
energy project investments are adequately considered.
Third, the bill provides a broad array of tools to CEDA to
accelerate deployment of clean energy technology including
direct loans, loan guarantees, letters of credit, and other
credit enhancements. The CEDA may also issue bonds, notes,
debentures or other obligations or securities. In addition CEDA
can use alternative fee arrangements such as ``profit
participation'' to increase the upside in a transaction and
offset the risk.
Fourth, the CEDA would use a portfolio investment approach
to mitigate risk and diversify investments across technologies.
3. areas for improvement
Overall, the 21st Century Energy Technology Deployment Act takes
the right approach to moving critical technologies across the Valley of
Death but there are some areas where it might be further improved. At
the core of these improvements is ensuring that CEDA ends up
successfully funding the right set of projects that will move
breakthrough technologies through the Valley of Death to full scale
commercialization.
We can think about the universe of possible CEDA projects as a
three-layer cake. The top layer, the most financeable projects, will
get financed by private investors. The bottom layer involves projects
that are far too risky and should not be financed at all. The layer in
the middle has projects that don't quite meet the bar of private
lenders but have promising technologies and should be financed by CEDA.
The challenge that CEDA has is figuring out which projects are in the
middle layer and where the layer starts and ends.
In meeting this challenge CEDA has three related tasks.
1. Select the projects that it will fund;
2. Structure the transactions to mitigate risk and be
compensated for residual risk;
3. Set the loan loss reserve to cover potential losses.
The bill has mechanisms addressing all these tasks but there is
little focus on the most obvious mechanism which is to engage private
financiers in some way. There are several reasons to do so:
They may have already reviewed the transaction, know the
participants, and can identify the risks and issues.
They will be financing the projects after projects one or
two so they can provide the performance criteria required in
order to finance subsequent plants.
Their degree of interest in participation in future projects
will be an indicator of future success.
Engaging the private financiers can be as simple as encouraging
CEDA to adopt a practice of actively reaching out to private financiers
on every transaction. CEDA might also run an annual finance conference
with the private sector to solicit feedback.
CEDA might also work to pre-arrange financing for the 3rd or 4th
plant in partnership with private financiers conditional on the initial
plants meeting certain performance criteria. Alternatively, CEDA could
reserve a senior position in the capital structure of the first project
for private lenders. This should be an option rather than a requirement
since even if the private financiers did not participate in the first
deal, CEDA would have gained a second opinion on the risk.
Coupled with CEDA's own assessment, this process would leave CEDA
better informed on whether to fund a particular project, how to
structure it and what reserve level to set. It would also provide the
private investors early exposure to the project so that they could
track its progress, making it more likely that they would finance later
projects.
Once a project has been selected, the next task is structuring the
deal and determining the degree to which CEDA can benefit from upside
that comes from a successful project. The bill allows for ``profit
participation'' under the Alternative Fee Arrangements section.
This is critical to the success of the program because it allows
CEDA to be compensated for risk with upside in successful companies.
This will help meet the critical goal of making the Clean Energy
Investment Fund, which undergirds CEDA, self-sustaining. This provision
could be further improved if CEDA were allowed to take equity positions
through purchase of warrants in the technology companies. CEDA would
then benefit from the rising value of companies that successfully
transitioned to commercial products. CEDA could do this either directly
or through a fund in partnership with private investors. CEDA might
also acquire rights to invest in additional future projects on
favorable terms.
The third task CEDA faces involves setting the loan loss reserve,
which is the percentage of capital the agency should keep as a buffer
against potential losses. Since the loan loss reserve depends both on
the quality of the deals selected and the structure of the
transactions, progress on the first two tasks above should make it
easier to set a reasonable loan loss reserve. This is important because
the lower the loan loss reserve the more loans CEDA can make for the
same amount of appropriation. For example, the current figures of $10
billion in appropriations with a 10% reserve--the initial assumption of
a loan loss reserve in the bill--would provide about $100 billion in
loans. If the reserve percentage was reduced to 5% then about $200
billion in loans could be provide for the same $10 billion.
Some might argue that CEDA should simply charge higher fees for
riskier projects but that would not mitigate the risk. In fact it might
increase the risk because it would place additional burden on the
borrower. This can be problematic when riskier borrowers are charged
more interest and fees, making them more likely to default.
A final issue involves collateral sharing: The previous loan
guarantee program did not share collateral fairly between the
commercial lender and the DOE. The DOE was first in line for the
collateral so if the project went bad the commercial banks may have
limited claim on the assets. This would be roughly equivalent to having
a first and second mortgage on a house but in the event of a
foreclosure only the DOE would get the house leaving the commercial
bank with insufficient recourse. Congress needs to ensure that if CEDA
is created there is a fair sharing of collateral.
4. conclusion
Mr. Chairman and Senator Murkowski, the legislation you are jointly
advancing obviously comes in the midst of an economic crisis. But it is
precisely at this moment - when clean energy projects so vital to our
economy, environment and security are facing increasing difficulty
getting financed--that the mechanism you propose is so important. This
is especially the case for projects involving innovative technologies
with higher associated risk--the very technologies that may well hold
the keys to addressing the climate crisis, our oil dependence, a
deteriorating electric grid and also provide a major stimulus to the
faltering economy. And when the economy improves, these Valley of Death
projects will continue to need the critical financial support that this
bill provides. At Google we stand ready to help you advance this
important legislation.
The Chairman. Thank you very much for your testimony.
John Denniston, we are glad to have you here. Go right
ahead.
STATEMENT OF JOHN DENNISTON, PARTNER, KLEINER PERKINS CAUFIELD
& BYERS, MENLO PARK, CA
Mr. Denniston. Thank you. Good morning, Chairman Bingaman,
Ranking Member Murkowski, members of the committee. My name is
John Denniston. I am a partner with a venture capital firm,
Kleiner Perkins Caufield & Byers. I am really honored to be
here today to share my views on how Federal policy might help
build a more sustainable energy system for America.
I am deeply inspired to watch the Clean Energy Deployment
Act taking shape at such an opportune time, both for our planet
and for our economy. We must move quickly. America's leading
scientists predict we only have a short period of time to make
dramatic cuts in our greenhouse gas emissions or risk
potentially catastrophic climate change. Time is also of the
essence as we move ahead to address our energy security and
restore America's global competitive position.
Today, to our peril, America is trailing in the race to
build renewable energy industries, the very industries destined
to become the economic engine of the 21st Century. The news is
sobering. Only five U.S. companies appear on the international
lists of the top 10 firms producing solar modules, wind
turbines, and advanced batteries. That is only 5 out of the top
30 companies in these crucial industries, a paltry 17 percent
market share and a far cry from the dominant market position
American companies enjoyed during the information technology
revolution.
Consider this. Today, more Germans are employed by their
green tech industry than by their auto industry. If we fail to
reverse this equation, we will forfeit our hope of solving our
energy security crisis. Future Americans will still depend on
other countries for our energy. They will simply be importing
innovative green technologies instead of crude oil.
U.S. venture capital and technology industry professionals
stand ready and are eager to help turn this situation around,
and we know that America can, once again, lead the way.
Turning now to the pending Clean Energy Deployment Act, I
first want simply to repeat my enthusiasm. There is so much to
praise in the CEDA legislation. I particularly admire the
adroitly worded goals and the creation of a diversified
portfolio weighted in favor of breakthrough technologies that
will surely deliver the biggest bang for the buck in terms of
combating our energy crisis.
I am also heartened to see your skillful efforts to level
the playing field for these credit-starved companies, including
provisions that may reduce over-burdensome costs.
But most importantly, this far-sighted bill directly
addresses one of the most daunting impediments to swift
adoption of renewable energy sources, the longstanding
unavailability of loans for breakthrough clean technologies
which has been greatly aggravated in the current financial
crisis.
You heard Dan Reicher speak of the valley of death, a
period during which companies with breakthrough technologies
find it difficult, if not impossible, to obtain loans. Dan is
correct. Most banks just are not interested in lending until
those novel technologies have been fully demonstrated over a
period of time in the marketplace. As you might imagine, the
financial crisis has made this valley of death even drier. CEDA
will now allow many of these companies to cross the valley of
death by enabling them to access the credit markets.
I elaborate on several other reasons for my enthusiasm in
my written testimony, but would like to take this time to
mention four suggestions for how to build on your success.
First, I urge you to review the bill's stipulations
concerning hiring. American taxpayers will expect CEDA to
retain the best available talent to make decisions involving
many billions of dollars' worth of complex loans, loan
guarantees, and other forms of credit enhancement. But the
current draft threatens to tie administrators hands with
restrictive policies when it comes to hiring that talent. This
provision merits another look.
Second, I suggest you broaden out the expertise of the CEDA
advisory council by including professionals with financial and
energy market know-how, emphasizing experience with renewable
energy. I am confident you can do this, even while keeping the
advisory council relatively small in size. While it is clearly
essential to gain the benefit of scientific input, I believe
business expertise will also be instrumental.
Next, CEDA amends the existing DOE loan guarantee program
in important ways, but I recommend one further step,
eliminating the need for a credit rating agency review in the
case of emerging growth companies. These credit agency reviews
are very costly and, in the case of emerging growth companies,
simply confirm what everybody already knows, that fledgling
companies have low credit ratings.
Finally, in a very short period of time, Energy Secretary
Steve Chu's team has made remarkable progress on the existing
DOE loan guarantees, including issuing the first conditional
guarantee and reducing the complexity and costs of applying for
the guarantees. I would encourage you to implement CEDA in a
fashion that does not interfere with the recent impressive
progress we have witnessed.
My main wish, however, is for the swift passage of this
commendable bill which is all the more timely and prescient in
view of the progress you and your colleagues are making with
comprehensive energy legislation. As America finally moves to
limit greenhouse gas emissions, we will obviously need to have
new, clean energy technologies up and running as soon as
possible.
I am heartened by this committee's efforts to address this
formidable challenge and grateful for the privilege of
collaborating with you.
[The prepared statement of Mr. Denniston follows:]
Prepared Statement of John Denniston, Partner, Kleiner Perkins Caufield
& Byers, Menlo Park, CA
Good morning, Chairman Bingaman, Ranking Member Murkowski and
Members of the Committee. My name is John Denniston, and I am a partner
at the venture capital firm Kleiner Perkins Caufield & Byers. I most
recently testified before you in July of last year, and am honored to
return today to share my views on how federal policy might help build a
more sustainable energy future.
I'm inspired to witness the manner in which you've been tackling
our energy crisis with bold legislation, including the pending Clean
Energy Deployment Act, CEDA. This bill couldn't be more essential at
this juncture, promising to provide not only strong environmental
stewardship but also well-timed help for our struggling economy, and a
tonic for U.S. international competitiveness.
Making the clean energy loans enabled by CEDA even more opportunely
timed is the progress you and your colleagues are making toward
adopting comprehensive energy legislation. As America moves forward to
reduce greenhouse gas emissions and enhance our climate security, it
becomes all the more urgent to empower our capital markets to support
new, clean energy technologies.
Together with most of the rest of America, venture capital and
technology industry professionals--Democrats and Republicans alike--we
are deeply concerned about the risks posed by our energy crisis: a
tripartite challenge encompassing climate change, energy security, and
increasing threats to our global competitiveness. At the same time, our
industry is in a unique position to help seize the opportunities these
challenges present to rebuild our economy, creating jobs and prosperity
along the way.
Even in these difficult economic times, the American venture
capital sector stands ready and able to spur new, innovative businesses
and boost employment. According to an IHS Global Insight Study soon to
be released, venture-backed companies in 2008 employed more than 12
million Americans, and generated nearly $3 billion in U.S. sales,
corresponding to 10.5% percent of U.S. private sector employment and
20.5% percent of U.S. GDP. From 2006--2008, venture-backed companies
grew jobs at three times the rate of the private sector taken as a
whole.
In fact, over the past several decades, U.S. technology companies
have accounted for as much as one-half of GDP growth, providing
Americans with one of the world's highest standards of living. Our
country would look quite a bit different today had we not, several
decades ago, become a global leader in biotechnology, computing, the
Internet, medical devices, semiconductors, software, and
telecommunications.
Founded in 1972, and based in California's Silicon Valley, Kleiner
Perkins is one of America's oldest venture capital firms. We have
funded more than 500 start-up companies, backing innovative
entrepreneurs in the digital, green technology and life science
industries. More than 170 of our companies have gone public, including
Amazon.com, AOL, Compaq Computer, Electronic Arts, Genentech, Google,
IDEC Pharmaceuticals, Intuit, Juniper Networks, Millennium
Pharmaceuticals, Netscape, Sun Microsystems, Symantec, and VeriSign.
Today, our portfolio companies collectively employ more than 275,000
workers and generate nearly $100 billion in annual revenue.
Kleiner Perkins is a member of the National Venture Capital
Association and a founding member of TechNet, a network of 200 CEOs of
the nation's leading technology companies. I serve on TechNet's Green
Technologies Task Force. My testimony today reflects my own views.
Before I respond to your invitation to comment on the pending Clean
Energy Deployment Act, I'd like to briefly recap and augment some of my
previous testimony--an overview of the way many of us in the venture
capital industry perceive the energy challenges and opportunities now
facing our country. I've touched on some of the following points in my
previous testimonies, but at the risk of a little repetition, I think
it's worthwhile to bear in mind the scope of our challenges as we move
forward to address them.
the energy crisis
There's a fast-growing consensus among Americans today about the
need to confront our three main energy challenges: the climate crisis,
our dependence on foreign oil, and the risk of losing our global
competitive edge by failing to champion the new green technologies
which are destined to become a dominant economic growth engine over the
coming years and decades.
Addressing these challenges vigorously may well be our best
opportunity to alleviate our financial crisis, create jobs and get back
on the road to prosperity. Green technologies--including sun, wind and
geothermal power, as well as advanced batteries, electric
transportation, and waste- to-energy processes--offer this country's
best hope of combating climate change, rebuilding our domestic economy
and regaining our edge as an economic superpower. But we have little
time to spare.
Climate Change
America's leading scientists predict we have only a short period of
time to make dramatic cuts in our greenhouse gas emissions or risk
potentially catastrophic climate change. Global temperatures and sea
levels are already rising and will continue to do so; the question now
is whether we can slow down the projected rate of future increases.
Climate change is no longer a partisan issue: both President Obama
and Republican former presidential candidate Senator John McCain have
publicly declared we must confront this crisis, with President Obama
putting it at the top of his policy agenda. Yet to our peril, we have
so far failed to move with the requisite speed and determination.
Energy Security
As for our energy security dilemma, this Committee is well aware
that America continues to import approximately 70% of our oil needs.
Given both rising international competition for these supplies and the
political instability of some of our major suppliers, this is clearly a
high-risk, unsustainable strategy.
Global Competitiveness
Finally, our future prosperity is at risk, and here I speak from
personal experience. As I've traveled on business to Asia and Europe,
I've watched other governments strive, and often succeed, in emulating
in the renewable energy sector the technology innovation that has been
a hallmark of the U.S. economy. Determined public policy has given
overseas entrepreneurs advantages, including financial incentives and
large investments in research and education.
Simply put, America is trailing in the race to build renewable
energy industries--the very industries that offer us our best hope of
job creation and a rising standard of living. The news is sobering:
Only five U.S. companies appear among the international lists of the
top-ten firms producing solar modules, wind turbines and advanced
batteries. That's five out of the top thirty companies in those crucial
industries, a paltry 17% market share, and a far cry from the dominant
position American companies enjoyed during the information technology
revolution. Consider this: today, more Germans are employed by their
greentech industry than by their automobile industry.
If we fail to reverse this equation, we'll forfeit our hope of
solving our energy security crisis. In that case, future Americans will
still be dependent on foreign energy imports--the only difference is
they'll be importing innovative green technologies instead of crude
oil.
