[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                   IMPLEMENTATION OF EPACT 2005 LOAN
                       GUARANTEE PROGRAMS BY THE
                          DEPARTMENT OF ENERGY

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 24, 2007

                               __________

                           Serial No. 110-32


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov


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                    COMMITTEE ON ENERGY AND COMMERCE

    JOHN D. DINGELL, Michigan,       JOE BARTON, Texas
             Chairman                    Ranking Member
HENRY A. WAXMAN, California          RALPH M. HALL, Texas
EDWARD J. MARKEY, Massachusetts      J. DENNIS HASTERT, Illinois
RICK BOUCHER, Virginia               FRED UPTON, Michigan
EDOLPHUS TOWNS, New York             CLIFF STEARNS, Florida
FRANK PALLONE, Jr., New Jersey       NATHAN DEAL, Georgia
BART GORDON, Tennessee               ED WHITFIELD, Kentucky
BOBBY L. RUSH, Illinois              BARBARA CUBIN, Wyoming
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                HEATHER WILSON, New Mexico
ELIOT L. ENGEL, New York             JOHN B. SHADEGG, Arizona
ALBERT R. WYNN, Maryland             CHARLES W. ``CHIP'' PICKERING, 
GENE GREEN, Texas                        Mississippi
DIANA DeGETTE, Colorado              VITO FOSSELLA, New York
    Vice Chairman                    STEVE BUYER, Indiana
LOIS CAPPS, California               GEORGE RADANOVICH, California
MIKE DOYLE, Pennsylvania             JOSEPH R. PITTS, Pennsylvania
JANE HARMAN, California              MARY BONO, California
TOM ALLEN, Maine                     GREG WALDEN, Oregon
JAN SCHAKOWSKY, Illinois             LEE TERRY, Nebraska
HILDA L. SOLIS, California           MIKE FERGUSON, New Jersey
CHARLES A. GONZALEZ, Texas           MIKE ROGERS, Michigan
JAY INSLEE, Washington               SUE WILKINS MYRICK, North Carolina
TAMMY BALDWIN, Wisconsin             JOHN SULLIVAN, Oklahoma
MIKE ROSS, Arkansas                  TIM MURPHY, Pennsylvania
DARLENE HOOLEY, Oregon               MICHAEL C. BURGESS, Texas
ANTHONY D. WEINER, New York          MARSHA BLACKBURN, Tennessee        
JIM MATHESON, Utah                   
G.K. BUTTERFIELD, North Carolina     
CHARLIE MELANCON, Louisiana          
JOHN BARROW, Georgia                 
BARON P. HILL, Indiana               

_________________________________________________________________

                           Professional Staff

 Dennis B. Fitzgibbons, Chief of 
               Staff
Gregg A. Rothschild, Chief Counsel
   Sharon E. Davis, Chief Clerk
   Bud Albright, Minority Staff 
             Director
                 Subcommittee on Energy and Air Quality

                    RICK BOUCHER, Virginia, Chairman
G.K. BUTTERFIELD, North Carolina,    J. DENNIS HASTERT, Illinois,
    Vice Chairman                         Ranking Member
CHARLIE MELANCON, Louisiana          RALPH M. HALL, Texas
JOHN BARROW, Georgia                 FRED UPTON, Michigan
HENRY A. WAXMAN, California          ED WHITFIELD, Kentucky
EDWARD J. MARKEY, Massachusetts      JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland             JOHN B. SHADEGG, Arizona
MIKE DOYLE, Pennsylvania             CHARLES W. ``CHIP'' PICKERING, 
JANE HARMAN, California                  Mississippi
TOM ALLEN, Maine                     STEVE BUYER, Indiana
CHARLES A. GONZALEZ, Texas           MARY BONO, California
JAY INSLEE, Washington               GREG WALDEN, Oregon
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon               JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah                   JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex 
    officio)
                                 ------                                

                           Professional Staff

                     Sue D. Sheridan, Chief Counsel
                    Bruce C. Harris, Senior Advisor
                    Laura Vaught, Policy Coordinator
                 David McCarthy, Minority Chief Counsel
                          Chris Treanor, Clerk


                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Rick Boucher, a Representative in Congress from the 
  Commonwealth of Virginia, opening statement....................     1
Hon. J. Dennis Hastert, a Representative in Congress from the 
  State of Illinois, opening statement...........................     2
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     3

                               Witnesses

Dennis R. Spurgeon, Acting Under Secretary, Department of Energy.     5
    Prepared statement...........................................     8
    Answer to submitted question.................................    76
James C. Cosgrove, Acting Director, Natural Resources and 
  Environment, Government Accountability Office..................    25
    Prepared statement...........................................    28
Julie Jorgensen, co-president and chief executive officer, 
  Excelsior Energy, Incorporated.................................    36
    Prepared statement...........................................    37
Denny Devos, director, corporate finance, POET...................    39
    Prepared statement...........................................    41
Christopher Crane, president and chief nuclear officer, Exelon 
  Generation.....................................................    46
    Prepared statement...........................................    47
    Answers to submitted questions...............................    81

                           Submitted Material

The Mesaba Energy Project........................................    58
Gary L. Kepplinger, General Counsel, U.S. Government 
  Accountability Office, letter of April 20, 2007 to Messrs. 
  Visclosky and Hobson...........................................    67


 IMPLEMENTATION OF EPACT 2005 LOAN GUARANTEE PROGRAMS BY THE DEPARTMENT 
                               OF ENERGY

                              ----------                              


                        TUESDAY, APRIL 24, 2007

              House of Representatives,    
                     Subcommittee on Energy
                                   and Air Quality,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 3:15 p.m., in 
room 2322 of the Rayburn House Office Building, Hon. Rick 
Boucher (chairman) presiding.
    Members present: Representatives Butterfield, Melancon, 
Barrow, Markey, Doyle, Gonzalez, Inslee, Hastert, Shimkus, 
Shadegg, Walden, Burgess, and Barton.
    Staff present: Sue Sheridan, Bruce Harris, Chris Treanor, 
Bud Albright, David McCarthy, Kurt Bilas, Peter Kielty, and 
Matthew Johnson.

  OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF VIRGINIA

    Mr. Boucher. The subcommittee will come to order. The 
Energy Policy Act of 2005 enacted two loan guarantee programs. 
Title XV authorized the provision of loan guarantees for the 
processing and conversion of municipal solid waste and 
cellulosic biomass into fuel alcohol and other commercial 
byproducts. Title XVII provides loan guarantees for projects 
that avoid, reduce, and sequester air pollutants for 
anthropogenic emissions of greenhouse gases. To date, the 
Department of Energy's focus has been on the implementation of 
the title XVII program, which includes 10 categories of 
projects that are eligible for loan guarantees. But no loan 
guarantees, as of today, have been awarded.
    In response to widespread concern surrounding the length of 
time associated with the making of any awards under the 
program, the continuing resolution providing appropriations for 
fiscal year 2007 addressed DOE's delays. The resolution 
provided for up to $4 billion in loan guarantees during the 
course of fiscal year 2007 and directed to DOE to complete a 
rulemaking on title XVII within 6 months. It further stipulated 
that no loan guarantees could be awarded until the final 
regulation has been issued.
    However, at a March hearing before the Appropriations 
Committee, Secretary Bodman stated that it is likely impossible 
to promulgate a final rule by that August deadline. In the 
meantime, a number of energy industries, including cellulosic 
ethanol producers, have expressed the strong need for the title 
XV loan guarantee program in order to begin the commercial 
deployment phases of their technologies. Since DOE's focus has 
been exclusively on the title XVII program, title XV loan 
guarantees have not been awarded, either.
    Other problems have also been voiced. For example, the 
statute allows for projects to self-fund the Government's risk 
in issuing a loan guarantee as an alternative to obtaining an 
appropriation to fund that risk. However, the initial DOE 
guidelines require that each project still receive an approval 
in an appropriations bill notwithstanding that self-funding 
authorization.
    Today's witnesses will enable us to examine the current 
state of the implementation process, as well as to hear from a 
number of witnesses whose projects have been affected by the 
fact that no awards have been made through either program at 
this time. We will also learn, from the witnesses, their 
recommendations for changes which would enable an expeditious 
implementation of the loan guarantee program.
    I want to say welcome to each of our witnesses and we will 
turn to their testimony momentarily. It is now my privilege to 
recognize the ranking Republican member of this subcommittee, 
the gentleman from Illinois, Mr. Hastert, for his 5-minute 
opening statement.

 OPENING STATEMENT OF HON. J. DENNIS HASTERT, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Hastert Thank you, Mr. Chairman. Thank you for holding 
this hearing on the status of the loan guarantee program of 
title XVII of the Energy Policy Act of 2005. I also want to 
thank our witnesses for agreeing to testify today. Your 
testimony is important to give perspective on the status of 
this program. Title XVII established a loan guarantee program 
at the Department of Energy to provide guarantees for new and 
innovative energy projects. These types of projects include 
ethanol, clean coal facilities, and nuclear power plants; all 
technologies I support.
    We need to get the next generation of these technologies 
and others like cellulosic and coal-to-liquid technology to the 
market as soon as possible. Doing so will help reduce our 
dependence on unstable foreign sources of energy. This 
increases our national security by providing the right energy 
here at home that we need to power the American economy in the 
future. However, after 20 months, no loan has yet to be 
guaranteed. That is too long. There have been a number of 
reasons why the program has been slow to start and I am sure 
that we will hear about them today.
    But the bottom line is that we need to get this loan 
guarantee program operational soon. Congress intended to have 
these loans guaranteed at a full 80 percent of the project 
cost, not to 80 percent of 80 percent that we are now hearing 
some spin. This full financing is essential for the future of 
energy innovation in this country. Title XVII provides the loan 
guarantees to get new technology like clean coal, carbon 
capture and sequestration, and the next generation nuclear and 
ethanol on the ground running and into the market. Not only do 
these technologies improve our energy security, but they will 
also improve our environment. But again, to get there, we need 
new technology; that is why title XVII is so important. 
Properly operated, the title XVII loan guarantees could bring 
these new technologies to market with benefits that all 
Americans are certain to realize.
    I look forward to today's hearing on title XVII; what has 
happened or not happened and why, and where this program is 
going. And if there are things in Congress and on this 
committee in particular that we can do to make this program 
work or changes that must be needed, let us hear about it. Mr. 
Chairman, I am somewhat anxious to hear the reasons why we are 
not getting this program in place and why some in the White 
House are trying to shave this down to 64 percent. With that, I 
want to get on with the hearing and yield back. Thank you, sir.
    Mr. Boucher. I thank the gentleman for his very well 
structured comments. The gentleman from Georgia, Mr. Barrow, is 
recognized for 5 minutes.
    Mr. Barrow. I will waive.
    Mr. Boucher. The gentleman from Georgia waives. I would 
note that any Member who waives an opening statement will have 
the time allotted for that opening statement added to that 
Member's period for posing questions. The gentleman from 
Washington State, Mr. Inslee, is recognized.
    Mr. Inslee. I will waive, Mr. Chairman.
    Mr. Boucher. Mr. Inslee waives. The gentleman from 
Massachusetts, Mr. Markey, is recognized.
    Mr. Markey. I would like to waive.
    Mr. Boucher. Mr. Markey waives. The gentleman from Texas, 
Mr. Gonzalez, is recognized.
    Mr. Gonzalez. I will waive.
    Mr. Boucher. He waives, also. The gentleman from Texas, Mr. 
Barton, ranking member on the full committee, is recognized for 
5 minutes.

