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Hot-Potato Policy

DOE loan guarantees degenerate into a political game.

Fortnightly Magazine - December 2007

Once upon a time, the U.S. Congress started a game of hot potato. The potato, otherwise known as the EPAct Title XVII Loan Guarantee Program, has been bouncing around Washington, D.C., since 2005.

For a long time it bounced among executive-branch agencies and Congress. Finally, DOE issued regulations in October, effectively putting the potato back in Congress’ lap. Legislators can end the game by funding the program.

But now that the industry is getting a good look at the potato, it looks decidedly funky—stuffed with caveats and half-measures. Whether that’s good or bad depends largely on whether you believe the government belongs in the potato game in the first place.

Not On My Watch

EPAct Title XVII directed the energy secretary to guarantee loans for projects that “avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies.”

The DOE, however, never seemed to embrace Congress’ assignment. Publicly, of course, DOE officials have supported the program, but their actions seem aimed at scuttling it—or ensnaring it in bureaucracy until President Bush’s term ends.

For example, the DOE’s proposed regulations in May 2007 made the program unworkable. They capped the guarantee at 80 percent of project debt, and subordinated the non-guaranteed debt to the federal government’s lien. In other words, the government would get first dibs on all project assets in event of a default, whether they were financed with guaranteed funds or not. Uncovered lenders could be left without any kind of security, which in practical terms closed off access to the remaining 20-percent slice of non-guaranteed debt.

Also, the rules forbade syndication of guaranteed loans. Sponsors could not re-finance project debt, forcing them to carry high-cost construction financing for up to 30 years.

“They took what could be a very effective instrument, and added quirky elements that made the program clunky,” says Ken Hansen, a partner with Chadbourne & Parke in Washington, D.C., and formerly counsel for both OPIC and Ex-Im Bank. “They were essentially poison pills. DOE could not be serious about raising capital for these purposes when they put in those terms.”

Institutional Memory

The likely reasons for DOE’s reticence are complicated, dating back to the Jimmy Carter and Ronald Reagan years.

A series of commercialization programs in the ’70s and ’80s involved the DOE in coal-to-liquids, ethanol and geothermal development. Some of these projects failed spectacularly—for various reasons, not all involving technology—and billions in taxpayer dollars went up in smoke, or vanished into dry holes.

The institutional memory of those failures remains fresh at DOE. A recent report from the department’s inspector general recalled costly examples of fraud, misappropriation and delay, and noted “agency officials [have] not always … appropriately acted to protect the Government’s interest in the case of default” (See Friedman, Gregory H., “Loan Guarantees for Innovative Energy Technologies: Memorandum for the Secretary,” DOE Office of the Inspector General, Sept. 19, 2007).

Since then,

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