As much as we've already fallen behind, however, I'm convinced
there's still time for the United States to catch up, and once again
lead a global technological revolution.
renewables: the opportunities
Moore's Law & The Pace of Technological Progress
In Silicon Valley, we often refer to a principle known as Moore's
Law: a prediction, credited to Intel cofounder Gordon Moore back in the
1960s, that semiconductor performance would double every 24 months.
Moore's law underpins the information technology revolution of the past
three decades. Better, faster, and cheaper silicon chips led the way,
over just the past quarter of a century, from an era of big and
expensive mainframe computers to affordable hand-held cell phones that
today connect people all over the world to the Internet and to each
other.
Over the past decade, we at Kleiner Perkins have seen signs of a
Moore's Law dynamic operating in the energy sector, giving us
confidence the rate of greentech performance improvement and cost
reduction will lead to energy solutions we can't even imagine right
now.
Alternative energy has become increasingly affordable. We're seeing
breakthroughs in a host of energy-related scientific disciplines,
including material science, physics, electrical engineering, synthetic
chemistry, and biotechnology.
These improvements have occurred over a period of time in which
there has been relatively little government policy support or
entrepreneurial focus on these sectors. Today, we're witnessing many of
our best and brightest innovators stream into the greentech sector.
Imagine what American ingenuity might accomplish in the future as we
combine our world-class entrepreneurial talent with a powerful policy
push!
renewables: the challenges
Our opportunities are breathtaking. Yet today, three major
obstacles still impede fastercommercialization of renewable energy.
The Financial Crisis
Our current economic downturn poses a dire threat to our overdue
efforts on energy reform. Energy companies--both green and brown--
depend on a flow of debt and equity investments to survive and prosper.
But the financial crisis has squeezed financial markets, particularly
prejudicing the emerging clean energy industry.
Long before this recession began, renewable energy companies with
breakthrough technologies faced a unique ``valley of death'' challenge:
it has been difficult, and often impossible, for these innovative
companies to obtain debt financing on projects at their earliest
stages. Banks are typically not interested in providing loans to
companies with novel technologies until they have been fully
demonstrated, over a period of time, in the marketplace.
As you might imagine, the global downturn has turned this valley of
death even drier. Many promising new technologies today are being
delayed or thwarted by the scarcity of commercial loans. The credit
markets are unwilling or unable to assume the risk to help them grow.
A Tilted Playing Field
The high cost of renewable energy sources, relative to the
incumbent fossil fuel and nuclear competition, is a second barrier to
greater capital investment and more rapid adoption of clean power. Why
does green power still cost more? Primarily because it's still so new,
meaning innovators have only just begun to work on cost-reducing
breakthroughs, and production volumes are still so low that providers
have yet to benefit from economies of scale. In other words, these
cost-down and scale-up phenomena are still in their infancy in the
renewable energy industries. In contrast, most coal-fired and natural-
gas plants were constructed many years ago, have already achieved the
benefits of cost reductions, and are now fully amortized, meaning their
owners no longer need to pass on these costs to ratepayers.
It's also worth noting that government policy to date has provided
powerful and costly support for fossil fuels and nuclear energy. In the
special case of nuclear power, the federal government has for many
decades assumed enormous costs for research and development, plant
operations, insurance and waste disposal--all of which, if borne by
nuclear plant operators, would make this power source a much less
viable option.
Beyond government subsidies, the fossil fuel industry has long
benefited economically by escaping responsibility for the costs of the
environmental consequences of its emissions--instead, society has paid
that price. These traditional power sources would become much more
expensive, and alternative sources of energy more cost-competitive, if
plant owners had to bear the true costs of these emissions.
Scarce Research Funding
The third major impediment to swift commercialization of clean
energy is America's woefully long record of underfunding basic,
translational and applied research for green technologies. At a time
when faculty interest in this field has never been keener, our leading
research institutions are begging for federal funding. Amounting
roughly to just $1 billion annually--most of which is ear-marked--DOE
funds dedicated to clean energy research are minuscule relative to the
problem at hand, especially when you take into account that America's
energy arsenal lacks a sufficient array of technological strategies to
solve our energy crisis. If we don't start filling our pipeline with
innovative new approaches, other countries which have long been more
prescient about this opportunity will continue to dominate this
critically important market.
the pending legislation
Turning now to the pending Clean Energy Deployment Act, I first
want simply to repeat my enthusiasm. This far-sighted and skillfully
drawn bill directly addresses one of the most daunting impediments to
the more rapid adoption of renewable energy sources: the longstanding
unavailability of loans for breakthrough technologies now aggravated by
our financial crisis.
ceda's progress
Goals and Priorities
While I applaud your efforts in general, I particularly admire
several specifics of this bill, including the adroitly worded goals,
and the tactic of creating a diversified portfolio, weighted in favor
of the most effective technologies. By setting out your goals so
clearly and drawing on scientific expertise to prioritize projects
accordingly, you are taking a big step to favor the technologies that
will give us the biggest bang for the buck, in terms of protecting the
climate, providing new jobs, and establishing energy security.
Breakthrough Technologies
I heartily commend CEDA's rational and balanced approach of
supporting newer technologies, eventhough they carry with them somewhat
higher commercialization risks than conventional energy sources. The
loan-loss reserve provisions send a clear signal that CEDA's managers
are to provide the maximum practicable percentage of support to promote
breakthrough technologies--a recognition that these innovations will
lead the way in addressing our energy crisis. In contrast, a zero risk
tolerance policy would defeat our efforts to mobilize America's
inventive spirit in this endeavor.
From my reading of the bill, it also appears that once our current
financial crisis ends and credit markets return to normal, CEDA
managers will be authorized to step back from lending to recipients
that can secure their own private funding. This will allow the federal
government to focus its limited resources on those breakthrough
technologies struggling to cross the ``valley of death.''
Yet another welcome nod to younger companies is CEDA's stipulation
that its managers, in appropriate cases, may reduce, or even eliminate,
previously required initial ``loan loss reserve'' payments, currently
calculated by multiplying the loan guarantee amount by an actuarially
determined default probability. Most emerging growth companies cannot
afford these payments. Similarly, CEDA lightens the burden for
companies pioneering breakthrough technologies by minimizing
application fees for loan guarantees.
Loan Aggregation
Loan aggregation is another terrific, and again, timely feature,
since it will both facilitate the rapid increase of clean energy loans
and energize the local banks that provide them. Under this approach,
CEDA will be able to bundle together loans from multiple borrowers,
which will both finance the upfront cost of renewable energy products
for large numbers of buyers and reduce the cost of capital by lowering
interest rates.
A Broadened Range of Eligible Loans
The legislation furthermore wisely expands the types of loans and
credit enhancements that may be issued. This flexibility will empower
federal officials, for example, to help provide financing to
manufacturers and loan guarantees for customer purchases of clean
technologies, such as solar panels and fuel cells. In light of the
credit crisis, many potential manufacturers and customers would be
otherwise unable to produce and buy renewable energy products.
Finally, I note that CEDA has been structured in a manner that
allows government and private sector lenders to collaborate. I can
imagine that one potential approach would allow CEDA and private
lenders to share collateral. This could be done, for instance, by
allowing a private lender to obtain a senior security interest on
specific equipment, while at the same time, an additional, CEDA-enabled
loan could attach its senior security interest to the remainder of the
project. This flexibility will create a multiplier effect on the
capital made available to clean energy companies under CEDA.
recommendations
All these features go far along the way to ramp up urgently needed
energy reform. Since you've asked, however, I'd like to recommend five
ways you might go even further:
1. Loosen Hiring Restrictions
American taxpayers will expect CEDA to retain the best available
talent to make decisions involving many billions of dollars worth of
complex loans, loan guarantees and other forms of credit enhancement.
The current draft of the legislation allows CEDA to hire up to 20
employees outside of the customary federal hiring restrictions, and
only in extraordinary situations, for example, where the CEDA
Administrator certifies that CEDA ``would not successfully accomplish
an important mission without such an individual.''
I recommend CEDA not be bound by unnecessarily restrictive federal
hiring policies, as the DOE loan guarantee authority is today. These
hiring restrictions to date have certainly slowed the implementation of
the loan guarantees authorized under the 2005 Energy Policy Act. I
believe a better approach would be to allow CEDA to employ and contract
expertise as it sees fit, providing compensation consistent with
prevailing private sector rates.
2. Add Business Expertise to the Advisory Council
While I'm encouraged to note CEDA's refreshing strategy of
welcoming scientific expertise to the new bank's Advisory Council, I
recommend you balance that know-how with financial and energy market
expertise, particularly individuals with experience with renewable
energy. I believe this combination of scientific and business expertise
will lead to the best decisions at the Advisory Council level.
3. Address Other Shortcomings of Existing Loan Policy
CEDA amends the existing DOE loan guarantee program in important
ways, but I recommend one further step: eliminating by statute the need
for a credit rating agency review in the case of emerging growth
companies. Such a review typically costs at least $150,000, and in the
case of start-up firms simply confirms what everyone already knows--
that fledgling companies have low credit ratings. This requirement
should be eliminated in the case of young companies.
4. Collaborate with the Department of Energy
As I'm sure this Committee is already aware, the first conditional
DOE loan guarantees were issued only very recently, even though
Congress granted loan guarantee authority more than three years ago, in
the 2005 Energy Policy Act. Energy Secretary Stephen Chu's team has
been working hard to correct this state of affairs and get loans out
the door to credit-starved energy companies. In addition to issuing
conditional guarantees, Secretary Chu and his team are working to
reduce the complexity and cost of applying for loan guarantees--efforts
that will be particularly helpful to start-up companies. I would
encourage you to implement CEDA in a fashion that doesn't interfere
with the recent, impressive progress we've witnessed.
5. Communicate Progress and Challenges
As our government moves ahead with its clean energy campaign, an
effort that will surely require substantial cost and sacrifice, it will
be particularly important to communicate to Americans what their tax
dollars are achieving.
To this end, I'd like to remind you of a suggestion I've made in
past testimony, which is to create a national energy dashboard--perhaps
managed by the DOE--to monitor our national energy transition. Updated
monthly and widely disseminated, the dashboard might measure greenhouse
gas emissions, the share of U.S. energy consumption powered by imported
fuel, U.S. market share of the global renewable energy industry,
federal funding for renewable energy research, and perhaps now even the
ramping up of federal loans and credit enhancement.
conclusion
Today's energy challenges are so vast and varied that we're
ultimately limited only by our imagination in the ways we can most
effectively address them. Again, however, I'm heartened by this
Committee's efforts, and grateful you've once again invited me here to
collaborate with you.
I look forward to today's hearing and to learning more about how we
can work together to build a more secure future for America and the
world.
The Chairman. Thank you very much.
Jeanine Hull, we are glad to have you here. Please go right
ahead.
STATEMENT OF JEANINE HULL, COUNSEL, DYKEMA
GOSSETT, PLLC
Ms. Hull. Thank you very much, Mr. Chairman, Ranking Member
Murkowski, and members of the committee. I am honored to be
invited to convey my great respect for the work the committee
and committee staff have done since the last time several of us
testified on legislation to create a Federal clean energy
funding entity.
I am of counsel at Dykema Gossett, a Detroit-based law
firm, where I advise clients on energy infrastructure and
project finance issues. My testimony today, however, reflects
exclusively my personal opinions based upon more than 30 years
of experience in the energy infrastructure and finance sector.
In my opinion, the committee's discussion draft of the 21st
Century Energy Technology Deployment Act, which creates the
Clean Energy Deployment Administration, or CEDA, has
brilliantly reconciled and improved the bills introduced in the
110th Congress by Chairman Bingaman and then-Ranking Member
Domenici, which were the subject of the July 2008 hearing.
Although similar to each other in most critical respects, S.
2730 focused on rapid deployment of existing technology while
S. 3233 focused on development of breakthrough technologies,
and each bill authorized the use of different tools to achieve
its respective purpose. As the discussion draft recognizes,
however, both purposes and both sets of tools will be required
to achieve the scope and scale of low and zero carbon
technology deployment necessary to meet the four challenges of
reliable domestic energy supply, environmental protection and
avoidance of major climate change damage, economic growth, and
physical security.
The fundamental purpose of CEDA is to use the limited
financial resources of the Federal Government, combined with
the expertise found in the outstanding laboratories, operated
by the Department of Energy and elsewhere, to leverage the
resources of the private sector capital markets for rapid
commercialization and deployment of energy efficiency and
renewable technologies to meet these four challenges. We appear
to no longer be debating whether such an entity is required,
only how to ensure that it achieves its mission with minimal
risk to the taxpayers.
Those who are concerned about any similarity between CEDA
and Fannie Mae or Freddie Mac should take comfort in the fact
that CEDA will terminate after 20 years, not likely long enough
to compete with other market participants, and in addition, as
a governmental entity, CEDA is not owned by shareholders and is
not, therefore, driven by a quarterly earnings requirement and,
thus, will not be subject to the kinds of incentives and
pressures applied to Fannie and Freddie.
However, CEDA can only succeed in its mission to manage
technological and financial risks if it is built on a solid
foundation of prudence, transparency, accountability, and
confidence. I believe such a foundation has been established in
this draft bill, and in my written testimony, I specifically
emphasize and support the numerous protections contained in the
bill to ensure these elements.
I do, however, want to note specifically that the Secretary
of Energy is required to establish specific goals for CEDA.
These goals are further refined by an energy technology
advisory council which will establish the assessment
methodology to be applied to all funding requests and provide
independent due diligence on specific technology approaches. I
believe this requirement for technology due diligence by the
council will be one of CEDA's major contributions to the
market. The council will be composed of experts from a broad
array of relevant fields, enabling the council to develop a
more accurate appraisal of specific technology than any
investor or investor group is likely to be able to produce
otherwise. Private investors will, therefore, be able to rely
on the council's assessment which will provide a strong market
signal of technical feasibility. This in itself should greatly
facilitate private capital market funding.
In addition, the administrator is explicitly tasked with
the responsibility to ensure that the administration operates
in a safe and sound manner. This is defined as including the
establishment and review of internal controls, consistent with
section 404 of the Sarbanes-Oxley Act. Having been a compliance
officer in energy trading firms, I have come to believe that
the only controls that are effective on a daily basis are these
internal hard controls that separate deal initiation or front-
office activities from accounting and other back-office
activities by having different people perform those tasks who
themselves report to different officers. Charges of rogue
employees are simply to me corporate speak for a lack of
internal controls. That this section is included in the
discussion draft indicates the care taken to ensure the long-
term viability of this entity.
I believe that a careful review of the discussion draft
shows that the committee has gone the extra mile to ensure that
CEDA's mission is clear, achievable, and focused; that CEDA is
provided with the necessary tools, authorities, and flexibility
to achieve its mission; and that CEDA has been structured to
ensure, as far as possible, that its resources are managed
carefully and with strict accountability, transparency, and
prudence, all the while ensuring the safety and soundness of
the entity.
However, the other critical task of the legislation is to
encourage CEDA to take on risky, but promising investments
necessary for it to meet its mission of fostering breakthrough
technologies without fear that the failure of one or more of
those technologies will eliminate support for its risk-taking
mission. Here again, I believe the committee has done an
outstanding job.
It is critical to be very clear that, if enacted, CEDA will
support some projects that, despite best efforts and thorough
due diligence, will result in losses. It is very hard for any
entity to acknowledge and accept losses or failures, but it is
particularly difficult for an entity subject to public scrutiny
and accountability to do so.
This is why I believe the heart and soul of this bill is
section 7(a)(1)(C), a section simply titled ``Risk.'' The key
part of this section requires the establishment of a loss
reserve, the very existence of which acknowledges the
inevitably of losses and provides a buffer against such losses.