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman, for holding this 
hearing today. I want to welcome our witnesses, also. We are 
here today to talk about the loan guarantee program that we 
authorized in the Energy Policy Act of 2005. I would like to 
point out that I was the chairman of that conference, in 
conjunction with the Senate. Senator Bingaman, Senator 
Domenici, and Chairman Dingell were the four major conferees on 
the Energy Policy Act.
    We first saw the proposal for loan guarantee in the Senate 
version of the EPAct. Because I did chair the conference, I had 
the ability to change it or at least recommend that it be 
changed, but Senator Domenici and Senator Bingaman felt so 
strongly, on a bipartisan basis, that the program was well-
crafted, that Congressman Dingell and myself decided to accept 
that. That was one of the things that we did accept from the 
Senate with no changes. Since it has been enacted, this program 
has run into one problem after another.
     The plain language of EPAct says that there shall be a 
Government loan guarantee of 80 percent of the capital cost of 
the project, not 80 percent of 80 percent. What a crock of 
horse hockey to come here and have to debate what 80 percent 
means. If we had known then what we know now, we would have put 
in an example about what 80 means. It means if you borrow a 
billion dollars or you need a billion dollars, you can borrow 
up to 80 percent of it and get a Federal loan guarantee on $800 
million. That is what it means. It doesn't mean $640 million or 
64 percent.
    There was never one bit of conversation between Mr. 
Bingaman, Mr. Domenici, Mr. Dingell and myself about 80 percent 
meaning 64 percent, not once. So if we can get anything into 
the record in this hearing, Mr. Chairman, let us at least say 
that the intent of the conferees was that 80 percent meant 80 
percent of the entire loan, period. I mean, plain language. And 
I think that Senators Bingaman and Domenici and Chairman 
Dingell will back me up on that.
    Having decided in their own infinite wisdom that somehow 80 
percent means 64 percent, the CBO has now come out and said 
that even though you can only borrow $640 million that is 
guaranteed, you are at risk in terms of CBO scoring for the 
entire $1 billion. Well, what the hey is going on here? If the 
most you can borrow is $640 million that mostly can be 
guaranteed by the Federal Government, then most of the Federal 
Government's risk, apparently, should be $640 million. So it 
just seems like the gods have it in for this loan guarantee 
program, that no matter which way you go, it is being viewed 
exactly the opposite way that the congressional intent was when 
we passed the law.
    Our friends at OMB and CBO are not the only problems, 
however, for this program. The appropriation committees in both 
the House and the Senate have had misgivings about this and 
about committing real dollars. EPAct is, we need to point out, 
only authorized spending. It is up to the appropriation 
committees to put muscle behind those authorizations and I am 
of the opinion that this is, if we really want to get some of 
these alternative energy programs going, if we really want to 
get our commercial nuclear activities going, we need to go 
ahead and put some real money into the loan guarantee program 
and get it moving.
    Now, last week, to top it off, our friends at GAO have said 
that even the initial steps that the Department of Energy has 
taken to set up an office and start communicating with 
potential applicants have gone too far, so every way we turn, 
what looked to be on paper, back when we actually did the 
Energy Policy Act, to be a pretty straightforward, simple 
program is turning into some sort of a Nightmare on Elm Street 
hypothesis, except it is Independence Avenue and we need to 
change that.
    So I am glad, Mr. Chairman, that you are having this 
hearing. I am glad to hear we are here to talk about what I 
consider to be a very important part of the Energy Policy Act. 
I think it is central to our discussions about climate change 
and reducing CO\2\ emissions. The very purpose of the loan 
guarantee program is to bridge the gap between the capital new 
alternative energy projects need to get built and the amount 
that investors are actually willing to invest and put their own 
capital at risk. So this is a program that we need to get 
moving. I hope that this hearing facilitates some clear 
thinking and some re-emphasis and renewed commitment to make 
this program move forward. With that, I yield back.
    Mr. Boucher. Thank you very much, Mr. Barton. The gentleman 
from Arizona, Mr. Shadegg, is recognized for 5 minutes.
    Mr. Shadegg. Mr. Chairman, I am going to commend you for 
holding this hearing and welcome our witnesses. I will waive.
    Mr. Boucher. Thank you, Mr. Shadegg. The gentleman from 
Oregon, Mr. Walden, is recognized.
    Mr. Walden. Mr. Chairman, I, too, am going to waive and 
look forward to the testimony of our witnesses. Thank you.
    Mr. Boucher. Well, all Members having either given an 
opening statement or waived that opportunity, we now welcome 
our first witness and I am pleased to welcome to the 
subcommittee Mr. Dennis Spurgeon, who is the acting Under 
Secretary of the Department of Energy, with expertise on a 
number of DOE initiatives and projects, including the current 
status of the implementation of the loan guarantee program. We 
are glad to have you here this afternoon. We will have, I am 
sure, a rather candid discussion about these issues and before 
we turn to that, we would welcome your opening statement. 
Without objection, your full written statement will be made a 
part of the record and we would welcome your oral summary of 
approximately 5 minutes.

   STATEMENT OF DENNIS R. SPURGEON, ACTING UNDER SECRETARY, 
                      DEPARTMENT OF ENERGY

    Mr. Spurgeon. Thank you, sir. Chairman Boucher, Ranking 
Member Hastert and Mr. Barton, and members of the subcommittee, 
I am pleased to be with you today to address the important 
steps underway at the Department of Energy to implement the 
Loan Guarantee Program contained in title XVII of the Energy 
Policy of Act of 2005.
    Title XVII authorizes the Secretary of Energy, after 
consultation with the Secretary of the Treasury, to make loan 
guarantees for projects that ``avoid, reduce, or sequester air 
pollutants or anthropogenic emissions of greenhouse gases and 
employ new or significantly improved technologies as compared 
to commercial technologies'' in service in the United States at 
the time the guarantee is issued. Under EPAct 2005 many types 
of energy related projects, including renewable energy systems, 
efficient electric generation and transmission systems, coal 
gasification, carbon sequestration, advanced nuclear energy 
facilities, biomass projects such as waste to cellulosic 
ethanol and refineries, among others, are eligible for loan 
guarantees under this title.
    A principal goal of title XVII is to encourage commercial 
use in the United States of new or significantly improved 
energy related technologies at an earlier date than the 
marketplace might otherwise support. DOE believes that 
accelerated commercial use of new and improved technologies 
will help to sustain economic growth, yield environmental 
benefits, enhance energy security and produce a more stable and 
secure energy supply and economy for the United States. We 
believe that consumers will also benefit economically from a 
carefully implemented title XVII loan guarantee program. 
Because of the lower cost of capital achieved through loan 
guarantees, consumers should experience lower utility rates and 
lower costs for other sources than without loan guarantees.
    Moreover, Title XVII Loan Guarantee Program may provide the 
necessary assurance to the capital finance market to enable 
financing for new technologies and those not yet proven in U.S. 
markets, such as bio-refineries or coal-to-liquids facilities 
that would not otherwise be able to obtain financing at a rate 
competitive enough to undertake construction and operation.
    Although Congress enacted title XVII in August 2005, the 
Department received the first necessary funding and 
authorizations needed under the Federal Credit Reform Act of 
1990 in the continuing resolution enacted February 15, 2007. 
Requests by the Department in 2006 for congressional approval 
to reprogram funds in fiscal year 2006 to fund the Loan 
Guarantee Office were unsuccessful. The CR provided $7 million 
in funding for administrative expenses of a Loan Guarantee 
Program Office and the 2008 budget $8.4 million for these 
expenses. The CR also included authority to issue guarantees 
for up to $4 billion in loans. The Department anticipates 
having authority available to guarantee $9 billion in loans in 
fiscal year 2008. I want to assure you that the Department is 
moving aggressively to implement Title XVII Loan Guarantee 
Program, as this program is a high priority for everyone at DOE 
from the Secretary on down.
    Indeed, even before the CR gave the Department 
authorizations and funding needed to carry out the Title XVII 
Loan Guarantee Program, the Department was hard at work 
addressing the twin objectives underpinning title XVII: 
advancing the early commercialization of new and improved 
energy technologies beneficial to the environment and 
minimizing the financial exposure of the United States.
    Thus, to move the effort forward and to gain needed 
experience with the statutory, regulatory, and commercial 
concerns integral to the operation of a loan guarantee program, 
the Department, in August 2006, published guidelines in the 
Federal Register that specified the process by which DOE would 
review and approve the first round of loan guarantee 
applications. At the same time, we issued a solicitation under 
the guidelines that invited project sponsors to submit pre-
applications for projects in support of the President's 
Advanced Energy Initiative.
    We received 143 pre-applications in response to the August 
2006 solicitation and are now working to evaluate them. 
Invitations to submit full applications will be issued to 
selected applicants as soon as possible. Under the CR, however, 
the issuance of loan guarantees in response to the August 2006 
solicitation and pursuant to any future solicitations, cannot 
occur until the Department issues final regulations for the 
title XVII program. The CR states that the final regulations 
must be issued within 6 months of the date of enactment, or by 
August 15, 2007.
    The August 2007 deadline for issuance of the final 
regulations is a challenge for the Department of Energy. 
Nonetheless, in response to this requirement, the 
administration is working very hard on a proposed rule which we 
hope to issue for public comment in the very near future. The 
draft rule was transmitted by DOE to the Office of Management 
and Budget on March 16, 2007, and is currently in interagency 
review process. While I cannot speak to the details of the 
draft notice of proposed rulemaking at this time, we will 
provide briefings to this subcommittee and others in Congress 
as soon as possible.
    At the same time, we are reviewing the initial round of 
pre-applications under the August 2006 guidelines and 
developing final regulations. The Department is also moving 
aggressively to staff its Loan Guarantee Program Office. The 
Secretary has issued a charter for the Credit Review Board, a 
requirement under the policies governing Federal credit 
programs in OMB Circular Number A-129 and the Secretary has 
designated officials within the Department to serve on this 
board.
    In addition, we are actively seeking to recruit a qualified 
individual to supervise the office's operations now that 
funding has been appropriated for the Loan Guarantee Office. 
Moreover, for the interim period, while we work through the 
process of hiring the appropriate technical experts to run this 
office, the Department has secured the services of certain 
employees with subject matter expertise detailed from elsewhere 
in the Federal Government.
    This should give you a sense of the determination of the 
Department to fully implement Title XVII Loan Guarantee Program 
as expeditiously as possible, consistent with the requirements 
of the law. That concludes my prepared testimony. I would be 
happy to respond to any questions you may have, sir.
    [The prepared statement of Mr. Spurgeon follows:]

