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Hot-Potato Policy

DOE loan guarantees degenerate into a political game.

Fortnightly Magazine - December 2007

the DOE has provided direct funding and loan guarantees under various schemes, such as the Clean Coal Technology program of the 1980s and ’90s. These programs yielded some noteworthy successes, but the dollar commitments were small compared to the new Title XVII program. Its first iteration would cover $9 billion in loans, and that’s just the beginning (theoretically).

The program’s proponents emphasize DOE won’t be issuing loans, and the loan-guarantee costs—which under the DOE rules are termed the “credit subsidy cost”—are supposed to be paid by the borrowers themselves, sort of like a mortgage-insurance policy. Irrespective of these facts, however, the Title XVII program now stands in a precarious position, vulnerable both to political attack in Congress and administrative obstruction by DOE and OMB.

Souring the Milk

While the final rules are significantly more palatable than the DOE’s May 2007 draft, they retain peculiar provisions that seem designed to marginalize the program.

First, the rules allow the government to guarantee up to 100 percent of the debt for a project, as long as that debt doesn’t exceed 80 percent of the project’s costs—in concordance with the language of Title XVII. But they add an important caveat: Such loans must be issued by the U.S. Treasury Department’s Federal Financing Bank.

This requirement might be driven by the Treasury Department, which doesn’t want to see tens of billions of dollars worth of U.S.-backed commercial debt in the capital markets, effectively competing with Treasury securities.

But by putting Treasury money on the line, the DOE is changing the political story of the Title XVII program; proponents can no longer say the U.S. government isn’t providing the loans. It also partially defeats the program’s secondary purpose—helping advanced-technology projects access the capital markets.

For project sponsors that want to use private capital, most notably long-term syndicated loans, the DOE will guarantee only 90 percent of the project debt. And the remaining non-guaranteed 10 percent will be subordinated to the federal lien. “It seems like they give with one hand and take away with the other,” says Jim Liles, a partner with Milbank, Tweed, Hadley & McCloy in Washington, D.C. “You can go to a commercial lender, but you have to go through this bureaucratic rig-a-ma-roll, and the lender is basically at risk for losing the non-guaranteed part.”

Dropping the Potato

Today as always, the Title XVII program hinges on politics. Congress might refuse to grant DOE’s requested $9 billion loan-guarantee authorization. And with $25 billion worth of requests already queued up, plus numerous multi-billion-dollar nuclear projects behind them, sticker shock easily could complicate the appropriations process.

And even if the appropriations survive, DOE can kill the program with a strict methodology for calculating credit-subsidy costs. DOE provides few clues into its thinking, except to say its methods will be more rigorous than those used by Ex-Im Bank. Rigorous pricing for commercialization risk might yield very high credit-subsidy costs.

“With Title XVII loans, there is no track record,” Hansen says. “The program focuses on technologies that in the world’s most advanced capital market aren’t financeable on their own.