However, cash held in loss reserves is by definition not
available for productive use or investment. The initial loss
reserve requirement, pending setting a requirement tailored to
its own risk experience, while appropriate for private firms,
is probably too low for CEDA since CEDA is tasked to facilitate
the funding of higher-risk projects than private equity is
willing to fund. However, the goal of loss protection is in
tension with the need to make as much capital as possible
available to maximize the number of funded projects, as the
chairman noted in his opening remarks. This is a perfect
illustration of the perpetual tug of war between risk
mitigation and potential payoff, which is the defining
characteristic of this type of entity.
Only if CEDA knows that it is acceptable--in fact,
expected--to recognize losses will it allow itself to take on
the risk it must take to achieve its mission. I would argue
that if it does not fail enough, it is not taking the
appropriate level of risk. Courage and boldness, along with
prudence, are required on all frontiers, and we are most
definitely on a technology frontier.
Mr. Chairman, Ranking Member Murkowski, thank you for the
opportunity to testify today in support of legislation that is
so vital to our country. I urge this committee to act on this
bill and move it to the floor as quickly as possible. Time is
truly of the essence.
This concludes my prepared remarks.
[The prepared statement of Ms. Hull follows:]
Prepared Statement of Jeanine Hull, Counsel, Dykema Gossett, PLLC
Good morning Mr. Chairman, Ranking Member Murkowski, and members of
the Committee. I am honored to be invited back to convey my great
respect for the work the Committee and Committee staff have done since
the last time many on this panel were invited to give our thoughts on
legislation establishing a federal clean energy funding entity.
I am currently `of counsel' at Dykema Gossett, PLLC, a law firm
based in Detroit, where I advise clients on energy infrastructure and
project finance issues. My testimony today, however, reflects
exclusively my personal opinions based upon more than 30 years in the
energy infrastructure and finance sector.
The subject of my comments today is the Committee's Discussion
Draft of the 2lst Century Energy Technology Development Act which would
create the Clean Energy Deployment Administration (``CEDA''). In my
opinion, this Draft has brilliantly reconciled and updated bills
introduced in the 110th Congress, S. 3233 and S. 2730, by Chairman
Bingaman and Ranking Member Domenici respectively, which were the
subject of the July 2008 hearing. Although similar to each other in
most critical respects, those bills differed in two fundamental
respects: S. 2730 was focused on rapid deployment of existing
technology while S. 3233 focused on development of ``breakthrough''
technologies, and each bill authorized the use of different tools to
achieve its respective purpose. As the Discussion Draft recognizes,
both purposes and sets of tools will be required to achieve the scope
and scale of low and zero carbon technology deployment necessary to
meet the four challenges of reliable domestic energy supply,
environmental protection and avoidance of climate change damages,
economic growth and physical security.
Testimony last year focused primarily on the need for a clean
energy funding facility, the seriousness of our energy related climate
and security problems, and the need for a federal funding entity to
facilitate the rapid deployment of not only existing energy efficiency
and renewable energy technologies, but also of breakthrough
technologies that have the potential to be `game-changers' in a carbon-
constrained economy.
There was significant discussion then about the crisis already
developing in the credit markets which balked at financing novel energy
technologies, and the decades of failure to achieve significant
efficiencies in energy use. So many things have changed since that
hearing in mid-July 2008: among many other things, the advent and
collapse of $4.50/gal. gasoline; the near total collapse of domestic
credit markets which spread globally; alarming new findings about how
much more quickly climate change is occurring than had been predicted
just 2 years earlier; a change of Administration; failures in key
domestic economic sectors, and the enactment of a nearly trillion
dollar federal stimulus package to address some of these events. All
this occurred in a matter of months!
The bright spot in this otherwise dreary litany is that now we are
no longer debating whether to take action, but how. Evidence of the
seriousness with which this Committee addressed the task of reconciling
the two excellent bills from last year is before us in form of the
Discussion Draft. The Committee clearly listened last year, not only to
the formal witnesses, but also to those whose concerns about federal
funding entities rose sharply with the trouble experienced last fall by
Fannie Mae and Freddie Mac, resulting in their takeover by the federal
government. The drafters of the Discussion Draft have taken great pains
to tailor the authorities and responsibilities of CEDA, as well as the
oversight functions of an independent Inspector General, the Government
Accountability Office and Congress. The drafters also provided a
focused and specific task, specific goals and the appropriate tools to
accomplish those goals.
Last year the Committee was encouraged to leverage the Government's
resources through the private capital markets and to provide credit
support or risk transfer to encourage private capital markets to fill
the gaps in existing lending practices. One specific lending gap
discussed was the infamous 'valley of death,' that is, the difficulty
of finding funding for projects attempting to pass from pilot scale
demonstration to commercial deployment. The other gap identified was
the lack of funding for widely available and proven, but small scale,
efficiency and renewable projects which cannot support standard
transaction costs. Witnesses testified that government funds were
appropriately applied to offset technology risk in breakthrough or
novel technologies, and financing/credit risk in small scale
applications that when deployed in massive numbers can provide
disproportionately large savings of carbon-based energy. Although it
has long been recognized that funding of basic research and development
is an important governmental function, justifying the expenditure of
millions of dollars annually, we are now beginning to acknowledge the
need and legitimacy for federal assistance to accomplish rapid and
widespread commercialization and deployment of appropriate
technologies.
Congress tested the waters for deployment support in the 2005
Energy Policy Act by creating the Loan Guaranty Program within the
Department of Energy. The fact that as of April 2009, no loan has yet
been guaranteed is not entirely the fault of the Department. The
legislative changes to the loan program are ones that should
substantially improve its ability to perform on a more timely basis. In
part, the lack of speed of the loan program demonstrates the need for
more than a single tool to accomplish such a monumental task. This
challenge has been met with the bill before you.
The draft 21st Century Energy Technology Deployment Act has
resolved the tension between the difference in focus and authorities
granted in S. 3233 and 2730. The new bill sets forth CEDA's mission in
Section 2 as (in paraphrase) promoting the domestic development and
deployment of clean energy technologies by creating an attractive
investment environment through partnership with and support of the
private capital market, with a priority on breakthrough technologies.
In short, the goals of both earlier bills have been melded together
while clearly putting the government in a limited, but critical support
role with respect to private markets. This subordinate role is
underscored by the fact that CEDA has a limited life of 20 years. It is
to provide the foundation for capital market development and then
terminate, not remain to compete in the markets it helps create. And
quite soundly, the draft provides all of the tools that were included
in last year's Bingaman and Domenici bills.
Those who are concerned about any similarity between CEDA and
Fannie Mae or Freddie Mac should take significant comfort in the fact
that CEDA is structured from the 'get-go' as a support facility for
private capital markets, and is not intended to stay in existence long
enough to compete in that market with the other for-profit
participants. This limitation alone is in all likelihood, sufficient to
prevent CEDA from following the paths of Fannie and Freddie.
However, CEDA can only succeed in its mission to manage
technological and financial risks to promote commercialization of clean
energy technologies if it is built on a solid foundation of prudence,
transparency, accountability and competence. I believe such a
foundation is established in this bill and want to specifically
emphasize and support the need for the following provisions:
i. safety and soundness
a. PRUDENCE
Numerous provisions of the draft require the CEDA Administrator or
the Secretary of Energy to create a well-thought out plan of how to
achieve the goals established by the bill. I shall address transparency
in a moment, but of course, all final planning documents will be
publicly available and subject to review. This approach carefully
balances the need for speed and flexibility with the need for prudent
consideration of various approaches and options.
Section 5 of the draft requires the Secretary of Energy to
establish specific goals for CEDA with respect to ensuring adequacy of
domestic energy supply, reducing reliance on foreign energy resources,
developing clean manufacturing capabilities, improving and expanding
energy infrastructure, and preventing energy waste, among other things.
These goals are further refined by an Energy Technology Advisory
Council which will establish the assessment methodology to be applied
by the Administration to all funding requests, and provide independent
due diligence on specific technological approaches. I must note here
that the requirement for technology due diligence by the Council will
be one of CEDA's major contributions to the market. The Council will be
composed of experts from a broad array of relevant fields, enabling the
Council to develop a more accurate appraisal of a specific technology
than any investor or investor group is likely to be able to otherwise
acquire. Private investors will be able to rely on the Council's
assessment with confidence, providing a strong market signal of
technical feasibility. The Council's imprimatur will give great
credibility to CEDA's decision to fund a particular project or
technology. This in itself should greatly facilitate private capital
market funding.
The Administrator is required to establish and maintain an adequate
loss reserve, an amount of cash or liquid securities set aside to
protect the Administration against expected losses. This is consistent
with safety practices required by the banking, credit union and savings
and loan regulators, the Securities and Exchange Commission and the
Commodity Futures Trading Commission in regard to entities subject to
oversight.
In addition, the Administrator is explicitly tasked with the
responsibility to ensure that the Administration operate in a 'safe and
sound' manner. This is defined as including the establishment and
review of internal controls, consistent with Sec. 404 of the Sarbanes-
Oxley Act. (See Sec. 6(b)(2)(B) of the Draft).
Having been a compliance officer in a number of energy trading
firms, I have come to believe that the only controls that are effective
on a daily basis are internal ``hard'' controls, not licensing
requirements or other external behavior prohibitions. Internal controls
that separate deal initiation, or ``front office activities,'' from
accounting and other ``back office'' activities, by having different
people perform those tasks who themselves report to different officers,
are the best means to avoid ``rogue bankers.'' In my experience,
charges of ``rogue bankers'' or ``rogue traders'' are simply corporate-
speak for a lack of adequate internal controls, both functional and
behavioral. That this section is included in the Discussion Draft
indicates the care taken to ensure the long-term success of this
entity.
b. TRANSPARENCY
As part of the US Department of Energy, CEDA is subject to
oversight by the authorizing and appropriating committees of Congress
and is required to report annually on its activities to Congress. It is
subject to oversight by the Office of Management and Budget and it is
subject to the provisions of the Administrative Procedures Act and the
Freedom of Information Act, two laws, among others, which can provide a
substantial level of transparency into CEDA's decision-making and
activities. Moreover, the Administrator is required to develop policies
and procedures that promote transparency and openness in CEDA
operations.
c. ACCOUNTABILITY
The Administrator, who also serves as chair of the Board of
Directors, is appointed by the President, reports to the Secretary of
Energy, and, along with other Directors, may be removed from office by
the President for cause. The Administrator is responsible and
accountable for meeting the goals established by the Secretary. In
addition, the Secretary of the Treasury will have an independent
responsibility to monitor the aggregate level of activity by the
Administration.
The Government Accountability Office is required to audit CEDA on a
regular basis, and is granted access to all personnel, records,
property, etc. necessary to perform its audit. Further, the
Administrator shall annually order an independent audit of CEDA's
financial statements by an independent public accountant, to be
conducted in accordance with generally accepted auditing standards. In
addition, the Administrator shall prepare and submit annual and
quarterly reports to the Secretary of Energy in the form prescribed by
the Secretary.
Taking a page from recent securities legislation, the
Administrator, as the Chief Executive Officer, and the Chief Financial
Officer are required to personally certify the accuracy and
completeness of these reports. Those reports will be made public after
receipt by the Secretary. An Inspector General will be assigned to CEDA
on a permanent basis.
d. COMPETENCE
The Draft recognizes the need for the types of specialized
expertise and experience which does not normally reside in the federal
workforce. The Administrator is granted significant flexibility to
bring in personnel with necessary expertise where justified, subject to
a limit on the total number of `exempt' staff at any given time, and
certain other limitations.
I believe that a careful review of the Committee Draft shows that
the Committee has gone the extra mile to ensure that CEDA's mission is
clear, achievable and focused; that CEDA is provided with the necessary
tools, authorities and flexibility to achieve its mission; and that
CEDA has been structured to ensure, as far as possible, that its
resources are managed carefully and with strict accountability for its
decisions, ensuring all the while the safety and soundness of the
entity.
ii. risk
After ensuring an appropriate mission and providing a structure for
safety and soundness, the next important task is to allow CEDA to take
on risky investments necessary for it to meet its mission of fostering
breakthrough technologies, without fear that the failure of one or more
supported technologies or projects will reduce or eliminate support for
its risk-taking mission. Here again, I believe the Committee has done
an outstanding job.
It is critical to be very clear that, if enacted, CEDA will support
some projects that, despite best efforts and thorough due diligence, do
not perform as expected, resulting in financial losses to CEDA. This
will happen and only means that CEDA is doing its job. If there were
little or no risk in CEDA's mission, there would be no need for it in
the first place. It is very hard for any entity to acknowledge and
accept losses or failures, but it is particularly difficult for an
entity subject to public scrutiny and accountability to do so because
of the potential for public humiliation in the wake of such loss,
something CEDA's counterparts in private equity do not usually have to
face.
That is why I believe the heart and soul of this bill is Section
7(a)(1)(C), a section simply titled ``Risk.'' This section requires the
establishment of a loss reserve, as discussed above, and even provides
an initial loss reserve requirement, pending sufficient data to create
a requirement more tailored to its own risk experience. The selected
loss reserve requirement is one common among private equity and other
risk firms. This loss reserve level, appropriate for private firms, is
probably too low for CEDA, since CEDA is tasked to facilitate the
funding of higher risk projects than private equity is willing to fund.
However, this goal is in tension with the need to preserve as much
capital as possible to maximize the number of projects which receive
funding. This is a perfect illustration of the perpetual tug of war
between risk mitigation and potential payoffs, which is the defining
characteristic of this space.
This section requires a portfolio or diversified approach, while
other sections of the bill allow for the creation of multiple risk
silos, with separate qualifications, fees and characteristics to
accommodate a diversified portfolio. Most importantly, this section
requires CEDA to provide the ``maximum practicable percentage of
support to promote breakthrough (i.e., the riskiest) technologies.''
These provisions are critical to the achievement of CEDA's mission,
which is nothing short of attempting to retool our economy to support a
`low-to-no-' carbon footprint. Only if CEDA knows that it is
acceptable, in fact, expected to recognize losses, will it allow itself
to take on the risks it must take to achieve its mission. I would argue
that if it does not `fail' enough, it is not taking the appropriate
level of risk. Again, what is `enough' failure and what is too much can
be answered only by experience. We will not crash through the carbon-
based economy barrier with timidity or by being risk averse. Courage
and boldness are required on all frontiers--and we are most definitely
on a technology frontier.
iii. national environmental policy act (``nepa'')
I encourage the Committee to consider narrowing the applicable
scope of the National Environmental Policy Act to this program.
Most of CEDA's activities and support will be focused on leveraging
private capital markets by providing some means of mitigating
technology risk, either through loan guarantees, credit support,
insurance, or by other means short of direct investment or lending.
When acting in a purely credit support role, it would be beneficial if
the project under consideration for such support could be subjected to
significantly less than full NEPA assessment or review. Of course, if
CEDA is considering investing equity or making a direct loan, a fuller
evaluation would be appropriate. This is particularly important in view
of the recognition by both the Department and the Committee that most
applications should receive a final determination within 180 days of
submission.
iv. conclusion
In my testimony last year, I identified four primary challenges to
our nation's future. I believe that, as proposed in the 21st Century
Energy Technology Deployment Act, CEDA will address each of the four
security challenges as follows:
Energy Security will be enhanced by the development of
domestic, affordable, reliable and sustainable sources of
energy to meet the demand for fuels and electricity while
simultaneously making the system less vulnerable to intentional
and unintentional disruption.
Economic Security will be enhanced through the increased
ability of the United States to insulate itself from the
inflationary pressures of dependence on a petroleum-based
economy, as well as slow the imbalance of payments to oil- and
gas-producing nations, many of which wish to do us harm. By
retaining petro-dollars at home and refocusing them on a
``greener'' economy, the United States can maintain and enhance
its manufacturing and intellectual competitiveness, create and
maintain good jobs and support (and export) thriving new
technologies.