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    Mr. Boucher. Well, thank you very much, Mr. Spurgeon. We 
appreciate your informing us of the status of the program from 
your perspective. Do you now believe that with the passage of 
the continuing resolution and the allocation of resources 
specifically to your department in order to carry forward the 
Loan Guarantee Program, that you have adequate staff and 
resources in order to perform this work?
    Mr. Spurgeon. Well, we are in the process of obtaining 
adequate staff. We believe we have adequate resources at this 
time, sir.
    Mr. Boucher. All right. Let me try to get you to be a 
little bit more precise about when your final rule is going to 
be implemented, allowing you to move forward with the program. 
The Appropriations Committee and the continuing resolution 
requires you to have that rule in place by August of this year. 
By August of this year, it will have been 2 years since the 
enactment of EPAct 2005 that established the Loan Guarantee 
Program and while I understand your explanation that you did 
not receive funding, specifically, to carry this work forward, 
it seems to me that from the time the CR was adopted until 
August you would have had a period of what, 5 or perhaps 6 
months? That occurred, I think, in January or early February. 
And so the question really now is why can't you get this 
finished by August? What stands in the way of doing that? 
Secretary Bodman recently testified that it was highly unlikely 
that would happen. Why not?
    Mr. Spurgeon. Well, I think the Secretary is reflecting the 
reality of a very important rule that we do anticipate that 
will have substantial public comment and input when we do issue 
the draft rule. For a rule of this type, 6 months is a short 
period in time. We do recognize we got a very late start, but 
we did, as I testified, and it is a matter of public record, 
get our draft notice of proposed rulemaking into interagency 
comment within 1 month of having the continuing resolution 
passed, so it is a priority. It is a personal priority of 
Secretary Bodman and I can attest to that because it is a 
personal priority of mine, as well.
    Mr. Boucher. So you are saying that it is essentially out 
of your hands at this point; it is in the hands of OMB and 
other agencies that have to review it.
    Mr. Spurgeon. But we do go through the interagency review 
and concurrence process and this is obviously a very important 
issue to agencies other than just the Department of Energy.
    Mr. Boucher. All right. The statute adopted in August of 
2005 also says that project applicants for a loan guarantee can 
self-fund the Government's risk in issuing the loan guarantee, 
meaning that you would not have to get an appropriation and 
yet, your preliminary guidance to the applicants says that you 
will not approve loan guarantees until you have approval of the 
projects from the Appropriations Committee. Well, I see a 
puzzled look on your face. If that is not accurate, tell me it 
is not accurate. It is our information that your preliminary 
guidance did, in fact, contain that statement. Is that not 
accurate?
    Mr. Spurgeon. Yes, sir. At that time. It was before there 
had been an authorization in an appropriations bill.
    Mr. Boucher. Well, but that avoids the question. When the 
applicant can self-fund the Government's risk, you would not 
need an authorization in an appropriations bill. Why did you 
ask for one, anyway?
    Mr. Spurgeon. I can only answer that it is my understanding 
and obviously, I would like to give you a better answer than 
what I can do here, personally, for the record, but it is my 
understanding that we did require an authorization in an 
appropriations bill notwithstanding the issue of the self-
funding.
    Mr. Boucher. Well, that is right and my question is why did 
you do that?
    Mr. Spurgeon. Let me give you that answer.
    [Mr. Spurgeon responded for the record:]

    Section 20320(a) of Public Law 110-5, the Revised 
Continuing Appropriations Resolution, 2007 only authorized the 
DOE to accept credit subsidy cost payments from borrowers for 
the full subsidy costs of loan guarantees. Consistent with 
Public Law 110-5, no appropriation has been sought or received 
to cover the credit subsidy costs, which, under Public Law 110-
5 and the Department's proposed final regulations must be self-
funded by the loan guarantee applicant. However , the 
Department is required under the Federal Credit Reform Act to 
obtain budgetary authority to cover the loan volumes that are 
going to be guaranteed. For fiscal year 2007, Congress 
authorized the Department to issue up to $4 billion in loan 
guarantees under title XVII of the Energy Policy Act of 2005. 
Additionally, the Department is required to seek and has 
obtained budgetary authority and an appropriation in the amount 
of $7 million for the administrative costs of operating the 
Loan Guarantee Program in fiscal year 2007.

    Mr. Boucher. Because that has significantly delayed 
projects, and in the minds of a number of project applicants 
who have expressed to this committee great frustration with the 
fact that that requirement was put in place, I would say, 
needlessly. Why the 64 percent cap on the amount of a project 
cost that will be subject to loan guarantee when the statue 
authorizes 80 percent?
    Mr. Spurgeon. Well, what will come out in the final rule is 
yet to be determined. I certainly recognize the question that 
you ask. I certainly recognize, and we do take into 
consideration, the significant amount of comments that we have 
received following that initial effort.
    [Mr. Spurgeon responded for the record:]

    To harmonize and balance the twin goals of issuing loan 
guarantees to encourage the use of new or slightly improved 
technologies while limiting the financial exposure of the 
Federal Government, the Department expressed a preference in 
the August 2006 guidelines that accompanied its initial 
solicitation for guaranteeing no more than 80 percent of 
project costs. Assuming that 80 percent of a project's cost is 
financed by debt guaranteed by the Federal Government under 
title XVII, this created a theoretical limit on the amount of a 
guarantee under the initial solicitation equal to 64 percent of 
project costs.
    The Department is currently reconsidering the appropriate 
limit to place on the percentage of debt instruments eligible 
for loan guarantees. In a May 16, 2007 Notice of Proposed 
Rulemaking, the Department proposed to raise 90 percent the 
portion of debt instruments that it would guarantee. Comments 
on the NOPR were due by July 2, 2007. Upon review of the 
comments, the Department will determine whether the proposed 90 
percent limit, some other limit, or no limit should be adopted.

    Mr. Boucher. All right. Well, I would leave it to you to 
consider very carefully that and hopefully you will come 
forward with 80 percent. One other question, Mr. Secretary, why 
a cap on the total amount of loan guarantees to be issued when 
applicants obviously have the opportunity to self-fund? Why is 
that necessary?
    Mr. Spurgeon. Well, I believe there is a requirement under 
FCRA that there be a cap. In other words, we can't issue loan 
guarantees for an uncapped amount.
    [Mr. Spurgeon responded for the record:]

    The Federal Credit Reform Act of 1990 requires that there 
be budgetary authority which caps the loan volume to be 
guaranteed.

    Mr. Boucher. Where does that requirement come from?
    Mr. Spurgeon. Well, let me try one of two things. I would 
have to turn around and ask one of my attorneys or be able to 
give you an answer and I would prefer to give you the answer 
for the record, sir.
    [Mr. Spurgeon responded for the record:]

    Specifically, the requirement that loan guarantees be 
covered by budgetary authority is contained in the Federal 
Credit Reform Act of 1990 at 2 USC Sec. 661c(b).