National (Physical) Security will be enhanced by reducing our
need to protect foreign oil and gas infrastructure and reducing
our presence in unstable areas which harbor those who may wish
to retaliate against the United States on its homeland as well
as abroad.
Environmental Security will be enhanced by reducing the
volume of emissions which contribute to climate change and
otherwise pollute the air, water and soil.
Mr. Chairman, Ranking Member Murkowski, thank you for the
opportunity to testify today in support of legislation that is so vital
to our country. I urge this Committee to act on this bill and move
legislation to the floor as quickly as possible. Time is truly of the
essence.
This concludes my prepared remarks. I look forward to your
questions.
The Chairman. Thank you very much.
Joe Hezir, we are glad to have you here.
STATEMENT OF JOE HEZIR, VICE PRESIDENT, EOP GROUP
Mr. Hezir. Thank you for the opportunity to be here today.
My comments are going to be perhaps more specific and targeted
to the budgetary and financial management aspects of the
committee discussion draft bill, the 21st Century Energy
Technology Deployment Act.
I served in several career positions at the Office of
Management and Budget for over 18 years, and during that period
of time, I had oversight for energy technology R&D programs,
including demonstration and deployment activities. I currently
serve as a consultant and an advisor to a number of entities
that are participating in the title 17 program, but my comments
today are my own and reflect the result of my cumulative
Government and private sector experience and do not represent
the views of any particular entity.
Let me speak first to the amendments to title 17 of the
Energy Policy Act. Title 17 originally established a simple and
flexible structure for the program at DOE. However, this
structure, because of its flexibility and lack of definition,
in some cases has actually contributed to delays or
uncertainties, and the amendments contained in this bill do
much to provide needed clarification and direction to DOE.
I just want to highlight several particular aspects of
those amendments, such as the revision to the definition of
commercial technologies which moves the definition to more of a
financial needs-based definition.
Second, the amendments give DOE greater flexibility to use
a combination of fees and appropriated funds to pay for budget
subsidy credit costs, which gives DOE the flexibility to
support smaller-scale projects and to support projects with
higher risk, but greater technological breakthrough potential.
The amendments also clarify that appropriations act
authority is not needed for the Department to issue loan
guarantees that are paid 100 percent by the borrower. This
amendment codifies an April 20th, 2007 GAO legal opinion that
ruled that the so-called self-pay authority in the Energy
Policy Act was independent of the Federal Credit Reform Act and
not subject to the Federal Credit Reform Act. This amendment
provides that needed clarification that DOE can proceed with
the issuance of loan guarantees without further appropriation
actions in cases where the borrower is willing to pay 100
percent of the cost of the budget credit subsidy.
There also is an amendment in this bill that provides
greater flexibility for DOE to enter into collateral-sharing
agreements with other lenders, as well as to allow multiple
equity investors that hold undivided interests in project
assets. When title 17 was enacted and the original regulations
were developed, they were developed primarily based on the
presumption that this program would operate with projects that
had a single equity holder and a single lender. In reality, the
financing structures, some of which were described here this
morning, may involve multiple equity holders, as well as
several co-lenders, including in some cases foreign export
credit agencies.
The amendments in this bill, if accompanied with the
appropriate changes in the DOE regulations, would enable DOE
greater flexibility to hold collateral in undivided interest
structures. It would enable DOE to adopt parallel lending
structures and would allow DOE to accept other collateral other
than project assets. This will help to reduce the risk exposure
to the Federal Government and in many cases enable DOE to
strengthen its collateral position.
The amendments also allow for the program to be converted
to a revolving fund, which is a customary Federal budgetary
account that allows it to better use its fee revenues and to
establish loan loss reserves.
These amendments, I believe, set the stage for the
establishment of the proposed Clean Energy Development
Administration, or CEDA. CEDA builds upon this and establishes
a new entity within DOE without creating a wholly new entity
such as a Government corporation. I think this balance will
permit faster startup while ensuring appropriate independence.
There are four pieces of the CEDA financial mechanisms that
I would like to briefly comment on.
The first has to do with what I call the CEDA business
model. CEDA financing authorities are modeled after the
successful business models that have been currently used in the
Federal Government in the U.S. Export Import Bank and the
Overseas Private Investment Corporation.
The Export Import Bank, as many of you know, provides
guarantees for buyers of U.S. goods and services overseas. The
bank is authorized to engage in credit activities up to $100
billion, and their programs have been very successful. In fact,
the bank earns fees in excess of its loan losses and its
administrative expenses.
OPIC provides loan guarantees and political risk insurance
for U.S. investors that are seeking to invest in developing
countries and emerging markets. They currently have a portfolio
of about $7 billion, but OPIC also earns net revenues on its
political risk insurance and it has a cost of only about 2
percent on its loan guarantee portfolio.
The other aspect of the bill that I think is important is
that the Federal Credit Reform Act would apply to the
transactions of this entity which provides a very rigorous
risk-based methodology for the CEDA to evaluate and process
applications.
The CEDA legislation also, I believe, has a very good
provision and provides for a portfolio approach with the clear
objective that the portfolio become self-sustaining.
I think also it is very important that the legislation
requires CEDA to establish a loan loss reserve. Establishing a
clear, up-front policy on loan loss rates, I believe, is
critical to guide CEDA's risk appetite for clean energy
technologies.
Fourth and finally, the bill includes a number of
provisions to ensure a high level of transparency and
accountability. These include a separate inspector general, GAO
reviews and oversight, audited annual financial statements, and
several reporting requirements to Congress.
In conclusion, I would just like to say that the proposed
CEDA will not be risk-free. Financing the deployment of clean
energy technology projects, including those with potential
breakthrough possibility, will entail risk. But I believe that
the framework that is created in the draft bill will provide a
rigorous framework to ensure prudent risk management.
Thank you, Mr. Chairman. That concludes my remarks. I would
be happy to answer any questions.
[The prepared statement of Mr. Hezir follows:]
Prepared Statement of Joe Hezir, Vice President, EOP Group
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to discuss with you today the
budgetary and financial management aspects of the Committee discussion
draft bill, the ``21st Century Energy Technology Deployment Act.''
I served in several career executive positions at the Office of
Management and Budget for a period of 18 years, the last 6 years as
Deputy Associate Director for Energy and Science. While at OMB, I was
responsible for oversight of energy technology R&D programs, including
policies for technology demonstration and deployment.
I currently am a consultant and advisor to a number of companies
participating in the DOE Title XVII loan guarantee program. I also
advise several industry trade associations on loan guarantee program
issues. My comments today are my own and reflect my cumulative
government and private sector experience and do not represent the views
of any particular company or organization.
My comments are focused on three topics:
the proposed amendments to Title XVII of the Energy Policy
Act of 2005;
the financial management provisions of the proposed Clean
Energy Deployment Administration (CEDA); and
the transition process from the current DOE Title XVII
program to the proposed new CEDA.
amendments to title xvii of the energy policy act of 2005
The enactment of Title XVII of the Energy Policy Act of 2005 (EPACT
2005) posed a major challenge to the Department of Energy. Title XVII
authorized not only a new program in DOE, but one that was of an
entirely different character than any existing DOE program.
Implementation of the Title XVII loan guarantee program for innovative
technologies required the establishment of a new office, hiring of
staff with expertise that did not exist within DOE, development of new
regulations, and development of a new business model within DOE.
Although the pace of implementation has not been as rapid as many
observers would like, the DOE Loan Guarantee Program Office has made
substantial progress and has now gained momentum that should become
evident in decisions in the near future.
Title XVII of the EPACT 2005 established a relatively simple and
flexible structure for the DOE Loan Guarantee Program. However, the
absence of detailed and prescriptive direction in the original statute
has contributed to delays and uncertainties.
New developments since the time of enactment, such as the potential
for co-financing from foreign export credit agencies and the collapse
of commercial lending and private equity markets, created issues that
were not envisioned at the time of EPACT 2005.
The draft bill contains a set of amendments to Title XVII that
provide much needed clarification and direction. In particular, the
proposed amendments would:
revise the definition of ``commercial technologies'' so that
the criterion for eligibility for a loan guarantee would
reflect the inability of a proposed clean energy technology
project to obtain commercial financing, rather than simply the
number of times that the technology was deployed in previous
projects receiving DOE Title XVII loan guarantees;
allow DOE to use a combination of fees and appropriations to
pay for budget credit subsidy costs, providing DOE flexibility
to adjust fees as needed to support smaller scale projects or
projects with higher risk but greater technological
breakthrough potential;
clarify that appropriations Act authority is not necessary
for the volume of loan guarantees that are supported through
100% self-pay fees. This amendment codifies an April 20, 2007
Government Accountability Office (GAO) Legal Opinion that the
so-called self-pay authority in Section 1702 (b)(2) of EPACT
2005 was independent from the requirement of Section 504 (b) of
the Federal Credit Reform Act of 1990. Section 1702 (b) of
Title XVII provides clear DOE authority to issue loan
guarantees through the self-pay mechanism, whereby DOE can
charge, collect and deposit in the Treasury such payments
without the need for appropriations. This does not limit the
ability of Congress to establish limits on self-pay guarantees;
it merely clarifies that no further appropriations action is
necessary in order for DOE to exercise the authority provided
in Section 1702 (b).
provide greater flexibility for DOE to enter into
collateral-sharing agreements with other lenders, especially
foreign export credit agencies, as well as allow multiple
equity investors that hold undivided interests as joint tenants
in project assets. EPACT 2005 and the DOE implementing
regulations were premised on an assumption that Title XVII
projects would have a single equity holder and a single lender.
Financing structures, particularly for larger power generation
projects, may involve multiple equity holders, using the
ownership structure of joint tenancy, as well as several co-
lenders. In some cases, equity holders with undivided interests
may provide a corporate guarantee beyond their ownership
interest in the project which would yield a significantly
stronger credit position for DOE. The proposed amendment on
subrogation, supplemented with changes in the DOE regulations,
will enable DOE to:
--hold collateral in undivided interest structures;
--adopt parallel financing structures (including co-lending from
Export Credit Agencies), and
--more easily accept collateral other than project assets.
These arrangements will lower the risk exposure to federal
taxpayers and enable DOE in many cases to strengthen its collateral
position;
convert the current DOE Loan Guarantee appropriation account
into a revolving fund, which is the customary type of federal
budgetary account used for business-like transactions. This
modification will provide greater funding certainty by enabling
DOE to utilize fees immediately upon collection, without
further appropriation, to pay for the continuing ramp-up in
staff and support services. The proposed change in the budget
accounting would reinforce the current requirement for DOE to
recover 100% of administrative costs through fees; and
provide clearer direction to DOE to complete its reviews of
project applications within 180 days. This will help guide
internal DOE program planning, while providing greater schedule
certainty to project applicants.
In short, these amendments provide DOE greater clarity to overcome
uncertainties in implementation, and provide greater flexibility to
respond to the types of project applications received to date. These
amendments are necessary to achieve expeditious implementation of both
the original Title XVII program, as well as the new Section 1705
program authorized by the Recovery Act, without diminishing program
effectiveness or accountability. However, it will be necessary for DOE
to promptly make corresponding changes in its Title XVII regulations to
reflect these changes.
the proposed clean energy deployment administration (ceda)
The proposed Clean Energy Deployment Administration (CEDA) builds
upon and greatly strengthens the current DOE Loan Guarantee Program
Office without the need to establish a new, wholly independent entity
such as a government corporation. Placing the CEDA within the
Department will enable the new organization to achieve operational
status more quickly, while establishing its independence in the areas
of personnel management, legal support, procurement and administrative
services. This organizational placement also will foster better
integration of CEDA activities with the proposed Energy Technology
Deployment goals established by the Secretary of Energy.
The proposed CEDA will have two principal financing authorities:
direct provision of credit enhancements in the form of
loans, loan guarantees and related instruments; and
indirect encouragement of commercial lending for clean
energy technologies through the purchase and resale of
commercially-originated loans for clean energy technologies.
The draft bill provides that, upon transfer of Title XVII functions
to CEDA, an additional $10 billion in direct funding will be provided
to CEDA from the Treasury. Assuming that the CEDA manages its portfolio
with a loan loss target rate of 10 percent or less, the funding should
be sufficient to support over $100 billion in loans, loan guarantees
and other forms of credit enhancement. These amounts are in addition to
the amounts made available in the Recovery Act and the Fiscal 2009
Omnibus Appropriations Act. In addition, CEDA is authorized to borrow
$2 billion from Treasury for securitization of clean energy technology
project loans originated by commercial lenders. The borrowing authority
will provide the initial capital to ``prime the pump'' as CEDA develops
a self-sustaining securitization program.
There are four aspects of the proposed CEDA financing authorities
that I would like to highlight: (1) the design of the CEDA financing
provisions based on the experience of other federal credit agencies,
(2) application of the Federal Credit Reform Act, (3) provisions to
encourage prudent risk management, and (4) transparency and
accountability requirements.
First, it is important to note that the CEDA financing authorities
are modeled after the successful business models of the U.S. Export-
Import Bank (ExIm Bank) and the Overseas Private Investment Corporation
(OPIC).
The ExIm Bank provides loans and loan guarantees to
international buyers for the purchases of U.S. goods and
services. The Bank is authorized to issue loans and loan
guarantees up to a statutory cap of $100 billion. The current
portfolio has an outstanding balance of over $40 billion. The
ExIm Bank makes credit decisions on the basis of a credit risk
model that classifies prospective borrowers by host country and
ownership structure. The country risk ratings are developed
through an Interagency Country Risk Assessment System (ICRAS)
that is applicable to all federal international assistance
programs. ExIm Bank's programs have been highly successful. It
expects to earn revenues from fees in excess of loan loss
reserves and administrative expenses.
OPIC provides loans, loan guarantees and political risk
insurance to encourage U.S. firms to invest in the economic and
social development of developing countries and emerging market
economies. OPIC also uses the ICRAS system in assessing host
country risk. OPIC has a current portfolio of loans and loan
guarantees of about $7 billion. OPIC earns net revenues from
its political risk insurance program, and has a budget subsidy
cost of only about 2 percent on its loan guarantee portfolio.
The financing authorities of the proposed CEDA are similar to those
of ExIm Bank and OPIC, and should enable CEDA to manage a large and
self-sustaining credit portfolio employing a disciplined risk
management process.
Second, the proposed CEDA would be subject to the Federal Credit
Reform Act of 1990 (FCRA), and would utilize the tools of FCRA to
manage loans and loan guarantees. FCRA provides three benefits: (1) a
rigorous methodology for evaluating project risk, (2) a disciplined
process for periodic review and re-estimate of the risks associated
with credit portfolios, and (3) reliance on permanent indefinite budget
authority to liquidate any losses in excess of the budget credit
subsidy cost (or loan loss reserve). The application of FCRA has had a
beneficial impact on the performance of federal credit programs. At the
end of fiscal year 2007, the last full fiscal year prior to the current
economic recession, the federal government held a portfolio of $260
billion in direct federal loans and $1.2 trillion in loan guarantees.
OMB budget data show that, on a government-wide basis, the budget
subsidy cost for new loan guarantees issued during fiscal 2007 was 2.1
percent, and that losses from guaranteed loans terminated for defaults
amounted to only 1.03 percent of the outstanding balance of the
portfolio.
Third, the draft bill requires prudent risk management. The draft
bill directs CEDA to adopt a portfolio approach, with a clear objective
that the portfolio becomes self-sustaining. As part of this portfolio
approach, the draft bill requires CEDA to establish a loan loss
reserve, and further states that the Administrator of CEDA ``. . .shall
consider establishing an initial rate of up to 10 percent for the
portfolio of investments under this Act.'' The draft bill also provides
for an annual review of loan loss rates by the Board of Directors and
an annual report to Congress on the results of that review.