    Mr. Boucher. Well, I will look forward to receiving the 
answer. The CR imposes a cap, but only for a 1-year period and 
so that would not be a cap for the long-term program and if 
applicants can self-fund, there is no need for a cap and I 
would encourage you not to impose one as you put this final 
rule forward. My time has expired and I recognize the gentleman 
from Illinois, Mr. Hastert, for 5 minutes.
    Mr. Hastert. I thank the chairman and some of your answers 
really puzzle me. Explain to me, it has been 20 months after we 
passed this piece of legislation. How come loan guarantees have 
not yet been made?
    Mr. Spurgeon. Well, sir, first of all, and I believe Mr. 
Barton also referred to it, we did request authority to 
reprogram funds within the Department in order to stand up a 
loan guarantee office very shortly after the Energy Policy Act 
was passed. That reprogramming request was not approved, sir, 
therefore we did not have the authority to stand up a loan 
guarantee office, to hire the people that would be responsible 
for reviewing and making recommendations to the Secretary 
relative to the issuance of those loan guarantees, so we went 
forward with doing what we thought we could, legally and 
responsibly.
    Mr. Hastert. But what was that?
    Mr. Spurgeon. Well, that was the initial solicitation that 
was issued in the summer of 2006 in order to get preliminary 
solicitation for projects that would potentially, then, be 
eligible for those guarantees.
    Mr. Hastert. So you said 6, 7 months ago you had ability 
now to move forward and solicit?
    Mr. Spurgeon. No, we went out for pre-solicitation.
    Mr. Hastert. Stand-up solicitation.
    Mr. Spurgeon. Yes, to stand up the office and we issued a 
request that, to get the ball rolling, if you will, to indicate 
these are not applications, but they are pre-applications from 
parties that might be interested in loan guarantees in order to 
be able to get experience, as I indicated in my testimony, with 
the kind of system and regulations that we were going to need 
to put in place to actually fully implement this program. But 
we did not feel, at the time, that we had the authority to 
actually issue loan guarantees. We were trying to move the 
process forward.
    Mr. Hastert. Why?
    Mr. Spurgeon. Because, as I mentioned, we did not have an 
authorization in an appropriations bill.
    Mr. Hastert. But, as the chairman said, you don't have to 
appropriate money.
    Mr. Spurgeon. Well, we don't have to appropriate money for 
the cost, the administrative cost of carrying out the loan or 
for what we would call the subsidy cost if it is self-funded, 
that is correct. So it still comes down to did we feel we had 
the authority to issue a loan guarantee and we did not. It was 
the opinion of the Department and, I believe, supported by the 
administration, that at that time, lacking an appropriations 
bill. We anticipated that we would get this in the 
appropriations bill that never happened.
    Mr. Hastert. OK, the Department of Energy lacks the will to 
make the decision on this, is that what you are saying?
    Mr. Spurgeon. Not at all. We have the authority at this 
point and we are moving forward aggressively, sir.
    Mr. Hastert. All right. Where does this whole idea of 80 
percent of 80 percent come from?
    Mr. Spurgeon. The basis of 80 percent of 80 percent and 
obviously, as I indicated, this is something that will be part 
of the rulemaking process and part of the comment process.
    Mr. Hastert. But rulemaking, you read the language of the 
bill; it said 80 percent.
    Mr. Spurgeon. It does, the authorization----
    Mr. Hastert. The legislative intent was 80 percent.
    Mr. Spurgeon. I understand that, sir.
    Mr. Hastert. It was the intent of this committee of 80 
percent.
    Mr. Spurgeon. I understand that.
    Mr. Hastert. It was the intent of the Speaker of the House 
at that time, it was 80 percent, not 80 percent of 80 percent. 
Why are you looking at something different?
    Mr. Spurgeon. Well, what we will actually look at is not 
through the interagency process yet relative to what the 
recommendation----
    Mr. Hastert. That is not an answer.
    Mr. Spurgeon. It is a difficult one. I have to say it is a 
difficult question for me because--it shall not exceed 80 
percent is the language.
    Mr. Hastert. Not 90 or 100 percent.
    Mr. Spurgeon. But I understand. But we also have the 
consideration of FCRA and whether that imposes a limit through 
its implementation, I think, was somewhat of the question, but 
nonetheless, I want to assure you that that issue is one that 
is receiving a great deal of attention within the 
administration as to what the recommended limitation on the 
amount of the guarantee for a loan will be and that is 
something that will be discussed. It will be subject to public 
comment and will eventually be decided on, on a broad 
interagency governmental basis.
    Mr. Hastert. Well, let me just say two things in closing. 
If there is anything that this committee is probably united on, 
was the intent of what that bill said and for you to do 
something different, I think it would be catastrophic. Second 
thing is if your administration was involved in World War II 
and it was 20 months before any decision was made at all before 
we made a decision on what we were going to do in the D-Day 
invasion, we wouldn't have ships, we wouldn't have tanks, we 
wouldn't have anything to move forward with. I think what we 
are trying to do on energy independence and energy security in 
this country not quite lines up with World War II, but it is 
pretty important and I think your agency has been sorely 
lacking in making progress. I yield back.
    Mr. Boucher. I thank the gentleman for his questions. The 
gentleman from Georgia, Mr. Barrow, is recognized for 8 
minutes.
    Mr. Barrow. Thank you, Mr. Chairman. Mr. Spurgeon, my Uncle 
Bill, the legendary Dean Tate at the University of Georgia, was 
fond of saying that working with a sorry boy who won't try is a 
little bit like going bird hunting and having to tote the dog. 
But I listened to Speaker Hastert's questions and I listened to 
your statement, I am not sure who thinks who is the dog in this 
picture, but I am kind of concerned to make sure, at least, we 
are all hunting the same thing. So I want to ask a couple of 
questions, at least to make sure that we are not in for a 
surprise at the end of this round.
    If I understand correctly, we are not moving forward much 
with implementing the title XV. We are still working on the 
title XVII and what concerns me is there is clearly a gap 
between the two in terms of their purpose and their intent. But 
I want to make sure there is something I am very concerned 
about that is squarely authorized under title XV is not going 
to wait its turn while we are trying to go forward with title 
XVII only to find out that it is not going to be foursquare 
inside of what you all have in mind.
    When I look at the title XVII, we are talking about new 
technologies for things like cellulosic ethanol, for example. 
Cellulosic ethanol is something I am very interested in because 
we are going to break ground this year, in my district, on the 
first commercially viable cellulosic ethanol plant in the 
country and it should be operational by the end of this year. 
But we are going to need 13 plants like that in order for 
Georgia to become self-sufficient in its transport energy 
needs, self-sufficient; 13 of those things can do it.
    Now what I am concerned about is to make sure that we are 
not going to find some surprise at the end of this current 
delay in trying to get title XVII loan program up and running 
to find out that that is just going to be for research and 
development and new technology. It is not going to be available 
to implement existing technology. I want to make sure the folks 
are doing what the range fuels people are doing in Treutlen 
County, GA is something they are going to qualify for at the 
end of this current waiting period, that we are both hunting 
after the same opportunity for them or people like them to be 
able to get going with what you are working on right now. Is 
that true?
    Mr. Spurgeon. It is true. The whole purpose of title XVII 
is commercialization, sir, and you are speaking of cellulosic 
ethanol; that fits squarely within the intent of the program. 
That is a program that has a high priority within our 
department. It has a high priority with the Secretary.
    Mr. Barrow. So you are assuring me and the industry that 
the end of this rulemaking process, when the regs are finally 
issued and the authority is there under the CR and under the 
appropriation for the next budget, that folks who want to build 
something with existing technology is going to be able to apply 
for and qualify under the title XVII you are working on right 
now?
    Mr. Spurgeon. Right. Yes, sir. It does apply to new and 
innovative technology. Something that is already in commercial 
application would have to be looked at based on that, but title 
XVII does relate to new, innovative technologies. It is not 
designed for something that is already in the marketplace.
    Mr. Barrow. Well, this new and innovative technology that 
is on the drawing board, there is an experimental plant that is 
going up in Treutlen County, GA that just qualified for a $77 
million assistance grant because it is the first one going. Is 
that fact that they are going to be first basically going to 
disqualify everybody else in the field from doing it because it 
is existing technology?
    Mr. Spurgeon. No.
    Mr. Barrow. I want to make sure that isn't going to happen.
    Mr. Spurgeon. It is a matter of being commercial, sir, not 
being--you want technology that has been proven. Title XVII is 
not an R&D type program. Title XVII is a commercialization 
program.
    Mr. Barrow. Fair enough.
    Mr. Spurgeon. And so the issue is, is it in commercial use?
    Mr. Barrow. So the question is going to be what is somebody 
who wants to replicate what they are going to do in Treutlen 
County at the range fuels place, what can they expect by the 
end of this year? What is going to be available to them and 
what are they going to be able to do?
    Mr. Spurgeon. I am going to try and be realistic as to how 
long it will take to actually get loan guarantees issued 
through the Department.
    Mr. Barrow. Exactly. That is what I want an answer to.
    Mr. Spurgeon. And I would say it would be very aggressive 
to have a loan guarantee program that is actually issuing loan 
guarantees by the end of this year.
    Mr. Barrow. What is going to be very realistic as opposed 
to very aggressive, because very aggressive says it isn't going 
to happen. You are basically saying right up front it isn't 
going to happen in this timeframe, so what is the realistic 
timeframe? When can folks expect to apply for something and 
qualify for it and actually get something?
    Mr. Spurgeon. Actually get it, I would say, early in 2008, 
sir.
    Mr. Barrow. How early? Middle of the year?
    Mr. Spurgeon. No, I think it can be earlier than that. I 
think our target is to have it up and running so that these can 
be issued in the first, early part of the year but now I am off 
in the projection area before we even have the rule out and 
before we even implement it, so there is nobody who wants to 
have this program executed correctly more than do I.
    Mr. Barrow. Oh, actually I think I want it executed much 
more correctly than you do because I have got something going 
in my district and my State has got a lot to offer in the 
cellulosic ethanol field, but I still want to have a realistic 
estimate and your desire and your anxiety to do this is 
commendable, but I want to know when you think it is going to 
happen. The first quarter of next year?
    Mr. Spurgeon. That would be my guess and I am going to 
phrase it just like that. That is a guess.
    Mr. Barrow. What is your best estimate?
    Mr. Spurgeon. It would be the same. It would be the same 
period.
    Mr. Barrow. OK. Thank you, sir. I yield back.
    Mr. Boucher. Thank you, Mr. Barrow. The gentleman from 
Arizona, Mr. Shadegg, is recognized for 8 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. Mr. Spurgeon, I feel 
your pain. I don't want to beat up on you, but I have got to 
tell you, I am a little bit of a skeptic about Government 
programs and if I were, perhaps, trying to teach a class why I 
have some skepticism about the ability of government to 
innovate or to implement, I might want to encourage them to 
read your opening statement and review your testimony here 
today.
    It says to me if you want government to innovate and move 
fast, you picked the wrong entity to do it because it is not 
government, it is going to be the private sector, which causes 
me to have a little bit of concern about my colleagues' 
enthusiasm for a loan guarantee program by government. As a 
matter of fact, it causes me to say if we are counting on 
government to solve these problems, you may be picking the 
wrong horse to ride.
    Having given that preamble, let me begin by saying first, I 
want to give you an opportunity to, in your words, tell me what 
you would say, in a sentence or two or a paragraph, to my 
constituents who believe that renewable energy systems, 
efficient electricity generation and transmission systems, coal 
gasification and carbon sequestration, advanced nuclear and 
biomass projects are vitally important, what would you say to 
them in plain English at, say, a town hall meeting about where 
we are in the process and why there has been some delay?
    Mr. Spurgeon. We are in the beginning of the process at 
this point. We can put a lot of reasons behind the delay, not 
having the necessary funding to begin the office, not getting 
started with the rulemaking until that point in time. We are 
now going through that process and it is a sometimes painful 
step-by-step process to put forward a major rulemaking in 
government and I have to say my whole career has been outside 
of government, not in government, so this is frustrating to me, 
as well. But I would explain the process.
     I would explain the need to not only pursue, as 
aggressively as possible, loan guarantees that can be 
supportive of introducing this advanced technology sooner than 
it might otherwise have been able to support how doing this can 
perhaps reduce the cost of the product from that technology to 
the consumer, but also recognizing that we cannot afford to 
have programs implemented that do not protect the American 
taxpayer and that they are done properly. And so we are going 
through a painful process, but the proper process in order to 
allow that to actually happen and unfortunately, it is slow.
    Mr. Shadegg. And would you say a part of the fault lies 
with the appropriations process in the Congress? Or you are not 
willing to go that far?
    Mr. Spurgeon. Well, I would only say we did request a 
reprogramming and it was not approved.
    Mr. Shadegg. My constituents would say what is a 
reprogramming? Since we are talking in town hall terms. So on 
one hand, the Government is telling you to do it immediately 
and on the other hand, the Government is saying well, we won't 
give you the money to do it immediately. Is that correct?
    Mr. Spurgeon. I think we have had a divergence of opinion 
relative to the loan guarantee issues across the board in our 
Government.
    Mr. Shadegg. I believe just a moment ago, I think in 
response to Mr. Barton, you said we now do have the authority 
to proceed?
    Mr. Spurgeon. Yes, sir.
    Mr. Shadegg. And yet, in response to my colleague from 
Georgia's comments, you said we would have to be very 
aggressive to get it by the end of this year and more likely it 
is sometime early next year. That is correct?
    Mr. Spurgeon. That is an honest guess.
    Mr. Shadegg. Again, talking to my town hall, not talking to 
a congressional hearing, we are talking to my town hall in 
Phoenix, AZ, walk me through what you have left to do that 
could delay us beyond the end of this year? Just in layman's 
terms each step that needs to be accomplished and I am going to 
ask you at the end to say what this Congress might do to 
expedite that, if anything.
    Mr. Spurgeon. Well, first step is the rule. We need to 
establish a rulemaking that will establish the process by which 
these loan guarantees can be applied for, the process by which 
one can calculate the self-funding aspect of what the subsidy 
costs.
    Mr. Shadegg. I want to make sure that one of my 
environmentalists couldn't raise his hand and say well, 
couldn't you have done this rule earlier?
    Mr. Spurgeon. Well, we seem to be a little bit, I don't 
mean to put it a little bit damned if we do and damned if we 
don't because on the one hand----
    Mr. Shadegg. Well, you would be the first Government agency 
in that position.
    Mr. Spurgeon. Going slow and on the other hand we are being 
criticized because we have gone beyond what our authority might 
have been.
    Mr. Shadegg. We are going to get a rule?
    Mr. Spurgeon. Yes, sir. We have got to get a rule and that 
the mandated timeframe for that is August 15 and we have been 
quite forthcoming in saying we are going to do everything we 
can to meet that date, but the Secretary is on record as saying 
that is a very aggressive date and so that is the next step. 
Then what we have got to do is we are going to have to 
implement that rule and that is going to be obtaining, going 
out and getting the proposals.
    Mr. Shadegg. Those will be the official proposals?
    Mr. Spurgeon. Those will be the official proposals.
    Mr. Shadegg. Not the preliminary proposals?
    Mr. Spurgeon. Yes. And some of the ones that were part of 
the preliminary package can still go forward. I am not saying 
that--now that we have the authority, those can be evaluated 
and they are being evaluated at the Department at this time. 
But you are now looking at getting these applications in, 
reviewing the applications and that needs to be a careful 
process, so by the time you go through that, if we are looking 
at the 1st of September or thereabouts for having the 
rulemaking done, then you are looking at the time needed to get 
applications in, to review those applications and to do all of 
the final due diligence that would be needed in order to then 
issue a loan guarantee for that project. And just looking 
realistically, that is something that would be very difficult 
to do in less than 90 days and that is where you get to the 
timeframe.
    Mr. Shadegg. So let us review. It is establish a rule, 
process the applications.
    Mr. Spurgeon. Well, basically issue the loan guarantee.
    Mr. Shadegg. And is there anything this Congress can do to 
expedite that, in light of the fact that we face serious energy 
problems? Any recommendation you can make to this committee?
    Mr. Spurgeon. Not in that process. I think that process is 
going on and your support, I think, obviously, when we know as 
an agency, that we have the strong support of the Congress to 
make this move in a hurry and that it is not unanimous. That is 
always a little bit of a stretch. But when it is a solid 
mandate that loan guarantees are important, that is always 
helpful to us.
    Mr. Shadegg. Nothing further. I yield back.
    Mr. Boucher. Thank you, Mr. Shadegg. The gentleman from 
Texas, Mr. Barton, is recognized for 5 minutes.
    Mr. Barton. Thank you. And I apologize, Mr. Secretary, if I 
asked something that you have been asked while I am out of the 
room. My first question is pretty straightforward. Are we clear 
that the congressional intent 80 percent is 80 percent?
    Mr. Spurgeon. You certainly have made that clear to me.
    Mr. Barton. Is there something that we need to do to 
officially follow up with DOE or OMB? I am dumbfounded that 
there is a debate about 80 percent isn't 80 percent.
    Mr. Spurgeon. It would not be for me to tell the ranking 
member the means by which to exert influence, but that is 
something that is a matter of debate.
    Mr. Barton. If we could get Mr. Boucher and Mr. Hastert and 
Mr. Dingell and myself, send a letter, that might be helpful?
    Mr. Spurgeon. I think it would be going beyond my position, 
sitting here, to suggest how one might proceed to have 
influence in the process.
    Mr. Barton. Well, let us go to the next question. What has 
been the real problem in meeting this deadline? Is it a policy 
problem? Is it a manpower problem? Is it a disagreement in the 
administration that you really don't want a loan guarantee? It 
would seem to me that it might take you some time to sort 
through the applications. I understand that and there have been 
a lot of preliminary requests for loans, but I don't understand 
why it would take a long time to set the rule up, itself. It is 
pretty straightforward. The law says what qualifies. You have 
got to put some definitions, put some timelines complying with 
Government procurement requests for proposals, but it is pretty 
straightforward. What has been the real hang up here?
    Mr. Spurgeon. Well, I think it, as I mentioned in the 
opening testimony, we did issue a notice of proposed 
rulemaking, meaning our draft rule and put it into interagency 
comment within a month of actually having the continuing 
resolution passed and actually, within about 2 weeks or so, of 
having funds allocated. The allocation of funds didn't come 
right instantly when the continuing resolution was passed, so 
we did move very quickly within the Department, very 
aggressively, to establish a proposed rule and we have put that 
into the interagency process, we do this in consultation with--
--
    Mr. Barton. Has there been some huge kickback? Has there 
been some amazing amount of consternation about the proposed 
rule that just you have gone beyond the payola and, oh my God, 
I can't believe that is the way you want to do it? I have not 
heard it. Nobody has called at my office and said you know, 
former Chairman Barton, you won't believe what those bozos at 
DOE did in the proposed rule. It would seem to me that unless 
you have got a manpower problem like Chairman Boucher talked 
about, that we could get this thing out there by the August 
deadline.
    Mr. Spurgeon. Well, I think the next step will be, we will 
get comments back from the review process and then we will make 
modifications to the draft rule that was drafted by the 
Department and that that will then be for public comment.
    Mr. Barton. Have there been any unforeseen comments? Have 
there been something that a light went on and you said we 
didn't really think about that?
    Mr. Spurgeon. I would not put it in that context, no.
    Mr. Barton. OK. My last question, why did you not allow 
nuclear projects to qualify for your original loan 
solicitation? What was the decision process there?
    Mr. Spurgeon. It was, I think, in plain English, a little 
bit of a walk before you run. The total loan limitation that 
was established for this initial round was $2 billion and a 
nuclear plant would most likely be above that number, but also 
practically speaking, we did not see, in this timeframe for 
that initial round, that there would be nuclear plants that 
would be in position----
    Mr. Barton. So there is no philosophical opposition?
    Mr. Spurgeon. There is no philosophical opposition and I 
think, many times in public, as well as the Secretary, we have 
spoken to the applicability of loan guarantees----
    Mr. Barton. And once we get this rule in place, you fully 
expect, as we ramp up the actual loan guarantee authorization, 
the availability of loans, that there will be solicitation for 
nuclear projects?
    Mr. Spurgeon. We do anticipate that.
    Mr. Barton. It is very important. It is very important that 
we get that first one. We put a limitation in the Energy Policy 
Act. It wasn't open ended. I think it is the first five. There 
is a specific number.
    Mr. Spurgeon. Well, there is not a limitation on a number 
in the loan guarantee section, sir. We do have, in standby 
support, a section of the Energy Policy Act that applies. The 
standby support would apply to the first six and there is a 
limitation of $500 million for the first three.
    Mr. Barton. But it is really important to get that first 
one to show the world that we can build a new generation of 
nuclear power plants in this country.
    Mr. Spurgeon. I absolutely agree with you, sir, not just 
the first one, but that we then sustain this growth of nuclear 
energy in the United States.
    Mr. Barton. Thank you, Mr. Secretary, and thank you, 
Chairman Boucher.
    Mr. Boucher. Thank you very much, Mr. Barton. I ask 
unanimous consent to place in the record a letter to Peter 
Visclosky, chairman of the Energy and Water Development 
Subcommittee of the House Appropriations Committee, and the 
Honorable David Hobson, the ranking Republican member of that 
subcommittee, a letter from the GAO dated April 20, 2007, which 
states that EPAct confers upon the Department of Energy 
independent authority to make loan guarantees notwithstanding 
the requirements of the Federal Reporting Act and for your 
information, that letter so states. So without objection, that 
letter will be made a part of this record.
     The gentleman from Illinois, Mr. Shimkus, is recognized 
for 5 minutes.
    Mr. Shimkus. Mr. Spurgeon, you are a service academy guy, I 
find out and you know, we academy guys, we have these 
interesting relationships. When we are together alone, we like 
to pick on each other and make fun of each other, but when the 
going gets tough and one is under the gun, we want to be around 
to be supportive. So and you are a nuke guy.
     And I liked John Shadegg's line of questioning because 
another case study is how people who have been in the private 
sector come into the Government agencies and they just get 
eaten up by them, the bureaucracy. There are all these case 
studies about these great heads of major corporate America that 
come in that are going to be the guy to affect the bureaucracy 
and they usually leave with their tail between their legs 
because it is just too big of a monster to get a handle on.
    A couple of quick questions. In your testimony you 
mentioned that the loan guarantees benefit consumers as opposed 
to a 50 percent debt/50 percent equity. Can you explain that 
quickly for me? Why do you believe that?
    Mr. Spurgeon. Well, just based on the cost of capital. If 
you are financing a plant with 50 percent debt/50 percent 
equity, equity is going to cost for a new nuclear plant 
something in the neighborhood of 15 to 18 percent. Debt is 
going to be, if it is guaranteed debt, it could be around 6.5 
percent or so. If it is straight debt, un-guaranteed, it could 
be somewhere in the 12 percent range, but nonetheless, the 
greater you can leverage a project, the lower the average cost 
of capital will be. And those who might be attacking the loan 
guarantees as subsidy to major energy interests, there is 
probably a consumer benefit to this, as we move forward.
    Mr. Shimkus. Isn't it true that the Export-Import Bank 
provides loan guarantees with 100 percent of loan coverage and 
that the Overseas Private Investor Corporation does the same, 
that the Transportation Infrastructure Financing Authority 
provides 100 percent loan coverage, that the Small Business 
Investment Corporation loan guarantees provide 100 percent loan 
coverage? Isn't it true that 100 percent loan coverage is a 
norm rather than exception?
    Mr. Spurgeon. Well, there are many agencies, as you point 
out, that do offer 100 percent loan coverage and in the private 
sector, I actually had one of those kind of loans, so I 
understand that.
    Mr. Shimkus. So you can understand that when we go with 80 
percent and we think that is our intent, that we want to do 
everything we can to ensure that that is the intent? Another 
case study as to once the law that has been passed by the 
legislature is signed into law and then the Federal agency 
changes that and so many times we have hearings and we have to 
address new legislation and it is a ping pong ball that goes 
back and forth, which doesn't make a lot of sense to a lot of 
us.
    Is it correct that a new electricity generation project to 
be built overseas can get a more favorable term from the 
Export/Import Bank than it could receive under the August 2006 
loan guarantee guidelines published by the DOE?
    Mr. Spurgeon. It is certainly possible.
    Mr. Shimkus. Hence our frustration. This is a big issue for 
all of us; energy independence, a lot of great technology out 
there. The chairman wants to move legislation and we want to 
encourage and help and assist in that. A lot of that will be 
built upon the success of EPAct or the failure of EPAct based 
upon what we intended to do and what didn't occur based upon 
the timeline, so I think you have received enough of our 
frustration. We would encourage you to move expeditiously to 
help us move forward. And with that, Mr. Chairman, thank you 
for recognizing me and I yield back.
    Mr. Boucher. Thank you very much. I appreciate the 
gentleman's questions. The gentleman from Texas, Mr. Burgess, 
is recognized for 5 minutes.
    Mr. Burgess. I apologize, Mr. Chairman, for not being here 
at the start of the hearing. We are having some bad weather 
back home and I needed to make sure everyone was OK. And I am 
also sensitive to the fact that we have got a vote in a few 
minutes, so I will try to be brief.
    Mr. Secretary, thank you for being here today. I am sure 
that the concern has been expressed over and over again by the 
members of the committee about the fact that we haven't had a 
new nuclear facility construction in this country in 30 years. 
We are now faced with the possibility that some of us, some in 
Congress are going to want to cap carbon emissions and reliance 
on nuclear energy or nuclear generation for electricity seems 
to make a great deal of sense to me. You talked, in your 
testimony, about the authorization under title XVII and the 
documents indicate a possible allocation for $4 billion of the 
$9 billion for central power generation facilities. May we then 
assume that nuclear coal-based technologies are going to have 
to compete for funding under this cap?
    Mr. Spurgeon. Well, the $4 billion is not stated as either 
a cap or a floor within the $9 billion, but I think it is a 
recognition of the desire to have a somewhat balanced 
portfolio, but obviously, we have, as the testimony shows or as 
the record shows, we have more in applications, even under the 
preliminary applications for loan guarantees than there is loan 
guarantee ceiling available to us, so there obviously will be 
some competition for loan guarantee funds.
    Mr. Burgess. And again, the rationale for that competition?
    Mr. Spurgeon. It is the idea of how much ceiling would be 
available to issue loan guarantees.
    Mr. Burgess. But do we run the risk of being in the 
position of either us or the administration picking winners and 
losers? Shouldn't we just allow the competition to proceed and 
see where the market goes?
    Mr. Spurgeon. Well, if there is a budgetary ceiling on the 
amount of loan guarantee ceiling available, bad sentence, but 
the idea being, then we are going to somehow have to select 
among those projects.
    Mr. Burgess. Thank you, Mr. Chairman. In the interest of 
the vote, I will yield back the balance of my time.
    Mr. Boucher. Thank you very much and Mr. Burgess, the 
gentleman from Louisiana, Mr. Melancon, waives questions. Well, 
Mr. Spurgeon, you are now excused and we thank you very much 
for your attendance here today. We are going to be submitting 
some follow-up questions to you by a letter and we would 
appreciate your expeditious response. The letter and the 
responses will be made a part of today's proceedings. Thank 
you, Mr. Spurgeon.
    Mr. Spurgeon. Thanks.
    Mr. Boucher. Let me welcome our second panel of witnesses. 
Mr. James Cosgrove is the Acting Director of the Natural 
Resources and Environmental Division of the Government 
Accountability Office; Julie Jorgensen is the co-president and 
chief executive officer of Excelsior Energy, a company 
developing an integrated gasification cycle facility in 
northeastern Minnesota; Denny DeVos is the director of 
corporate finance for POET, the largest dry mill ethanol 
producer in the United States, formerly known as Broin 
Companies. POET is located in Sioux Falls, South Dakota.
    Christopher Crane is the senior vice president of Exelon 
Corporation and the president and chief nuclear officer of 
Exelon Nuclear. I want to say welcome to each of our witnesses 
and thank each of them for joining us here this afternoon. 
Without objection, your prepared written statement will be made 
a part of the record and we would welcome your oral summary, 
hopefully contained within 5 minutes. Mr. Cosgrove, we will be 
happy to begin with you.