Establishing a clear, up-front policy on loan loss rates is critical to
guide CEDA's risk appetite for clean energy technologies, especially
breakthrough technologies. Regardless of the specific numerical target
selected by CEDA, the portfolio will encompass a range of project risk,
and it is likely (and desirable) that a significant portion of the
portfolio will have loan loss risk that is substantially less than the
average loss rate used to establish reserves.
Fourth, and finally, the draft bill provides a number of important
provisions to ensure a level of transparency and accountability for
CEDA that exceeds the current Title XVII program. Specific measures
include:
a separate, dedicated Inspector General;
application of Sarbanes-Oxley standards for the maintenance
of internal controls and capital adequacy;
independently audited annual financial statements;
quarterly and annual reports to the Secretary on CEDA's
financial condition;
annual loss rate review by the Board of Directors and
reports to Congress; and
oversight and audits by GAO at the discretion of the
Comptroller General.
None of these requirements currently apply to the DOE Loan
Guarantee Program Office. These measures will provide a high degree of
openness and transparency, providing ample early warning of any
emerging problems or issues.
In summary, the CEDA will not be risk free. Financing the
deployment of clean energy technology projects, and potential
breakthrough technologies, will entail risks. But the draft bill
creates a rigorous framework to ensure prudent risk management.
transition from the current doe loan guarantee program office to the
proposed ceda
The draft bill contains special provisions to promote a seamless
transition of the current DOE Title XVII program to the proposed CEDA.
Currently, the Title XVII program is managed by the Loan Guarantee
Program Office (LGPO) under the Chief Financial Officer. The LGPO is
relatively small but has an exceptionally high workload. There may be
75 or more applications currently pending at the LGPO, and the
implementation of the new Section 1705 loan guarantee program
authorized in the Recovery Act will add substantially to that total.
While the early pace of LGPO has not been as rapid as many outside
observers would like, it has been gaining momentum, and it is
reasonable to assume that the Department will complete due diligence
and take action on a large number of these applications prior to
activation of the proposed CEDA. Thus, it is critical that the credit
review activities currently underway within DOE be sustained without
loss of momentum as the program transitions to the new CEDA.
impact of the fiscal year 2009 omnibus appropriations act
The Fiscal 2009 Omnibus Appropriations Act made significant changes
to the funding resources of the DOE Title XVII program. The Act
extended indefinitely the previous $38.5 billion in prior year loan
guarantee volume, and provided for $8.5 billion in additional loan
guarantee volume, for a total volume of $47 billion. These amounts are
in addition to the $6 billion appropriated in the Recovery Act to cover
approximately $60 billion in loan guarantee volume under the new
Section 1705 loan guarantee program.
The Omnibus Act also contained new and extremely restrictive
language regarding the issuance of new loan guarantees that qualify
within the $47 billion loan guarantee volume limitation. Specifically,
the Act prohibited DOE from issuance of loan guarantees to projects
that have other federal contracts, leases or other forms of federal
assistance. Further, the Act requires a certification by the Director
of OMB for each loan guarantee issued under this authority. This
provision unnecessarily restricts the ability of DOE to issue loan
guarantees to projects that have other legal relationships with the
federal government, and will inevitably slow the pace of the program
due to the need for case-by-case OMB determinations.
The impacts of this provision need to be addressed in the
consideration of the draft bill because, if left unchanged, the
restrictions will carry over along with any unused authority that is
transitioned to the proposed CEDA.
conclusion
In conclusion, the draft bill:
provides many needed clarifications and modifications to the
existing Title XVII authorities. These amendments need to be
accompanied by expeditious changes in the implementing
regulations;
creates a sound platform for an effective clean energy
technology deployment financing program, with an emphasis on
breakthrough technologies;
provides a robust set of financing tools to accelerate the
deployment of clean energy technologies, especially those with
breakthrough potential;
establishes checks and balances to ensure prudent risk
management, promote transparency and establish strict
accountability; and
defines a transition mechanism that will sustain the growing
momentum of the current Title XVII program.
This concludes my prepared statement. I would be pleased to answer
any questions.
The Chairman. Thank you very much. Thank you all for your
excellent testimony.
Let me ask a few questions here and then I am sure Senator
Murkowski and others will have questions.
Matt Rogers, let me start with you. One of the concerns we
heard loud and clear at the previous hearing that we had was
that if we were to establish any kind of new entity, it might
impede the ability of the Department of Energy to move out
aggressively with implementing the current loan guarantee
program. I think the consensus that I sort of picked up at that
time from witnesses was that we needed to make changes in the
law to facilitate a better working of the existing loan
guarantee program, and we also needed to perhaps have an
expanded capability in an entity separate from the Department
of Energy, but that we did not want the second of those to get
in the way of the first.
I guess I would ask you whether you think we have found the
right balance here. Are there provisions in here we need to
look at changing in order that we not impede what Secretary Chu
is now trying to do with the existing loan guarantee program?
We are trying to assist the Secretary with implementation of
that program rather than impede it, and I want to just be sure
that we are doing that, if possible.
Mr. Rogers. We appreciate very much the work that you and
Senator Murkowski have put into collaborating with the
Department on the changes necessary to make the current program
work more effectively.
There are a couple of technical language changes that we
can work with staff on to further enhance the ability of the
current programs to move out efficiently, effectively, and to
protect the taxpayers' interests, as we move forward here, that
could be included in the context of this legislation to make it
stronger both for the near term and long term.
As we think about that goal, which you set out so clearly,
it is one that we clearly share, which is to move out the
existing pipeline of loans within the existing authority that
you have given us in a very expedited fashion to contribute to
the Recovery Act. Utilizing vehicles like this to enhance that
capability, I think that will enhance the Recovery Act and set
things up for future success.
The Chairman. Let me ask. One of the suggestions that I
believe you had in your testimony--I believe it was in yours,
John--where you talk about the possibility of this CEDA taking
equity positions. Was that in your testimony? That was in Dan
Reicher's testimony, I guess, suggesting that we provide
additional authority in that regard.
Could you elaborate on that as to what you think is lacking
in what we currently have before us?
Mr. Reicher. Mr. Chairman, I think the provision, as
written, goes a long way, and the suggestion was a further
improvement. There is what is called profits participation that
is already spelled out in the bill. The idea would be if there
was additional equity interest that could be taken, for
example, in the underlying company that is providing the
technology for the project that is being deployed. That is a
fairly standard technique that is used in the project finance
world, and there are several others that might be looked at. We
can definitely work with staff to think this through.
But what overall it would do is basically put this fund
that you are creating on an even firmer footing so that it is
in fact self-perpetuating. There will be returns as a result of
the loans that get made. There also may be upside as well in
both an ownership interest in the project itself and, as I
said, potentially even an ownership interest in the underlying
technology company, and that can be done through warrants or
any number of other mechanisms.
The Chairman. Let me ask John Denniston if he has any
thoughts about this suggestion.
Mr. Denniston. Yes. So you ask an excellent question. Just
as a macro perspective, in our current financial crisis, there
is an extreme scarcity of capital across the board. I believe
that is your question, both debt and equity. So this
legislation addresses the debt portion of that challenge, that
crisis in the market today.
Your question is should you also do something about equity,
to encourage equity investment. I think that is a great
question. It is a complicated question. One of the wonderful
things that you have done in the legislation is put CEDA in a
position to not actually write checks, but issue a loan
guarantee. So actually the expected outlay from the U.S.
Treasury is relatively small relative to the boost that you put
into the capital markets from the debt that will come,
strengthened by and enabled by that guarantee.
There is an equity scarcity. So people taking equity risks
on projects--it is very, very difficult to come by that. There
are two potential paths that Congress could take.
The first is to actually put the Federal Government in the
business of writing equity checks. There are concerns around
that, adverse selection and so forth, because that is an actual
outlay. But there is clearly a need for it.
Another path to get to the same point is to create greater
incentives for the private market to come forward with that
equity risk capital. Tax incentives are one. There are very
powerful tax incentives that could be put in place right now
for green technologies that would be a strong encouragement for
private sector equity capital to come into clean energy
technology companies.
Mr. Reicher. Mr. Chairman, if I might, just adding on that.
Somewhere in the middle, I think, is this notion of actually
taking an equity stake. It does not necessarily mean that the
Federal Government has to make an equity investment but in a
sense taking an equity stake in the form of warrants or
something else in the project or in the underlying technology
company.
This is a complicated area, and I am the first to admit it.
But I think it is worth probably another set of discussions
with staff to frame it in a way that will put this, as I say,
on the firmest footing to be self-perpetuating and deal with
this financial crisis we face right now.
The Chairman. Senator Murkowski.
Senator Murkowski. It is complicated and it certainly
raises a whole host of issues. I think when we look at what is
happening within the automobile industry right now and
Government looking at taking equity interest, raises great
concerns. I think we need to be very careful in this area.
But I am also cognizant of the fact that right now with the
capital markets as they are and just the upheaval that we have
seen, this is a different time for us in terms of availability
of credit for whatever the project, and level of risk. I think
we are all hoping that we are going to ride through this and we
are going to get on more stable footing, but right now it
really complicates the picture.
Mr. Rogers, I want to go back to your response to the
chairman regarding anything that we need to be doing right now.
I appreciate your response that you think we can work through
some of the language. Recognizing Secretary Chu's desire to
issue loan guarantees in the next month or so on a very
expedited basis and I appreciate his enthusiasm and his
commitment. Is there anything that we need to be doing at this
point in time, recognizing that this legislation is still in
the development stages? But we have talked previously about the
issues of superiority of rights, cross-default issues. Is there
more that we can be doing to help you at this point in time?
Mr. Rogers. The two specific issues that are standing out
there--one is the CBO language that was adopted as part of the
2009 budget resolution which limits the ability of the Federal
Government to make loans to entities that are doing business
with other parts of the Federal Government. That encumbrance
does, in fact, limit us from making a set of loans to a set of
very good counter-parties that are currently in the pipeline.
So it is something that, given that it as part of the statutory
language of the 2009 budget bill, requires a statutory fix to
address.
The same thing is true, we believe, of some of the
discussions about the undivided interest issue that you raised
and the cross-default issues there. I think, again some of that
is addressed in here. There are some language fixes that would
make it clearer because what we want to do--and there is a set
of loans, again, coming forward quite quickly where the
undivided interest and the pari passu treatment would enable
other parties to co-fund some of these projects in the United
States with us. The Japanese Export Bank, for example, would
like to fund some of the nuclear facilities that we have
currently under consideration. The way the rules are currently
written, we are not able to do that in a way that works for
that entity. This is a way to diversify the risk, reduce the
risk for the American taxpayer, and get these projects done
more rapidly. So your help in those statutory changes will be
appreciated.
Senator Murkowski. Ms. Hull, you mentioned the loan loss
reserve, and you stated that in your opinion the amount we are
providing for is perhaps too low at this point in time. I would
be curious to hear from those of you at the table as to what
you might consider to be an appropriate percentage limit for
the loan loss reserves. 10 percent is consistent with the
safest thrift institutions, CBO's most recent interpretation of
stimulus funding for the loan guarantee. So there was rationale
for that. But can you just briefly speak to what you think
might be a reasonable loan loss reserve? You can start, Ms.
Hull.
Ms. Hull. Thank you. I think it is a great idea that there
is the recognition of the need for a loss reserve. I think what
the committee has done with that in terms of balancing that
tension between having sufficient capital available to put to
productive use versus the capital reserve to protect against
losses--it is a tough balancing act. As I said, the percentage
that is the initial percentage structured in the bill, as it
stands now, is appropriate for what is for private equity now.
I think, however, since we are asking this entity to do two
things--not only invest in breakthrough technologies so you
would need a slightly higher percentage because those are
technologies that, by definition, have much greater risk than
what is being financed now, but we are also asking this entity
to finance energy efficiency and existing renewable technology
deployment in small-scale applications so that they can be
aggregated and, therefore, financed in a way that the market is
just not doing today. That does not entail risk. It does entail
risk. It does not entail the same level of risk.
Therefore, you have got two silos. One is very high risk;
one is very low risk. So as long as all of your projects are
not in the high-risk silo, you have probably come up with what
I consider to be a responsible loss reserve. The only issue is
how much goes into the breakthrough technologies, how much goes
into the deployment of the low-risk technologies. That is
something that experience of this entity will dictate the
appropriate level. So in my opinion, it is something to be
aware of, but I am not sure I would change anything in the bill
now.
Senator Murkowski. My time has expired, but I would ask if
anybody else has any comments to respond. Mr. Denniston? I
think, Mr. Reicher, you had suggested it might want to be
lower.
Mr. Denniston. I would actually suggest that it be higher.
Dan--I respect his view, and I am sure he will have great
insight as well.
I think what this committee is looking at is two competing
factors. When you look at the loan loss reserve, which is a
critical metric in this legislation, the one objective is you
want to minimize Federal outlays in this budgetary environment.
The other is that you want to accelerate, as much as possible,
breakthrough clean energy technologies into the marketplace. In
my view, as you increase the loan loss reserve--the Government
is taking greater risk--you accelerate the marketed option of
breakthrough technologies. That is, I think, what we are trying
to do.
So the question for the committee is what is the proper
percentage to set. It is not scientific, but there is math
involved with it, and the math is you make a--in this
legislation, there is a fresh $10 billion appropriation. If the
loan loss reserve is 10 percent, then the expected Treasury
outlay is $1 billion. If, for example, you set the loan loss
reserve at 25 percent, to pick a figure, the expected outlay is
$2.5 billion.
So in my view, I would rather see a 25 percent loan loss
reserve because I think that will send a signal to Matt Rogers
and his team at DOE that we really want to get breakthrough
technologies into the market. We want to have advanced
batteries that triple or quadruple the energy density for
electric transportation or solar panels that cut in half the
cost of solar electricity. That is what we are trying to do.
The implication of that for the U.S. Treasury is the
difference $2.5 billion outlay at 25 percent and $1 billion. So
the difference is $1.5 billion. Again, the beauty of what you
have done is the leverage created through loan guarantees means
that there is only a Treasury outlay for some percentage of the
loan authority going out in the marketplace.
Mr. Reicher. So just following up on that, the other part
of the math, which is important, is that a 10 percent loan loss
reserve would provide about $100 billion in loans. If it was at
5 percent, it would provide about $200 billion in loans. So
there is a big implication of how you set it.
But I think the real answer today is we really cannot set
it today. It is OK to put it as 10 percent nominally, but
echoing my colleagues, it really is going to depend on the mix
of transactions, the types of transactions, the relative types
of risk, the investment structures that we use for those
transactions. I think this is exactly the sort of thing that a
smart administrator with a good board of directors and staff
can establish, and I think it is wise to both set a nominal
rate now, but give the administrator and the agency the ability
to adjust that with input and oversight by the board of
directors. So I think I am comfortable with where it is, and I
think the important thing is let us get going and let the new
agency figure this out in the way that the private sector has
to deal with every day.
The Chairman. Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman. I want to thank
you personally for your work and the ranking member's work, and
I appreciate the opportunity to work with you on what I believe
to be one of the most important pieces of energy policy to
really move us forward in terms of new technologies, getting us
off of not only foreign oil but foreign technologies, and being
able to create jobs. So I think this is very, very important,
and we need it yesterday.
I appreciate, Mr. Chairman, your allowing doubting
industries to come in in March and testify. Jeff Metz who spoke
talked about a new injection molding process for wind turbine
blades, and they are ready to go. These are folks that were in
the auto industry, ready to move, have developed this new
technology. But the issue for them is financing. So we see this
over and over again.
When I think about the issues for us around not having done
this, it is costing us jobs. Asia has been so far ahead of us
around batteries, and we have seen what that has resulted in in
terms of many challenges, as well as now wind and solar and
other areas. So I believe this is very, very important that we
do it and it adds to what we did in the recovery plan.