   STATEMENT OF JAMES C. COSGROVE, ACTING DIRECTOR, NATURAL 
 RESOURCES AND ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE, 
                         WASHINGTON, DC

    Mr. Cosgrove. Thank you, Mr. Chairman, Ranking Member 
Hastert, members of the subcommittee. I am pleased to be here 
today to discuss DOE's implementation of a loan guarantee 
program authorized by title XVII of the Energy Policy Act of 
2005. As you have heard, this program is intended to encourage 
innovative technologies that show promise of decreasing air 
pollutants and manmade greenhouse gases. My remarks this 
afternoon are based on the results of our February 2007 report 
which reviewed DOE's initial efforts to launch the new loan 
guarantee program.
    The findings of this report highlight the need for adequate 
planning and sound management, both essential to minimize 
Federal financial liabilities and to ensure the program's 
success. As you know, by guaranteeing a loan for a project, the 
Government shoulders some of the projects financial risk. 
Private lenders are thus more willing to finance projects and 
borrowers gain access to credit on morer favorable terms. 
However, if a borrower defaults on a loan, Federal taxpayers 
are on the hook to repay the lender.
    DOE's program guidelines call for borrowers to be charged 
fees that cover all program costs, including the costs 
associated with potential defaults and program administration. 
Nonetheless, depending on the details of how DOE implements the 
program, substantial financial risks for taxpayers would remain 
and let me explain why.
    First, taxpayers could be stuck with a bill if DOE 
underestimates the agency's administrative costs over the life 
of the loans. DOE intends to require borrowers to pay a fee to 
cover these expenses. At the time of our review, however, DOE 
had not determined how it would estimate its administrative 
costs, recover those costs from borrowers, or fund revenue 
shortfalls if it collects too little.
    The program's subsidy costs also poses financial risk for 
taxpayers. This cost is essentially the net amount the 
Government would have to pay a lender in the case of a loan 
default. All Federal agencies are required to estimate the 
expected subsidy amounts and set aside sufficient funds in a 
special treasury account. Estimating default risk and subsidy 
cost is difficult, especially for the types of innovative 
projects that would qualify for the program. This is because, 
in addition to the technological uncertainties, volatile energy 
prices also effect the economic viability of these projects.
    DOE will have to estimate the subsidy cost to determine the 
amount to charge borrowers, but it had not established policies 
or procedures for doing so at the time of our review. Instead, 
DOE had asked potential borrowers, who have an incentive to 
underestimate these costs, to provide preliminary subsidy cost 
estimates. If DOE's final subsidy cost estimate is too low, the 
resulting shortfall would be automatically charged to taxpayers 
through a permanent indefinite appropriation, not through the 
annual appropriations process.
    Our report identified multiple steps that DOE needs to take 
to achieve reasonable assurance the program will be well-
managed, including the following five key steps: issue 
regulations, establish a credit review board, set policies and 
procedures for selecting and monitoring loans and lenders, set 
policies and procedures for estimating administrative and 
subsidy costs and accounting for loan guarantees, and set 
program goals and objectives.
    We found that DOE's actions address these five steps either 
incompletely or not at all. For example, DOE had not issued 
regulations for implementing the program. Instead of a plan to 
rely on guidelines for awarding the first $2 billion in loan 
guarantees, regulations are preferable to guidelines because 
regulations are more transparent to policymakers and the 
public, carry the force of law and hold the agency implementing 
the program and participants accountable to the terms 
specified.
    In conclusion, at the time of our review, DOE did not have 
in place the critical policies, procedures, and mechanisms 
necessary to ensure the program's success. In our report we 
recommended that the Department complete the five key steps 
just discussed before issuing loan guarantees. Since we 
completed our audit work, the Revised Continuing Appropriations 
Resolution for fiscal year 2007 directed DOE to implement most 
of our recommendations by issuing final regulations before 
awarding loan guarantees.
    The resolution also requires GAO to review the loan 
guarantee program annually and to report our findings to 
Congress. We look forward to working with you and others in 
Congress to help ensure the success of this program. Mr. 
Chairman, this concludes my prepared statements. I would be 
happy to respond to any questions you or the members of the 
subcommittee may have.
    [The prepared statement of Mr. Cosgrove follows:]

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    Mr. Boucher. Thank you very much, Mr. Cosgrove. Ms. 
Jorgensen.

 STATEMENT OF JULIE JORGENSEN, CO-PRESIDENT AND CEO, EXCELSIOR 
                  ENERGY, INC., Minnetonka, MN

    Ms. Jorgensen. Good afternoon, Chairman Boucher, 
Congressman Hastert and members of the subcommittee and thank 
you for the invitation to appear before you today. My name is 
Julie Jorgensen and I am the co-president and CEO of Excelsior 
Energy. We are an independent power company located in 
Minnesota and we are the developers of the Mesaba Energy 
Project, which is a 600 megawatt IGCC facility to be located in 
northeastern Minnesota. Excelsior is appreciative of the very 
strong local, State, and Federal support we have received.
    In 2003, Minnesota passed groundbreaking enabling 
legislation for the Mesaba Project that created a market for 
its output and removed the barriers to entry for the IGCC 
technology that were within the State's control. Several State 
agencies also provided important early funding for the Mesaba 
Project. In 2004, the United States Department of Energy 
selected the project for funding under Round II of the Clean 
Coal Power Initiative.
    The project will use ConocoPhillips' E-Gas Technology and 
has the ConocoPhillips Wabash River IGCC facility as its design 
starting point. The Mesaba Project will pave the way for the 
use of western coal in IGCC applications, a key impediment to 
widespread IGCC market adoption. We appreciate the leadership 
of Congress in authorizing the DOE loan guarantees for advanced 
technologies like IGCC. We particularly appreciate the specific 
authorization for a loan guarantee for our Mesaba Project in 
EPAct title XVII. EPAct also specifically provides that the 
Project's Clean Coal Power Initiative award can be used as 
budget authority for the loan guarantee.
    The project is in the advanced development phase with all 
permits filed and the joint State and Federal EIS expected to 
be published in the next several months. Implementation of the 
loan guarantee program authorized by EPAct is now directly on 
the project's critical path schedule. With the loan guarantee, 
the project's costs of capital is reduced so that its cost of 
energy can compete with a conventional coal plant. This is 
achieved by reducing the interest rate on the debt and ensuring 
that adequate leverage levels are achieved. Both of these are 
critical to the goal.
    In addition to bringing down the costs of capital for the 
first mover IGCC plants, the guarantee serves as an essential 
catalyst to the financing of these facilities. The Mesaba 
Energy Project is structured to meet all of the credit quality 
requirements for an investment grade financing. Nonetheless, 
the rating agencies indicate that an investment grade rating 
will not be possible for the first fleet of IGCC plants. 
Without the guarantee, there may simply not be debt capacity in 
the markets for these first mover projects, given their $2 
billion size.
    Every day the first movers are delayed spells delay for the 
market shift to carbon capture ready IGCC. We believe that the 
proposed guidance to limit the guarantee to less than 80 
percent of total project costs and to require lenders to hold 
both guaranteed and un-guaranteed debt creates problems and 
adds complexity that work against Congress's goal in enacting 
EPAct. Instead, we believe the best approach is to guarantee 
debt representing 80 percent of total project costs with the 
DOE obtaining the same type of input and advice that commercial 
underwriters receive from rating agencies and independent 
engineers in order to ensure that default risk is adequately 
addressed.
    In conclusion, the guarantee program and the specific 
guarantee authorized by the Energy Policy Act for the Mesaba 
Project are essential to remove the final barriers to the 
timely implementation of the project and the handful of other 
projects that are close behind it, a successful culmination of 
the U.S. Government's 30-year program to develop and implement 
the IGCC technology. Again, I thank you for the opportunity to 
appear here today and look forward to your questions.
    [The prepared statement of Ms. Jorgensen follows:]