I had one technical point. Mr. Denniston, you talked about
credit rating reviews, eliminating those. I wondered if anyone
else would want to comment on that. It has been my experience,
particularly most recently around various issues we have been
working on with autos and so on, it is very difficult when
there are challenges and you are trying to help, but
particularly if it is startups, particularly in high-risk
situations, as you indicated, we would know what the credit
rating review would be on this. So I wonder if anyone else
would want to comment about the suggestion Mr. Denniston had of
eliminating that language from the bill.
Yes, Ms. Hull.
Ms. Hull. Senator, I strongly agree with Mr. Denniston's
proposal. As he noted--there is really little to add to what he
noted--the requirement for the credit report is a very
expensive and time-consuming requirement that provides, I will
say flatly, zero new information. It is intended as a fig leaf
or some kind of something to hold onto that really does not
give you anything additional and is a tremendous burden on the
applicants.
Senator Stabenow. Anyone else? Yes.
Mr. Hezir. Yes, Senator. Just to give you a little bit of
context for the credit assessment, this was a general
recommendation that CBO has made for all Government credit
programs. It tends to make more sense for loans and loan
guarantees where there is not technological risk because the
credit rating agencies, for all the reasons that were stated
here this morning, are just not in a good position to make
those kinds of assessments when the primary risk is
technological.
When DOE wrote the regulations, OMB had asked them to
include this requirement because it had been part of, as I
said, a CBO Government-wide recommendation. I think at a
minimum, it probably needs some greater flexibility because
there probably are instances where it provides very little, if
any, additional value.
Senator Stabenow. Thank you.
Mr. Reicher. I would just second that.
Senator Stabenow. Thank you.
Mr. Chairman, I would hope we would look at that provision
regarding the credit rating risk. I know what we want to do is
to be able to encourage quicker deployment of higher-risk kinds
of investments to get new breakthrough technologies. It seems
to me this would be potentially a barrier for that.
I wonder if I might just take a final moment, Mr. Rogers,
since we have you here, to ask a couple questions regarding the
recovery plan because we did put in place the $2 billion for
batteries. I appreciate the efforts now on section 136 and the
loan guarantees and so on. But we also put in place a
manufacturing credit of 30 percent, which has a cap on it of
$2.3 billion, which frankly we could use all of that right now
in Michigan. So I would love to see us raise that cap or take
it off.
But in the investment and production tax credits, we did
something innovative, which I think is very important, what I
would like to see expanded, and said if someone is not
currently making a profit or they are a startup company and
they qualify for the credits around alternative energy but
cannot take them because they are in a loss position, they
would be able to get a grant equaling the value of the credit.
I wonder if you could just indicate where we are in that
process. Has that been developed? How soon will businesses be
able to use that feature in the Recovery Act?
Mr. Rogers. Senator, the Department of Energy has been
working quite closely with our colleagues at the Department of
Treasury to work out the details of how to administer that
program effectively. It is, as you describe, a program that has
the industry quite excited because it takes away a set of
uncertainties and risks and levelizes the playing field between
firms that are already profitable and firms that are pre-profit
in this context.
What we have set out is a plan. Treasury should be
announcing it here momentarily. I thought they were going to do
it either in the last couple days or next couple days, but it
is in a shorter period of time to describe exactly how that is
going to work.
In simple terms, the Department of Energy is working with
Treasury to underwrite some of the risk. One of the things the
Department of Energy does especially well is reviews at the
technologies and underwrites whether or not those are advanced
technologies that meet the terms of the act. But then the
Treasury is actually quite good at administering the follow-up
through the IRS. So we are working through that and the details
have actually been pretty well worked out and that should be
available shortly.
Senator Stabenow. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman, and thank you for
your insights to all of the panelists.
I want to follow up a little bit on Senator Stabenow's
question about the credit rating because I think, Mr.
Denniston, you actually very accurately described the conflict
and the challenges. How do we reassure taxpayers on the one
hand and, on the other hand, promote lending and risk-taking
that is required for these new technologies?
For you or for anybody else, are there other ways that we
can look at some of these startup companies who are looking for
funding and say these are good risks, and should we have any
other means of evaluating or trying to lay that out as part of
the bill?
Mr. Denniston. It is a great question, Senator Shaheen.
Let me come back to the emerging growth company scenario.
Just so people understand, what is being required today is that
a company with a very weak balance sheet that is just getting
going, trying to raise money, has to go out and spend hundreds
of thousands of dollars to get a credit rating agency review,
which comes back and says this company has a weak balance sheet
and is not a AAA rating.
I think if to check the box, that there needs to be a
credit rating agency letter, CCC or whatever the lowest rating
is, you know, quadruple Z, let startup companies say, we
volunteer, we are the lowest level. If that is 4 Z's, that is
us. Do not make us spend the $200,000. We will stipulate that
that is our rating, and you have done what the rating agency
would have done. Virtually every startup company would say that
is us.
I think that this bill has been very skillfully drafted in
that it establishes an advisory council with scientific
expertise because the question is which breakthroughs stand the
best chance of making a difference for our energy crisis. So it
establishes an advisory council populated with scientific
expertise. As I said in my testimony, I would add to that,
augment it with business expertise. That then gives the DOE,
the CEDA, I think the best viewpoint in terms of how the loan
and loan guarantee authority ought to be issued.
This is not a credit rating agency question. Furthermore, a
lot of these loan guarantee decisions are not on a company.
They are on a project. Project financing does not relate to the
credit of the company. It relates to the merits of the project
itself. So there is no point in having a credit rating agency
review on a company. It is the merits of the project. The
advisory council, I would submit to you, has a much better
informed viewpoint on the merits of that than a credit rating
agency.
Mr. Reicher. Senator, let me just echo John's point. The
focus is on a particular energy-generating or energy-saving
project. I was in that business for a while and it is a much
narrower set of issues to analyze. It is a particular
technology being deployed in a particular place with a
combination of debt and equity. You can go out and see how the
venture capital company's pilot plant worked or did not work.
You can see what other applications there have been. You can do
some analysis around that project. So you are not starting from
scratch looking at a technology idea in a small company and are
they even going to get it to pilot stage. You know that it
works at pilot stage. Now the question is can you back this at
a full deployment stage. So, as John said, it is not so much
around the credit of the company. It is around the quality of
the project, the people behind it, and the history of the
technology that undergirds it.
Senator Shaheen. Thank you. I am not advocating for the
rating but just echoing the concern that you all raised, that
there is a real conflict here between what we are trying to do.
Mr. Rogers, first, I want to thank you for all of the hard
work that is going on to get those economic recovery dollars
out as fast as possible. We are looking for them in New
Hampshire at every opportunity and appreciate that everyone is
going very hard to try and get administrative rules written,
but would just echo what I am hearing at home that that is a
real concern as people are looking at how to apply for dollars.
I heard as part of a discussion something that is not
directly pertinent to this legislation, but I think it is
related and so is worth raising. One of the concerns that I
heard in meeting with some bankers was a question about how to
value green technology and how to look at that in terms of
granting loans and credit. I think there is a real void there,
as we are looking at trying to encourage lending in the private
sector for new energy technologies for green buildings, for
everything related, that there is not a real understanding of
how this adds additional value or how to value green
technologies and green buildings at all. I do not have any
magic ideas for how to address this, but I think it is a
concern, particularly as we are looking at spending the dollars
in the economic recovery act and as we think going forward
about the investments that we are making, how do we help make
sure that we are valuing these in a way that is real.
Thank you.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman, and thanks for
holding this hearing. I certainly support this legislation.
But I wanted to ask our witnesses today if they could--I
think, Mr. Reicher, in your testimony you talked about over the
last 5 years VC capital putting something like $12 billion into
green technology or various renewable technology programs. My
first question is just really to understand where we think we
are today since October in actually getting projects approved.
I do not mean difficult technologies. I mean basically already
tried and true, implemented in the marketplace. So where are
we? Just give me a percentage. What percentage of projects do
you think, since October, are getting funded? Either Mr.
Denniston or Mr. Reicher.
Mr. Reicher. I cannot give you a specific percentage, but I
can tell you that there really has been a major fall-off in the
ability to finance basic run-of-the-mill renewable energy
projects, you know, the 150th or 200th wind project, basic
established technologies with established forms of debt and
equity. It is very, very difficult these days to get these
done, which makes it even harder, obviously, to go out and
deploy a new, less proven technology. So these two things come
together in the form of this legislation.
Senator Cantwell. So fall-off--I am assuming you mean more
than 50 percent. Probably more like 75 or 80 or 90 percent when
you say fall-off.
Mr. Reicher. It is very significant. I just, unfortunately,
do not have a number for you.
Mr. Denniston. I do. I have got a couple of data points.
Actually one which I think is important. Venture capital in the
first quarter of 2009 in the U.S. was $3 billion. The run rate
in 2008 on a quarterly basis was roughly $8 billion. So we are
down by 60 percent just overall venture investment. I think the
clean tech portion of that is representative. I do not have
that exact figure.
What I would say, Senator Cantwell, is that the debt
markets have gone for renewable energy virtually to zero. So
that is a 100 percent reduction, which is why this bill is
absolutely mission-critical. The equity portion I think is
reflective of the number that I just gave you.
Senator Cantwell. That is why I think today--and this bill
is a given. The question is really to me what else we should be
doing given the crisis. This is not about hard-to-fund
technologies. This is just about funding technology, and with
the credit markets frozen up, we have very viable energy
technology that is basically not being deployed, not being
implemented, not getting onto the grid, and job creation being
deterred because we have not gotten our capital markets flowing
in a way that would fund these projects.
So one thing that I want to ask about is if you think a
low-cost capital program either to meet an RES requirement or a
smart grid requirement, something that would be basically
amortized over a long period of time, you know, 30 years,
something like that, would help in providing patient capital
into the marketplace and help stimulate it. So basically the
Government putting low-interest, long-term loans out there as a
way to help build confidence back and boost some of those
credit markets to come back on line.
Yes, Mr. Denniston.
Mr. Denniston. Sure. Senator, I think you are asking the
right question, which is our capital markets are broken. What
can the Government do to break the logjam and resolve our
energy crisis at the same time? So I think your idea of low-
cost loans is a good one.
Your prior question, which is what is happening on the
equity market side, a similar question that was raised earlier,
is exactly right. This bill does not attempt to resolve the
shortage of equity capital. As I say, there are multiple paths
to go there. One is for the Government to actually write checks
for equity investment. The other is to provide incentives
through the tax system or low-cost capital to do that. There is
a screaming need for it. I will say that.
Mr. Reicher. The beauty of the bill is that it does strike
a balance between breakthrough projects which it finances and
more standard issue commercial projects. That is, in fact, how
I think it will ultimately become self-sustaining because those
standard-issue projects will actually have a good flow of
capital back and keep this going. So I think it is a start.
The beauty of the loan guarantees, as opposed to direct
loans, is the huge leverage. We talk about $10 billion
leveraging $100 billion in projects. That is a huge leverage.
So I would second what John said about figuring out
additional ways to do it, but I think this is a very, very good
way to start. It is a critical need.
I will give you one quick data point, as you asked the
question about the state of the debt markets and funding for
clean energy. I would note that Wachovia, AIG, and Lehman
Brothers were in the renewable energy finance business up until
about a year ago. So even the players that have fallen flat on
their backs on the street were in there. So we have a real
serious problem right now moving these projects forward.
Senator Cantwell. I agree, and so I think we should be even
bolder.
I appreciate the boldness that the chairman and the ranking
member have worked on this, but I think given the fact that
things are way beyond proven technology and lack of funding, we
need to do something in addition.
So thank you, Mr. Chairman.
The Chairman. Thank you very much.
I could go on here with other questions, but I think maybe
we will stop where we are. I think this has been very good
testimony, and we appreciate the very constructive suggestions
that we have heard here. We hope to incorporate some of those
ideas into a new, improved version here and perhaps be in a
position to introduce this as freestanding legislation later
this week and then proceed to deal with it here in our
committee in the next week or so. So that is our hope. Thank
you all very much.
That will conclude our hearing.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
[The following statement was received for the record.]
Prepared Statement of Michael J. Mcinnis, Managing Director, The Erora
Group, LLC
We appreciate the opportunity to share our suggestions about how
Congress can help improve the availability of financing for deployment
of clean energy and energy efficiency technologies, in particular coal-
gasification facilities and CO2 pipelines.
In our view, creation of a new federal ``Energy Bank'' and related
initiatives will be essential for our nation to achieve a low-carbon
economy. We thus support measures such as the draft 21st Century Energy
Technology Deployment Act. A new Clean Energy Deployment Administration
(CEDA) could help bring to market not only new and unfamiliar green
energy technologies, but also promising carbon capture and storage
projects that are well understood but lack financing because of
constraints in the credit markets. This new agency or a new ``Energy
Bank'' should have the authority to provide various types of credit,
including loans, loan guarantees, and other credit enhancements, as
well as measures that provide secondary market support.
cash creek gasification project
Deploying a fleet of coal-gasification projects plugged into a
network of dedicated CO2 pipelines will be an important step
toward a low carbon economy. Coal gasification coupled with carbon
capture and geologic sequestration in connection with enhanced oil
recovery is the only cost-effective, near-term, comprehensive solution
to reducing greenhouse gas emissions utilizing our country's most
abundant natural resource.
The prospect of a coal-fired power fleet with the emission profile
of natural gas combustion turbines is not a distant reality. In fact,
we are in the final stages of developing the Cash Creek Gasification
Project (``Project'') in Henderson County, Kentucky. But the financing
of low-carbon emission coal facilities in the current economic
environment requires federal support.
With near-term federal support, the Project will create 1,000-1,500
construction jobs and 200-300 new permanent employment positions, while
supporting thousands of manufacturing jobs related to equipment
purchases. When operational, the project will gasify 2.8 million tons
of coal per year, producing natural gas and generating electricity in a
natural gas combined cycle plant. Once built, the plant will be the
cleanest coal-fueled facility in the country, with a greenhouse gas
emissions profile similar to that of a natural gas combined cycle
facility. In fact, the facility will capture nearly 100% of the carbon
dioxide resulting from the gasification process and greater than 75% on
a plant-wide basis. The captured carbon dioxide can then be transported
by pipeline to support enhanced oil recovery in other parts of the
country or could be geologically sequestered as that opportunity
arises.
Our facility has in hand, or soon will have secured, all the
necessary permits to commence construction, including all required
water use and air quality permits. By working with local chapters of
the AFL-CIO and executing a project labor agreement, we have ensured
that a trained workforce will be ready to commence construction.
During the course of developing the Cash Creek project, we
contemplated applying for a loan guarantee under the existing title 17
program. Even when we had access to adequate sources of project debt
funding, we decided not to file an application because we faced too
much economic uncertainty about whether the credit subsidy cost would
make our project either uneconomic or significantly less economic. In
the current economic environment, the risks associated with the credit
subsidy cost process are too great to bear. We were thus pleased that
Congress agreed to cover with appropriated funds the credit subsidy
cost in the new title 17 loan program established as part of the
American Recovery and Reinvestment Act. Congress should do so for
projects funded under the prior loan program as well. In addition, we
appreciate the ongoing efforts of Congress and the Department of the
Energy to streamline the loan guarantee program so that it will not
stand as an impediment to future projects.
We set forth below our recommendations on ways that CEDA or an
Energy Bank could help finance gasification facilities, CO2
pipelines, and other projects in order to help get lowemission coal
projects off the ground. In addition, we make recommendations for
further improvements to the Department's title 17 loan guarantee
program.
ceda/energy bank recommendations
We believe it is essential that the new entity have the authority
to provide loans, not just loan guarantees, and that Congress
appropriate the funds to support it as early as may be practicable. In
the current and foreseeable economic environment, we do not believe
loan guarantees will address the principal challenge companies such as
ours face--access to capital--even if the credit subsidy cost problem
is addressed.