                      Testimony of Julie Jorgensen

    Good afternoon Chairman Boucher, Congressman Hastert, and 
members of the subcommittee, and thank you for the invitation 
to appear before you today. My name is Julie Jorgensen and I am 
the co-president and CEO of Excelsior Energy. Excelsior is an 
independent power company based in Minnesota. We are the 
developers of the Mesaba Energy Project, a 600MW Integrated 
Gasification Combined Cycle (IGCC) plant to be located in 
northeastern Minnesota.
    While I am sure the subcommittee is familiar with IGGC 
technology, let me briefly describe the process. The plant we 
are developing will combine a gasification process with a 
combined cycle power plant to produce electricity from coal 
with less air pollution. In an IGCC plant, coal, petroleum 
coke, or blends of coal and petroleum coke are crushed and then 
slurried with water. The slurry is pumped into a pressurized 
vessel (the gasifier) along with sub-stoichiometric amounts of 
purified oxygen. In the gasifier, controlled reactions take 
place, thermally converting the feedstock materials into a 
gaseous fuel known as synthesis gas, or syngas. The syngas is 
cooled and cleaned of contaminants prior to combustion. 
Cleaning the fuel, rather than scrubbing stack emissions, is 
inherently more efficient because the fuel is at high pressure 
and temperature, and requires treatment of 1/130 of the volume 
of gases that require scrubbing in conventional coal plants. 
Carbon dioxide can also be captured efficiently at this pre-
combustion stage. IGCC results in-highly efficient power 
generation with lower levels of air emissions through the 
operation of a combustion turbine and a steam turbine generator 
in tandem.
    The plant will be fuel flexible and will run on fuel blends 
including 100 percent Powder River Basin sub-bituminous coal, 
Illinois 6 bituminous coal and coal/petcoke blends. I have 
attached a more extensive description of the Mesaba Energy 
Project for the record.
    Excelsior is appreciative of the strong local, State and 
Federal support we have received. In 2003, Minnesota passed 
groundbreaking enabling legislation for the Mesaba Project that 
created a market for its output and removed the barriers to 
entry for the IGCC technology that were in the State's control. 
Several state agencies also provided important early funding 
for the Mesaba Project.
    In 2004, the U.S. Department of Energy (DOE) selected the 
Project for funding as part of Round II of the Clean Coal Power 
Initiative. The Project will use ConocoPhillips' E-GasTM 
Technology, and has the ConocoPhillips Wabash River IGCC 
facility as its design starting point. The Project will have 
two gasification trains rather than the single train at Wabash, 
with a third gasification train for back-up and reliability, 
and incorporates over 1600 lessons learned in 12 years of 
operation at the Wabash plant and a DOE optimization study of 
that facility. The Mesaba Project will pave the way for the use 
of Western fuel in IGCC applications, a key impediment to 
widespread IGCC market adoption.
    We appreciate the leadership of the Congress in authorizing 
DOE loan guarantees for advanced technologies like IGCC. In the 
Energy Policy Act of 2005 (EPAct), Congress recognized the 
strong public policy interest in advancing the commercial 
deployment of clean energy technologies, technologies that will 
enhance our energy security, reduce local air pollution, and 
provide tools to help reduce our emissions of greenhouse gases.
    We are particularly appreciative of the specific 
authorization for a loan guarantee for the Mesaba Project in 
EPAct Title 17. EPAct also specifically provides that the 
Project's Clean Coal Power Initiative award can be used as 
budget authority for the loan guarantee.
    The project is in the advanced development phase, with all 
permits filed and the joint state/Federal environmental impact 
statement expected to be published in the next few months. All 
transmission planning is underway. Because of the detailed 
technical work that has been completed by Excelsior, 
ConocoPhillips and Fluor on the Project, and its fuel flexible, 
multi-train design, the Electric Power Research Institute 
recently selected the Mesaba Energy Project as the pioneering 
sub-bituminous coal IGCC template in its CoalFleet program, 
which is developing IGCC reference designs for the utility 
industry. ConocoPhillips is working on the first stage of front 
end engineering design (FEED), a preparatory step to ordering 
long lead equipment items and completing the engineering design 
required before construction starts.
    The Project's power purchase agreement (PPA) is pending 
before the Minnesota PUC. The tariff structure assumes the debt 
is guaranteed as authorized under EPAct. As a result, the 
tariff, or cost of energy, under the PPA is comparable to that 
of a new utility-owned super-critical pulverized coal plant. 
This price parity demonstrates that the loan guarantee program 
will achieve the stated goal of reducing the cost of energy 
from the first commercial fleet of IGCC facilities in order to 
ensure rapid market penetration of the technology. This is 
achieved by reducing the cost of capital by both reducing the 
interest rate on the debt and ensuring that adequate leverage 
levels are achieved. Both are critical to the goal.
    In addition to bringing down the cost of capital for the 
first mover IGCC plants, the guarantee serves as an essential 
catalyst to the financing of these facilities. The Mesaba 
Energy Project is structured to meet all of the credit quality 
requirements for an investment grade financing. The Project 
output will be sold under a long-term offtake agreement, 
removing the largest default risk. The Project will have an 
engineering, procurement and construction turnkey contract with 
a world-class engineering firm that will guarantee plant 
performance, the other principal default risk. Nonetheless, the 
rating agencies indicate that an investment grade rating will 
not be possible for the first fleet of IGCC plants. Utility 
owned, rate-based plants will face similar constraints due to 
the $2 billion size of these facilities, and their material 
impact on utility balance sheets. Without the guarantee, there 
may simply not be debt capacity in the markets for these first 
mover projects. Every day the first movers are delayed spells 
delay for the market shift to carbon capture ready IGCC and 
further lock-in of conventional technologies that tie our hands 
in efforts to craft meaningful climate policy that does not 
adversely affect economic activity.
    By late summer, we expect to move to the financing phase of 
the Project. Implementation of the loan guarantee authorized by 
the Energy Policy Act for the Project is now directly on the 
Project's critical path schedule. We have worked with major 
financial institutions, law firms and turnkey contractors to 
identify the optimal financing structure to implement the 
guarantee. We believe that the proposed guidance to limit the 
guarantee to less than 80 percent of total project costs, and 
to require lenders to hold both guaranteed and non-guaranteed 
debt, creates problems and adds complexity that work against 
Congress' goals in enacting EPAct. Instead, we believe the best 
approach is to guarantee debt representing 80 percent of total 
project costs, with the DOE obtaining the same type of input 
and advice that commercial underwriters receive from rating 
agencies and independent engineers in order to ensure that 
default risk is adequately addressed.
    IGCC has moved front and center as a national energy 
security and climate change policy priority because of its 
flexibility to capture carbon dioxide emissions. The Project is 
participating in the DOE's Plains CO\2\ Reduction Partnership 
which is spearheaded by the Energy and Environment Research 
Center at the University of North Dakota. The Project has filed 
a carbon capture and sequestration plan with the Minnesota 
Public Utilities Commission (PUC) that is the first of its kind 
anywhere in the United States. The plan contemplates 30 percent 
capture and sequestration of CO\2\ when the Minnesota PUC 
determines that it is in the ratepayers' interests. Excelsior 
and Fluor have identified a means to achieve 30 percent capture 
using currently commercially available technology, by removing 
CO\2\ that is present in the syngas. This capability provides 
an early source of a large CO\2\ stream for one of the 
demonstrations of carbon capture and sequestration that are 
essential to the DOE's roadmap to low carbon impact coal 
utilization. The DOE programs to demonstrate large scale CO\2\ 
sequestration could be accelerated by years by the Mesaba 
Project. The Project can then undertake 90 percent 
sequestration when the research and development path identified 
by the DOE for the technology is completed and ready for 
implementation.
    The Mesaba Project therefore offers an opportunity to jump 
start the carbon capture and sequestration demonstrations that 
are critical to any meaningful climate change policy. The Clean 
Air Task Force has calculated that moving up the date of 
commercialization of IGCC with carbon capture and sequestration 
by six months, in China alone, will do more to stabilize 
atmospheric carbon dioxide concentrations than all the wind 
capacity installed in the world.
    The guarantee program and the specific guarantee authorized 
by the Energy Policy Act for the Mesaba Energy Project are 
essential to remove the final barriers to the timely 
implementation of the Project and the handful of others that 
are close behind it, a successful culmination of the U.S. 
Government's 30-year program to develop and implement the IGCC 
technology.
    Again, I thank you for the opportunity to appear before you 
today and look forward to answering any questions you may have.
                              ----------                              

    Mr. Boucher. Thank you, Ms. Jorgensen. Mr. DeVos.

STATEMENT OF DENNY DEVOS, DIRECTOR OF CORPORATE FINANCE, POET, 
                        SIOUX FALLS, SD

    Mr. DeVos. Thank you. Mr. Chairman and distinguished 
members, thank you for the opportunity to visit with you today. 
My name is Denny DeVos. I am the director of corporate finance 
for POET. I would like to talk with you today about challenges 
and opportunities to utilize loan guarantees on financing 
cellulosic and other innovative renewable energy projects. 
POET, headquartered in Sioux Falls, SD, is the largest dry mill 
ethanol producer in the United States. POET, formerly Broin 
Companies, is an established leader in the bio-refining 
industry. The 20-year-old company has built 25 ethanol 
production facilities, marketing more than 1 billion gallons of 
ethanol annually. Additionally, four projects are under 
construction with several others in development.
     The POET development model is unique. It started on the 
Broin family farm in Minnesota and has spurred growth of 
investment by thousands of farmers and individual main street 
investors. Just 10 years ago, most ethanol plants' capacity was 
10 to 15 million gallons per year. Those plants are small by 
today's standards. Most dry mill ethanol facilities are now 
designed at 50 to 125 million gallons. Today, the design and 
construction costs exceed $2 per gallon, reaching upwards of 
$250 to $300 million. The cost to expand an existing facility 
to a cellulosic ethanol facility is approximately 100 percent 
greater than a traditional corn-to-ethanol facility.
    Project LIBERTY, POET's commercial cellulose project for 
converting corn fiber and corn cobs to ethanol will expand the 
50 million gallons per year traditional corn-to-ethanol plant 
in Emmetsburg, IA to 125 million gallons per year bio-refinery 
that will produce 25 million gallons of ethanol from corn 
stover and fiber from the corn kernel. POET was fortunate to be 
selected as a recipient of a Department of Energy grant for up 
to $80 million to support Project LIBERTY.
    In addition to producing 27 percent more ethanol from an 
acre of corn, Project LIBERTY will reduce natural gas needs to 
operate the 125 million gallon per year plant by 83 percent and 
utilize 23 percent less water. To better position the 
Department of Energy's loan guarantee program, we believe a 
review of the challenges we see with the program POET has 
considered in the past as of value. The programs we have 
considered are the Department of Energy Loan Guarantee Program, 
the USDA Business and Industry Program and the USDA Renewable 
Energy Systems and Energy Efficiency Improvement Programs.
    Concerning the Department of Energy program, POET has 
submitted a pre-application to guarantee a $137 million loan. 
We see the following challenges to a successful final 
application and issuance of a loan guarantee. Statutory 
provision requires the Department of Energy to possess a first 
lien priority in the assets. It would be difficult, if not 
impossible, to obtain commitments for the un-guaranteed portion 
of the loan. Delays in processing our application may cause 
delays in construction of the project. The subsidy cost of the 
expected liability to the Federal Government in issuing the 
guarantee is an extreme burden and difficult to define for a 
startup and expanding company.
    Concerning the USDA Business and Industry Loan Guarantee 
Program, the maximum loan amount of $25 million is too low. 
Loans greater than $5 require national office approval. The 
percent of loan guaranteed diminishes to 60 percent for loans 
greater than $10 million. And lastly, the Renewable Energy 
Systems Program, loans cannot exceed 50 percent of the total 
project cost and the maximum loan amount is $10 million. 
Personal and corporate guarantees are not possible due to the 
large number of investors and the need to treat investors 
equally regardless of percent of ownership.
    As outlined previously, we have found challenges with the 
proposed Department of Energy as well past United States 
Department of Agriculture guarantee programs. An enhanced 
program that draws from aspects of all three programs, we 
believe, would be acceptable to the lending community and 
significantly increase investments in new technologies. The 
following are highlights of specific recommendations for 
proposed Federal loan guarantee program.
    Eligibility. Projects that employ innovative technologies 
for renewable energy and energy efficiency. Benefit to lenders, 
provide lenders with another tool to expand their loan 
portfolio, improve the economic and environmental living 
climate in rural communities and allow the lenders to make 
loans above their loan limits. Maximum loan amount, as it would 
pertain to the industry that we are involved with would be 
limited to the maximum of $200 million in loan per borrower or 
a $160 million 80 percent of $200 million loan. It is important 
for all parties involved in financing or owning renewable 
energy projects to have something at risk, therefore POET does 
not support 100 percent loan guarantee.
    Fees and costs. No subsidy costs should be assessed for 
potential future costs to the Federal Government for making 
payments due to lack of cash flow or upon liquidation. While 
assuring in the event of default, 80 percent of should be paid 
by the Department of Energy and 20 percent of the shortage 
should be covered by the holder of the un-guaranteed portion. 
Concerning servicing, knowledgeable and adequate staff 
resources are essential to providing prompt response to loan 
guarantee applications.
    POET is honored to have testified to the Energy and 
Commerce Subcommittee on Energy and Air Quality. Thank you.
    [The prepared statement of Mr. DeVos follows:]