In drafting legislation, Congress should authorize the new entity
to provide loans to support gasification projects and CO2
pipelines that have the following characteristics:
Projects that are fueled with domestic sources of solid
fuels and that avoid, reduce, or capture and geologically
sequester the highest levels of CO2 should receive
priority;
Projects that have necessary air, water, and other permits
in hand--and thus are closest to being shovel ready--should
receive priority; and
The new entity should have sufficient funds to allow it to
lend up to 80% of the capital costs of up to 10 low-carbon
emission coal-gasification facilities and CO2
pipelines to geologic sequestration sites, including enhanced
oil recovery operations.
title 17 recommendations
We recommend that the Department revise the regulations that
implement title 17 of the Energy Policy Act of 2005 to address two
important issues. First and foremost, we believe that the Secretary
should issue an additional project solicitation and prioritize the
award of loan guarantees based on a project's greenhouse gas emissions
profile and how soon the project will have all permits necessary to
commence construction. Implemented in this way, the title 17 loan
guarantee program not only would serve as a catalyst to stimulate the
economy by supporting shovel-ready projects, but also would encourage
applicants to develop the cleanest possible projects. Second, the
Department should revise the implementing regulations to streamline the
application process and to address the implementation problems that
discouraged us and other companies from seeking loan guarantees as a
tool to bring commercially available technology to market.
As a related initiative, Congress should make modest changes to
section 703 of the Energy Independence and Security Act of 2007 to
encourage not only research and development projects, but also
deployable projects that are using state-of-the art technology. With a
few simple modifications, Congress not only would encourage the
development of technologies for the large-scale capture of carbon
dioxide from industrial sources, but also would speed their deployment.
conclusion
If the United States is to retain its economic and technological
competitiveness, while at the same time making a significant
contribution to reducing its overall greenhouse gas emissions, it is
essential that large scale commercially viable CCS and coal
gasification technologies be deployed. By authorizing CEDA or a new
Energy Bank to provide loans and by improving the loan guarantee
program, Congress can address the problems caused by the current credit
crisis and meet the twin goals of creating new green energy jobs and
placing a down payment on technology that will make the United States
more energy efficient and energy independent.
APPENDIX
Responses to Additional Questions
----------
Responses of Matthew Rogers to Questions From Senator Murkowski
Question 1. Many questions remain as to DOE'S interpretation of
Title 17 provisions from the 2005 Energy Policy Act, specifically on
the superiority of rights and cross default-issues for projects with
multiple owners or creditors.
Answer. The Department of Energy is committed to review all issues
associated with the proposed ownership structures on a case-by-case
basis. Separately, it is studying these issues in the context of the
proposed legislation and its current rules. In general, the DOE
believes appropriately designed project structures can create
opportunities to reduce the risk to U.S. taxpayers and increase the
positive impact from the loan guarantee program.
Question 2. Given Secretary Chu's desire to issue loan guarantees
in the next month or two, how is the loan guarantee office is
interacting with applicants to make sure that their questions and
concerns are addressed?
Answer. After a Department of Energy loan guarantee application is
received, it is reviewed for completeness by the loan guarantee office
and for technical merit at one of the national laboratories. Complete
applications, that meet the technical and financial requirements under
the Energy Policy Act of 2005 (EPACT), move into the due diligence
phase. In this phase, the project is assigned a Senior Investment
Officer. The Senior Investment Officer consults with the Treasury
Department on the terms and conditions of the guaranteed loan and works
with the project sponsors to ensure that all parties understand how the
project will be evaluated by the Title XVII Loan Guarantee Program and
addresses any questions or concerns the project sponsor may have, on a
consistent basis.
Question 3. There appears to be some disagreement among the
witnesses as to what is an appropriate percentage limit for the loan
loss reserve. Ten percent is consistent with the safest thrift
institutions and CBO's most recent interpretation of Stimulus funding
for the Loan Guarantee Program.
Answer. The Department does not set a threshold for an acceptable
rate of default for projects participating in the program. Title XVII
requires that there must be a reasonable prospect of repayment in order
for the Department to issue a loan guarantee. Under Title XVII,
therefore, each loan is reviewed on its own merits. The Department goes
through a rigorous due diligence and underwriting process utilizing in-
house as well as independent external advisors to assess and mitigate
the risks. The Department calculates a quantitative credit subsidy cost
for each of the loan guarantees under the program; OMB has final
approval of these cost estimates. Consistent with the Federal Credit
Reform Act, the actual subsidy cost for any particular Title XVII loan
guarantee will be determined based on the specific characteristics of
the individual loan, including credit risks and the terms and
conditions of the contracts. Moreover, under the Federal Credit Reform
Act, the subsidy cost reflects the best estimate of the long-term cost
to Government of the loan or loan guarantee, excluding administrative
costs. There is no need for a separate loan loss reserve.
Question 4. Can you elaborate further on what you think is a
reasonable level for the loan loss reserve to be set at, and how that
compares to existing treatment of credit subsidy costs for comparable
programs in the federal government?
Answer. The Department does not set a threshold for an acceptable
rate of losses for projects participating in the program. The statute
requires that there must be a reasonable prospect of repayment in order
for the Department to issue a loan guarantee. Under Title XVII, each
loan is reviewed on its own merits. The Department goes through a
rigorous due diligence and underwriting process utilizing in-house as
well as independent external advisors to assess and mitigate the risks
associated with default. The Department calculates a quantitative
credit subsidy cost for the loan guarantees under the program; OMB has
final approval of these cost estimates. Consistent with the Federal
Credit Reform Act, the actual subsidy cost for any particular Title
XVII loan guarantee will be determined based on the specific
characteristics of the individual loan, including credit risks and the
terms and conditions of the contracts. Moreover, under the Federal
Credit Reform Act, the subsidy cost reflects the best estimate of the
long-term cost to Government of the loan or loan guarantee, excluding
administrative costs. There is no need for a separate loan loss
reserve.
Question 5. Legislation similar in concept to the draft we are
discussing today has been introduced in the House. Have any of you had
a chance to review that bill, and if so, how does its risk profile,
structure and operation compare to the contents of this Senate draft?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment.
Responses of Matthew Rogers to Questions From Senator Barrasso
Question 6. Would this legislation influence or slowdown the
Department of Energy's processing of the applications that are already
pending for the Loan Guarantee Program?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment. We
appreciate the Committee's diligent efforts to make the loan guarantee
program successful. Additionally, any organizational change always
creates concerns about talent retention.
Question 7. Would staffing for CEDA come from current DOE Loan
Guarantee Program employees? What would be the net increase in federal
employees due to this legislation?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment. The current
loan guarantee program is staffing up aggressively to support existing
loan authorities.
Responses of Matthew Rogers to Questions From Senator Bennett
Question 8. Mr. Rogers I understand that since Congress established
the loan guarantee program in 2005, (EPACT) DOE has received hundreds
of applications, but has announced that it is in negotiations on only
its first potential award--(Solyndra--a solar manufacturing company.)
February 19, 2009 Secretary Chu announced that DOE was going to begin
offering loan guarantees under the Recovery Act by early summer and
disperse 70% of the investment by the end of next year. Additionally,
Secretary Chu has stated that the loan program would be streamlined and
the process would be simplified. Can you please update the Committee as
to what the Department's plans are to improve the implementation and to
make awards under this program and when will DOE issue new guidelines
consistent with the Secretary's objectives?
Answer. The Department of Energy's Credit Programs are an urgent
priority for Secretary Chu. He is personally reviewing the programs,
and has committed to giving the programs the attention, departmental
resources and oversight they need to succeed while ensuring that
taxpayer interests are protected. Delivering on this opportunity to
help drive economic recovery and make a down payment on the Nation's
energy and environmental future represents an essential leadership role
for the Department. The Loan Guarantee Program is moving forward
aggressively to make loans to companies that have applied for credit
assistance for a variety of advanced technologies. Our plan is to
deliver loan guarantees by the end of this year. As required by the
2009 Omnibus Appropriations Act we have sent an implementation plan to
the Appropriations Committees in anticipation of issuance of new
solicitations.
Question 9. Mr. Rogers, during negotiations on the FY'09 budget,
CBO raised concerns that the loan guarantee program might encourage the
federal government to enter into 3rd party financing arrangements that
could result in increased exposure to mandatory spending. CBO decided
that if the Subcommittee was to avoid an additional score of ``hundreds
of millions of dollars'', we must include language in the Energy and
Water bill that would discourage 3rd party financing arrangements. This
language is written in a manner that is very broad and has already
created several unintended consequences including prohibiting several
legitimate projects from consideration this year. I know this has been
a frustration of Sen. Dorgan and the entire subcommittee. We have been
working together to resolve this, but we believe a solution can only be
crafted if DOE, OMB and Congress work together on a solution. Mr.
Rogers will you arrange a meeting in the next week with the Deputy OMB
Director, yourself, Chairman Bingaman, Chairman Dorgan, Sen. Murkowski
and myself to resolve this issue with CBO to ensure loan guarantees can
be made consistent with the Act?
Answer. The Department is working to resolve this issue. We hope to
find a resolution to it in the near future.
Question 10. Are you aware of any 3rd party financed loan guarantee
projects currently being considered by the Department? Would the
Department undertake any projects that commit the federal government to
long term financing arrangements with another federal entity without
first identifying the necessary appropriated funding?
Answer. The Department is working to resolve this issue. No
projects have been precluded at this time as we hope to find a
resolution to it in the near future, however there are several projects
that have submitted applications that potentially may be adversely
affected by specific language in the 2009 appropriations, and those
projects have been communicated to appropriate Congressional staffers.
Question 11. Mr. Rogers, Congress provided an additional $6 B to
pay the subsidy cost of loan guarantees made under a new Section 1705
authority for renewable energy technology and transmission lines. The
Department has not made any announcements regarding the implementation
of this new authority and how it will work with the existing
solicitations for renewable energy technologies. Can you please tell
the Committee how the two programs will be implemented and when we can
expect loans to be awarded?
Answer. The Department is currently developing its approach to
implementation of the new authority under the American Recovery and
Reinvestment Act.
Question 12. As part of the FY'09 Continuing Resolution signed last
fall (September 30th, 2008), auto companies were give $25 B in loan
guarantees to help transition these companies to building factories to
manufacture more energy efficient automobiles. As of yet, I am not
aware of a single award that has been made to any auto company. What
are the Department's priorities and goals for this program and how will
these funds be used to improve the fiscal condition of Detroit
automakers?
Answer. The FY 2009 Continuing Resolution signed last fall provided
funding for the Advanced Technology Vehicles Manufacturing Incentive
Program (ATVMIP), which was established by Section 136 of the Energy
Independence and Security Act of 2007. Section 136 of the Energy
Independence and Security Act of 2007 establishes an incentive program
consisting of both grants and direct loans to support the development
of advanced technology vehicles and associated components in the United
States. Only the loan portion was funded.
Under Section 136, the ATVMIP provides loans to automobile and
automobile part manufacturers for the cost of re-equipping, expanding,
or establishing manufacturing facilities in the United States to
produce advanced technology vehicles or qualified components, and for
associated engineering integration costs. Stringent evaluation criteria
were outlined in statute and regulation for both applicant and project
eligibility. Included in these eligibility requirements is that the
applicant be financially viable without the assistance of other federal
funding for the same project and that the applicant have a positive net
present value. In addition, several technical criteria were also
provided, including meeting certain fuel efficiency standards for
vehicle manufacturers and a verification of future installation on a
specified advanced technology vehicle (ATV) for component
manufacturers.
As a Secretarial priority, the ATVMIP's goal, is to accelerate the
manufacture and development of fuel efficient, advanced technology
vehicles. We have completed the technical review of nearly 200 projects
contained in more than 100 applications and are working through the
financial viability reviews on more than two dozen companies. We are in
detailed negotiations with the first group of potential borrowers and
expect to make a series of loan commitments during the summer.
Question 13. What is the timeframe for making loans to struggling
automakers?
Answer. This program is a high priority for the Department and as
such, the Department is working quickly and responsibly to ensure that
the most deserving of applicants have the financing they need to
develop tomorrow's advanced vehicle technologies. The Department's
ATVMIP expects to make a series of loan commitments during the summer.
Question 14. Is your office prepared to act in a timely manner to
ensure support Raser's bid to transform the Hummer Division of GM to a
hybrid electric platform, rather than sell the division to a Chinese
manufacturer?
Answer. The ATVMIP is prepared to act on any and all applications
in accordance with the evaluation procedures established in the
program's Interim Final Rule. This procedure allows for the in-depth
financial and technical evaluation of all applications. To date, the
program has received over 100 applications, 40 of which have been
determined to be substantially complete.
During the application review period, the Department is not at
liberty to discuss individual applications due to the sensitivity of
the application process.
Question 15. This legislation proposes that the Clean Energy
Deployment Administration would be retained within the Department of
Energy, similar to the Energy Information Administration. However, as
we approach the 4th anniversary of the EPACT's signing, I am skeptical
that the Department is able to implement this program in an effective
and timely manner. Over the past several years, DOE has struggled to
set up this program and fought both OMB and CBO over scoring and
implementation strategies. While, I don't doubt Secretary Chu's
commitment to implementing this program, the facts speak for
themselves. I would prefer see an entity that is entirely focused on
implementing and supporting the deployment of clean energy based on
sound financial fundamentals. I fear that political pressures within
the Department will drive the investment strategy, rather than allowing
commercial fundamentals and sound risk management strategies to dictate
the outcome. Do you agree that creating this program within the
existing DOE bureaucracy, which will compete for personnel and budget
needs, is in the best interest of the program? Based on DOE's track
record is this the best organizational model to drive investment into
our energy sector?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment. Our task in
the near term is to demonstrate to Congress and the American people
that the Department's existing loan guarantee authority represents good
value for money. Our ability to execute the first loan guarantees
should provide important information to Congress as it considers
alternatives for making loan guarantees a long term, sustainable policy
tool.
Question 16. This new legislative authority creates a nine member
board and an eight member advisory council to advise the board of
technology and investment priorities. Over the past three years, we
have faced difficulty in implementing this program as a result of
interference from OMB regarding the implementation of the program rules
and regulations. It is unclear how an additional layer of bureaucracy
will improve the program implementation. In addition, as part of the
Stimulus bill Congress provided $400 M to establish the Advanced
Research Projects Agency--Energy (ARPA-E) within the Department to
advise the Secretary in the deployment of energy technology. This
legislation seems to go out of its way to create new and redundant
layers of bureaucracy. Does anyone believe it is vital that the
advisory council be included in this text? Why can't we rely on the
existing program offices, laboratories and ARPA-E to advise the board
on the promising technology options?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment. The current
program relies heavily on technical support from the Department of
Energy's core operating programs, including the Office of Nuclear
Energy, the Office of Fossil Energy, the Office of Electricity Delivery
and Energy Reliability, and the Office of Energy Efficiency and
Renewable Energy for reviewing applications, defining program technical
requirements, and promoting the program. DOE's national laboratories
also provide essential technical support.
Question 17. Based on DOE's existing track record and significant
delays in implementing the existing loan guarantees, do you have any
concerns about the Department's ability to expand the financial
offerings prescribed in this bill? Does the Department have sufficient
capability at the staff level to implement, evaluate and support the
new authorities provided in this legislation, including securitization
of energy projects, which has never been done in the federal
government? (There is no secondary market for these investments) Does
the Department have any familiarity with financial risk management to
ensure the investment portfolio is balanced and not overexposing
taxpayers to unnecessary investment risk?
Answer. The Administration is still evaluating the proposal, and
looks forward to working with the Committee to ensure efficient and
effective assistance for energy infrastructure investment.
Question 18. Compliance with the National Environmental Policy Act,
including environmental assessments for loan guarantee projects, has
contributed to the delays in awarding the Loan guarantees. This
legislation is a mixed bag when it comes to waiving onerous hiring
regulations to bring on qualified federal staff and pay them
competitive salaries, but it also does nothing to accelerate the NEPA
reviews and it raises the cost of construction of energy projects by
requiring compliance with Davis Bacon rules. Aside from waiving federal
hiring and compensation rules are there any other positive reforms that
would lower the cost of energy projects or speed their deployment?
Should we do more in this regard?
Answer. The Department has not conducted research or analysis on
this issue. However, Secretary Chu has directed us to accelerate the
loan guarantee review process significantly and deliver the first loans
in a matter of months, while maintaining appropriate oversight and due
diligence to protect taxpayers' interests. We are taking steps to
reduce the cycle time from application to loan guarantee so that viable
projects are funded, with all due speed and due diligence.
______
[Responses to the following questions were not received at
the time the hearing went to press:]
Questions for Jeanine Hull From Senator Murkowski
Question 1. There appears to be some disagreement among the
witnesses as to what is an appropriate percentage limit for the loan
loss reserve. Ten percent is consistent with the safest thrift
institutions and CBO's most recent interpretation of Stimulus funding
for the Loan Guarantee Program. Can you elaborate further on what you
think is a reasonable level for the loan loss reserve to be set at, and
how that compares to existing treatment of credit subsidy costs for
comparable programs in the federal government?
Question 2. Legislation similar in concept to the draft we are
discussing today has been introduced in the House. Have any of you had
a chance to review that bill, and if so, how does its risk profile,
structure and operation compare to the contents of this Senate draft?
Questions for Jeanine Hull From Senator Bennett
Question 3. This legislation proposes that the Clean Energy
Deployment Administration would be retained within the Department of
Energy, similar to the Energy Information Administration. However, as
we approach the 4th anniversary of the EPACT's signing, I am skeptical
that the Department is able to implement this program in an effective
and timely manner. Over the past several years, DOE has struggled to
set up this program and fought both OMB and CBO over scoring and
implementation strategies. While, I don't doubt Secretary Chu's
commitment to implementing this program, the facts speak for
themselves. I would prefer see an entity that is entirely focused on
implementing and supporting the deployment of clean energy based on
sound financial fundamentals. I fear that political pressures within
the Department will drive the investment strategy, rather than allowing
commercial fundamentals and sound risk management strategies to dictate
the outcome. Do you agree that creating this program within the
existing DOE bureaucracy, which will compete for personnel and budget
needs, is in the best interest of the program? Based on DOE's track
record is this the best organizational model to drive investment into
our energy sector?
Question 4. This new legislative authority creates a nine member
board and an eight member advisory council to advise the board of
technology and investment priorities. Over the past three years, we
have faced difficulty in implementing this program as a result of
interference from OMB regarding the implementation of the program rules
and regulations. It is unclear how an additional layer of bureaucracy
will improve the program implementation. In addition, as part of the
Stimulus bill Congress provided $400 M to establish the Advanced
Research Projects Agency--Energy (ARPA-E) within the Department to
advise the Secretary in the deployment of energy technology. This
legislation seems to go out of its way to create new and redundant
layers of bureaucracy. Does anyone believe it is vital that the
advisory council be included in this text? Why can't we rely on the
existing program offices, laboratories and ARPA-E to advise the board
on the promising technology options?
Question 5. Based on DOE's existing track record and significant
delays in implementing the existing loan guarantees, do you have any
concerns about the Department's ability to expand the financial
offerings prescribed in this bill? Does the Department have sufficient
capability at the staff level to implement, evaluate and support the
new authorities provided in this legislation, including securitization
of energy projects, which has never been done in the federal
government? (There is no secondary market for these investments) Does
the Department have any familiarity with financial risk management to
ensure the investment portfolio is balanced and not overexposing
taxpayers to unnecessary investment risk?
Question 6. Compliance with the National Environmental Policy Act,
including environmental assessments for loan guarantee projects, has
contributed to the delays in awarding the Loan guarantees. This
legislation is a mixed bag when it comes to waiving onerous hiring
regulations to bring on qualified federal staff and pay them
competitive salaries, but it also does nothing to accelerate the NEPA
reviews and it raises the cost of construction of energy projects by
requiring compliance with Davis Bacon rules. Aside from waiving federal
hiring and compensation rules are there any other positive reforms that
would lower the cost of energy projects or speed their deployment?--
Should we do more in this regard?
______
Questions for John Denniston From Senator Murkowski
Question 1. There appears to be some disagreement among the
witnesses as to what is an appropriate percentage limit for the loan
loss reserve. Ten percent is consistent with the safest thrift
institutions and CBO's most recent interpretation of Stimulus funding
for the Loan Guarantee Program. Can you elaborate further on what you
think is a reasonable level for the loan loss reserve to be set at, and
how that compares to existing treatment of credit subsidy costs for
comparable programs in the federal government?
Question 2. Legislation similar in concept to the draft we are
discussing today has been introduced in the House. Have any of you had
a chance to review that bill, and if so, how does its risk profile,
structure and operation compare to the contents of this Senate draft?
Questions for John Denniston From Senator Bennett
Question 3. This legislation proposes that the Clean Energy
Deployment Administration would be retained within the Department of
Energy, similar to the Energy Information Administration. However, as
we approach the 4th anniversary of the EPACT's signing, I am skeptical
that the Department is able to implement this program in an effective
and timely manner. Over the past several years, DOE has struggled to
set up this program and fought both OMB and CBO over scoring and
implementation strategies. While, I don't doubt Secretary Chu's
commitment to implementing this program, the facts speak for
themselves. I would prefer see an entity that is entirely focused on
implementing and supporting the deployment of clean energy based on
sound financial fundamentals. I fear that political pressures within
the Department will drive the investment strategy, rather than allowing
commercial fundamentals and sound risk management strategies to dictate
the outcome. Do you agree that creating this program within the
existing DOE bureaucracy, which will compete for personnel and budget
needs, is in the best interest of the program? Based on DOE's track
record is this the best organizational model to drive investment into
our energy sector?
Question 4. This new legislative authority creates a nine member
board and an eight member advisory council to advise the board of
technology and investment priorities. Over the past three years, we
have faced difficulty in implementing this program as a result of
interference from OMB regarding the implementation of the program rules
and regulations. It is unclear how an additional layer of bureaucracy
will improve the program implementation. In addition, as part of the
Stimulus bill Congress provided $400 M to establish the Advanced
Research Projects Agency--Energy (ARPA-E) within the Department to
advise the Secretary in the deployment of energy technology. This
legislation seems to go out of its way to create new and redundant
layers of bureaucracy. Does anyone believe it is vital that the
advisory council be included in this text? Why can't we rely on the
existing program offices, laboratories and ARPA-E to advise the board
on the promising technology options?
Question 5. Based on DOE's existing track record and significant
delays in implementing the existing loan guarantees, do you have any
concerns about the Department's ability to expand the financial
offerings prescribed in this bill? Does the Department have sufficient
capability at the staff level to implement, evaluate and support the
new authorities provided in this legislation, including securitization
of energy projects, which has never been done in the federal
government? (There is no secondary market for these investments) Does
the Department have any familiarity with financial risk management to
ensure the investment portfolio is balanced and not overexposing
taxpayers to unnecessary investment risk?
Question 6. Compliance with the National Environmental Policy Act,
including environmental assessments for loan guarantee projects, has
contributed to the delays in awarding the Loan guarantees. This
legislation is a mixed bag when it comes to waiving onerous hiring
regulations to bring on qualified federal staff and pay them
competitive salaries, but it also does nothing to accelerate the NEPA
reviews and it raises the cost of construction of energy projects by
requiring compliance with Davis Bacon rules. Aside from waiving federal
hiring and compensation rules are there any other positive reforms that
would lower the cost of energy projects or speed their deployment?--
Should we do more in this regard?
______
Questions for Dan W. Reicher From Senator Murkowski
Question 1. There appears to be some disagreement among the
witnesses as to what is an appropriate percentage limit for the loan
loss reserve. Ten percent is consistent with the safest thrift
institutions and CBO's most recent interpretation of Stimulus funding
for the Loan Guarantee Program. Can you elaborate further on what you
think is a reasonable level for the loan loss reserve to be set at, and
how that compares to existing treatment of credit subsidy costs for
comparable programs in the federal government?
Question 2. Legislation similar in concept to the draft we are
discussing today has been introduced in the House. Have any of you had
a chance to review that bill, and if so, how does its risk profile,
structure and operation compare to the contents of this Senate draft?
Questions for Dan W. Reicher From Senator Bennett
Question 3. This legislation proposes that the Clean Energy
Deployment Administration would be retained within the Department of
Energy, similar to the Energy Information Administration. However, as
we approach the 4th anniversary of the EPACT's signing, I am skeptical
that the Department is able to implement this program in an effective
and timely manner. Over the past several years, DOE has struggled to
set up this program and fought both OMB and CBO over scoring and
implementation strategies. While, I don't doubt Secretary Chu's
commitment to implementing this program, the facts speak for
themselves. I would prefer see an entity that is entirely focused on
implementing and supporting the deployment of clean energy based on
sound financial fundamentals. I fear that political pressures within
the Department will drive the investment strategy, rather than allowing
commercial fundamentals and sound risk management strategies to dictate
the outcome. Do you agree that creating this program within the
existing DOE bureaucracy, which will compete for personnel and budget
needs, is in the best interest of the program? Based on DOE's track
record is this the best organizational model to drive investment into
our energy sector?
Question 4. This new legislative authority creates a nine member
board and an eight member advisory council to advise the board of
technology and investment priorities. Over the past three years, we
have faced difficulty in implementing this program as a result of
interference from OMB regarding the implementation of the program rules
and regulations. It is unclear how an additional layer of bureaucracy
will improve the program implementation. In addition, as part of the
Stimulus bill Congress provided $400 M to establish the Advanced
Research Projects Agency--Energy (ARPA-E) within the Department to
advise the Secretary in the deployment of energy technology. This
legislation seems to go out of its way to create new and redundant
layers of bureaucracy. Does anyone believe it is vital that the
advisory council be included in this text? Why can't we rely on the
existing program offices, laboratories and ARPA-E to advise the board
on the promising technology options?
Question 5. Based on DOE's existing track record and significant
delays in implementing the existing loan guarantees, do you have any
concerns about the Department's ability to expand the financial
offerings prescribed in this bill? Does the Department have sufficient
capability at the staff level to implement, evaluate and support the
new authorities provided in this legislation, including securitization
of energy projects, which has never been done in the federal
government? (There is no secondary market for these investments) Does
the Department have any familiarity with financial risk management to
ensure the investment portfolio is balanced and not overexposing
taxpayers to unnecessary investment risk?
Question 6. Compliance with the National Environmental Policy Act,
including environmental assessments for loan guarantee projects, has
contributed to the delays in awarding the Loan guarantees. This
legislation is a mixed bag when it comes to waiving onerous hiring
regulations to bring on qualified federal staff and pay them
competitive salaries, but it also does nothing to accelerate the NEPA
reviews and it raises the cost of construction of energy projects by
requiring compliance with Davis Bacon rules. Aside from waiving federal
hiring and compensation rules are there any other positive reforms that
would lower the cost of energy projects or speed their deployment?--
Should we do more in this regard?
______
Questions for Joseph S. Hezir From Senator Murkowski
Question 1. There appears to be some disagreement among the
witnesses as to what is an appropriate percentage limit for the loan
loss reserve. Ten percent is consistent with the safest thrift
institutions and CBO's most recent interpretation of Stimulus funding
for the Loan Guarantee Program. Can you elaborate further on what you
think is a reasonable level for the loan loss reserve to be set at, and
how that compares to existing treatment of credit subsidy costs for
comparable programs in the federal government?
Question 2. Legislation similar in concept to the draft we are
discussing today has been introduced in the House. Have any of you had
a chance to review that bill, and if so, how does its risk profile,
structure and operation compare to the contents of this Senate draft?
Question 3. Your testimony focuses on the operation of existing
entities, like EXIM and OPIC, which are similar to the ``Clean Energy
Deployment Administration'' as outlined in the draft bill. How do the
loans, loan guarantees and other forms of credit support provided by
these similar entities compare to grants and cost-shared demonstrations
in terms of a return on the use of taxpayer dollars?
Questions for Joseph S. Hezir From Senator Barrasso
Question 4. Do you think there is adequate accounting transparency
to guarantee that the Clean Energy Deployment Administration does not
over-leverage itself or take irresponsible risks? Are there additional
steps that can be taken to minimize taxpayer exposure?
Question 5. The government has a poor track record of picking
winners and losers in the marketplace. Do you think this legislation
provides a framework for an independent, pragmatic review of
applications and not fall prey to political whims?
Questions for Joseph S. Hezir From Senator Bennett
Question 6. This legislation proposes that the Clean Energy
Deployment Administration would be retained within the Department of
Energy, similar to the Energy Information Administration. However, as
we approach the 4th anniversary of the EPACT's signing, I am skeptical
that the Department is able to implement this program in an effective
and timely manner. Over the past several years, DOE has struggled to
set up this program and fought both OMB and CBO over scoring and
implementation strategies. While, I don't doubt Secretary Chu's
commitment to implementing this program, the facts speak for
themselves. I would prefer see an entity that is entirely focused on
implementing and supporting the deployment of clean energy based on
sound financial fundamentals. I fear that political pressures within
the Department will drive the investment strategy, rather than allowing
commercial fundamentals and sound risk management strategies to dictate
the outcome. Do you agree that creating this program within the
existing DOE bureaucracy, which will compete for personnel and budget
needs, is in the best interest of the program? Based on DOE's track
record is this the best organizational model to drive investment into
our energy sector?
Question 7. This new legislative authority creates a nine member
board and an eight member advisory council to advise the board of
technology and investment priorities. Over the past three years, we
have faced difficulty in implementing this program as a result of
interference from OMB regarding the implementation of the program rules
and regulations. It is unclear how an additional layer of bureaucracy
will improve the program implementation. In addition, as part of the
Stimulus bill Congress provided $400 M to establish the Advanced
Research Projects Agency--Energy (ARPA-E) within the Department to
advise the Secretary in the deployment of energy technology. This
legislation seems to go out of its way to create new and redundant
layers of bureaucracy. Does anyone believe it is vital that the
advisory council be included in this text? Why can't we rely on the
existing program offices, laboratories and ARPA-E to advise the board
on the promising technology options?
Question 8. Based on DOE's existing track record and significant
delays in implementing the existing loan guarantees, do you have any
concerns about the Department's ability to expand the financial
offerings prescribed in this bill? Does the Department have sufficient
capability at the staff level to implement, evaluate and support the
new authorities provided in this legislation, including securitization
of energy projects, which has never been done in the federal
government? (There is no secondary market for these investments) Does
the Department have any familiarity with financial risk management to
ensure the investment portfolio is balanced and not overexposing
taxpayers to unnecessary investment risk?
Question 9. Compliance with the National Environmental Policy Act,
including environmental assessments for loan guarantee projects, has
contributed to the delays in awarding the Loan guarantees. This
legislation is a mixed bag when it comes to waiving onerous hiring
regulations to bring on qualified federal staff and pay them
competitive salaries, but it also does nothing to accelerate the NEPA
reviews and it raises the cost of construction of energy projects by
requiring compliance with Davis Bacon rules. Aside from waiving federal
hiring and compensation rules are there any other positive reforms that
would lower the cost of energy projects or speed their deployment?--
Should we do more in this regard?
Question 10. Mr. Hezir, your testimony suggests that the Federal
Credit Reform Act has had a generally positive effect on the federal
government's management of credit instruments. However, in the context
of the Title XVII loan guarantee program there are concerns that the
credit subsidy cost will be so high that it is a barrier to applicants.
Is that a result of Federal Credit Reform Act, in general, or has DOE
and OMB interpreted FCRA too narrowly?
Question 11. As your testimony notes, the CEDA is directed to
consider risk on a portfolio-basis. Will this reduce the credit subsidy
cost for applicants?