                        Statement of Denny DeVos

    Mr. Chairman and distinguished committee members, thank you 
for the opportunity to visit with you today. My name is Denny 
DeVos. I am Director of Corporate Finance for POET. I would 
like to talk with you today about challenges and opportunities 
to utilize loan guarantees when financing cellulosic and other 
innovative renewable energy projects.
    POET, headquartered in Sioux Falls, South Dakota, is the 
largest dry mill ethanol producer in the United States. POET, 
formally Broin Companies, is an established leader in the bio-
refining industry through project development, design and 
construction, research and development, plant management, 
ownership, and product marketing. The 20-year old company has 
built 25 ethanol production facilities and currently manages 19 
plants in the United States while marketing more than one 
billion gallons of ethanol annually.
    Since 2000, POET Design and Construction, formally Broin 
and Associates, has constructed 19 green field ethanol plants 
in 5 States and completed 5 major expansions of existing 
facilities. The value of our design build contracts since 2000 
has exceeded $900 million. Additionally, four green field 
projects of similar size and scope are currently under 
construction with several others in development. Each project 
has been successfully designed, built and managed by POET. 
These projects have resulted in the addition of 875 millions of 
gallons per year (MGPY) of new fuel ethanol capacity.
    The POET development model is unique. It started on the 
Broin family farm in Minnesota and has spurred the growth of 
investment by thousands of farmers and individual main street 
investors. POET's business model is to invest in, develop, 
design, construct and manage ethanol production facilities 
called Premier Partner Plants. However, the facilities are 
independent limited liability companies (LLC) owned primarily 
by individuals and local farmers that provide the corn 
feedstock. POET employs the facilities general manager and on-
site technical engineer. All other employees are employed by 
the LLC. POET also has Board of Director representation at each 
plant.
    By leveraging business size and position, POET has created 
the most successful and profitable ethanol facilities in the 
industry. POET has achieved breakthrough progress beyond 
ethanol processing, extracting extraordinary new value from 
each kernel of corn.
    Just 10 years ago, most ethanol plants' capacity was 10-15 
MGPY. POET's first plant was 1 MGPY and was one of the largest 
in operation at the time. Traditional ethanol plants were built 
in corn producing states which put incentives in place to 
stimulate investment by farmers and other local main street 
investors. Incentives stimulated development of an industry at 
a time when new interest was sparked by technology 
advancements. Public policy, which was driving these 
incentives, was sparked by the oil crisis in the 1970's and the 
clean air initiatives that followed. The cost per gallon to 
build and fund working capital for these plants was 
approximately $1.75 per gallon or a total of $20-25 million.
    Those plants are small by today's standards. Most dry mill 
ethanol facilities are now designed at 50-125 MGPY capacity. 
The cost of an ethanol plant project just five years ago was 
$1.20 per gallon capacity. Today, the design and construction 
costs exceed $2 per gallon, reaching upwards of $250 million to 
$300 million or more to deliver a completed project. The 
significant increase is due to inflation of construction 
materials and labor. Most notably are stainless steel, 
concrete, other metals and qualified, skilled, manpower.
    Due to additional storage, feedstock and waste handling, 
and pre-treatment equipment, the cost to expand an existing 
facility to a cellulosic ethanol facility is approximately 100 
percent greater than a traditional corn-to-ethanol facility. 
Project LIBERTY, POET's commercial cellulose project for 
converting corn fiber and corn cobs to ethanol, will expand an 
existing 50 MGPY traditional corn-to-ethanol plant in 
Emmetsburg, IA to a 125 MGPY bio-refinery that will produce 25 
million gallons of ethanol from corn stover and fiber from the 
corn kernel. POET was fortunate to be selected as the recipient 
of a DOE grant for up to $80 million to support Project 
LIBERTY. In addition to producing 27 percent more ethanol from 
an acre of corn, Project LIBERTY will reduce the natural gas 
needs to operate the 125 MGPY plant by 83 percent and utilize 
23 percent less water. Expansion costs to an existing facility 
are projected in the range of $4.00 per gallon expanded 
capacity. A cellulose facility designed and constructed on a 
``green field'' site would be substantially greater due to 
utility and product handling infrastructure.
    The following table depicts the design and construction 
costs per gallon of plant capacity:

    Corn-to-Ethanol Facility 1995 $1.75-$2
    Corn-to- Ethanol Facility 2000 $1.15-$1.35
    Corn-to-Ethanol Facility 2007 $2-$2.25
    Cellulose-to-Ethanol Expansion Facility 2009 $4+

    As technology develops and the cellulosic ethanol industry 
matures, the cost of construction is predicted to go down as 
long as the materials of construction do not inflate at a 
greater rate.
    Historically, the majority of financing for ethanol plant 
construction has been accomplished using local individual 
investment and bank debt financing provided through the farm 
credit system and a few other Midwestern lending groups. All 
POET projects have a strong local farmer investment component, 
which promotes not only delivery of corn to the plant but 
ownership as well.
    In terms of financing cellulose-to-ethanol production 
facilities, success will be achieved using new cellulosic 
processing technology. To achieve production at commercial 
volumes, we believe the use of properly designed loan guarantee 
programs will be absolutely necessary to attract investors, 
creditors and banks. The involvement of these groups is 
essential in supporting rapid development of these new, 
evolutionary cellulosic technologies. To better position the 
Department of Energy in its loan guarantee program we believe a 
review of the challenges we see with the programs POET has 
considered is of value.
    POET has considered utilizing the three programs below:

     DOE Loan Guarantees for Projects that Employ 
Innovative Technology in Support of the Advanced Energy 
Initiative
     USDA Business and Industry
     USDA Renewable Energy Systems and Energy 
Efficiency

                     Improvements Guarantee Program

    POET has not utilized any of the above loan guarantee 
programs due to the challenges detailed in the next few 
paragraphs.
    While POET has submitted a pre-application to guarantee a 
$137 million loan under this program for construction of a 
cellulosic ethanol facility, we see the following challenges to 
a successful final application and issuance of a loan 
guarantee:
     Sec. 1702(g)(2)(b) requires, with respect to any property 
acquired pursuant to a guarantee, ``the secretary'' shall be 
superior to the rights to any other person with respect to the 
property. This statutory provision requires DOE to possess a 
first lien priority in the assets of the project and other 
collateral security pledged. Therefore any holders of non-
guaranteed debt have a subordinate claim to the DOE in the 
event of default and will not receive payment on their debt 
until the DOE is paid in full. Since the need for a guarantee 
is a result of a lender's perceived higher risk, when compared 
to other lending opportunities, it will be difficult, if not 
impossible to obtain commitments for the un-guaranteed portion 
of the loan, due to the un-guaranteed portions' subordinate 
position.
     The guaranteed portion of the loan must not be 
separated from, or stripped from the un-guaranteed portion of 
the loan, or sold in secondary debt markets. To meet this 
requirement, the lender that originated the guarantee is 
required to hold the un-guaranteed loan. It is highly probable 
that a lenders risk appetite, at least one who is willing to do 
a guaranteed loan, is much different than a lender who focuses 
on the subordinated debt market. Since the originating lender 
is required to hold both types of debt, it will be difficult, 
if not impossible to find a lender to hold both portions of the 
loan.
     Delays in processing our application may cause 
delays in start-up and delays in the commencement in 
construction of the project.
     The guaranteed loan cannot be subordinate to other 
debt. In some cases the new loan is for expansion of an 
existing facility with prior debt that is still outstanding.
     Payment of fees to cover administrative cost for 
DOE issuing the guarantee, servicing and monitoring costs of 
the DOE, and normal fees charged by the originating lender, are 
a significant challenge for a start-up or expanding company.
     The subsidy cost of the expected liability to the 
Federal Government from issuing the guarantee, which is the 
estimated net present value at the time the guaranteed loan is 
dispersed, is an extreme burden to a start-up or expanding 
company. The liability would be a result of default payments 
made to the originating lender on the loan, due to lack of 
payment by the company from cash-flow or liquidation of the 
collateral. The subsidy cost is wholly distinct and separate 
from fees for issuing and servicing the loan guarantee. The 
subsidy fee can either be an appropriation by congress or 
payment by the borrower.
    At present, it is our understanding that the borrower is 
expected to make this payment and no appropriation has been 
made. Since we do not intend to bring a project that we do not 
expect to be successful, we do not feel a subsidy payment 
should be required. Should the DOE, through their analysis, 
require an upfront cash subsidy payment, this undo burden may 
keep the project from moving forward.
     The Maximum Loan amount of $25 million is too low. 
Most renewable energy projects are now of a capacity in excess 
of 50 million gallons, with total project costs in excess of 
$100 million (current facilities cost $2-$2.25 per gallon to 
construct).
     Loans greater than $5 million require national 
office approval. (Due to the seasonal nature of construction in 
cold climates, if the time to receive a commitment for 
guarantee is lengthy, the project could be delayed for a full 
year.)
     The percent of the loan guarantee diminishes to 60 
percent for loans greater than $10 million. Lending 
institutions see almost no value in a guarantee at the 60 
percent level.
     When adding the potential one-time 2 percent fee 
and the annual renewal fee for a guarantee to a lender's 
typical cost, the total financing costs are excessive and very 
challenging for an expanding or start-up company.
     Since in most circumstances ownership is by a 
large group of rural investors, personal and corporate 
guarantees are not possible.
     If the guarantee is contingent upon successful 
start up, performance guarantees and no substantial 
deterioration in financial position, limited or no-value will 
be given to the guarantee by a lender considering financing for 
the project. URLP
     Loans cannot exceed 50 percent of total project 
costs.
     The maximum loan amount is $10 million. This is 
too low. (Current ethanol facilities cost $2 to $2.25 per 
gallon to construct with most project scopes being in excess of 
50 million gallons.)
     Loans greater than $5 million can only be 
guaranteed for a maximum of 70 percent. (This results in a 
maximum of 35 percent of the total project cost being 
guaranteed. Fifty percent of the total project costs times 70 
percent.) This provides no value to the lender.
     Loans greater than $5 million require national 
office approval. (Due to the seasonal nature of building in 
cold climates, if the time to receive a commitment for loan 
guarantee is lengthy, the project could be delayed for a full 
year.)
     The one-time 1 percent guarantee fee and annual 
renewal fee along with typical lender fees result in total 
financing costs that are very challenging for a start-up or 
expanding company.
     Personal and corporate guarantees are not possible 
due to the large number of investors and the need to treat 
investors equally regardless of percent ownership.
    The $2 billion DOE loan guarantee program targets broad 
renewable energy initiatives. Federal loan guarantee programs 
will be essential to commercialize cellulosic ethanol plants 
until technology is proven and the industry is matured to a 
point where conventional lending is feasible.
    As outlined above, we have found challenges with the 
proposed DOE as well as the past USDA programs: USDA Business 
and Industry Loan Guarantee Program, USDA Renewable Energy 
Systems and Energy Efficiency Improvements Guarantee program, 
and DOE Loan Guarantees for Projects that Employ Innovative 
Technology in Support of the Advance Energy Initiative. An 
enhanced program that draws from aspects of all three programs, 
we believe, would be acceptable to the lending community and 
significantly increase investments in new technologies that 
will enable renewable fuels to replace our dependence on 
imports of fossil fuels.
    The following are specific recommendations for a proposed 
Federal loan guarantee program supporting the Advanced Energy 
Initiative:

                             Eligible Areas

     Projects that employ innovative technologies for 
renewable energy and energy efficiency.
     Loans can be guaranteed in cities with a 
population of up to 50,000.
     Priority given to applications for working in 
rural communities of 25,000 or less. Eligible borrowers
     Any legal entities, including individuals, public 
and private organizations and federally recognized Indian 
Tribal groups may borrow.
     There is no size restriction on the business. 
Benefits to the business:
     Assist in bringing new technology to commercial 
scale much sooner.
     Assist in deploying new technology on a broad 
scale faster.
     Higher loan amounts, stronger loan application, 
less equity injection, lower interest rates, and longer 
repayment terms assist businesses that may not qualify for 
conventional lending or financing.
     Assist business in stability, growth, expansion, 
and rural development.

                            Eligible Lenders

    Most lenders are eligible, including national and state 
chartered banks, farm credit system banks, and savings and loan 
associations. Other lenders, such as insurance companies and 
mortgage companies may be eligible if approved by USDA.Benefits 
to Lenders

     Provide lenders with another tool to expand their 
loan portfolio.
     Improve the economic and environmental living 
climate in rural communities.
     Guaranteed and or/un-guaranteed portion can be 
sold to enhance liquidity and increase profitability while 
limiting financial exposure.
     Allows lender to make loans above its loan limits.

                         Eligible Project Costs

     Cost of acquisition, lease or rental of real 
property, including engineering fees, surveys, title insurance, 
recording fees, and legal fees incurred in connection with land 
acquisition, lease or rental, site improvements, site 
restoration, access roads and fencing.
     Engineering, architectural, legal, and bond fees, 
and insurance paid in connection with construction of the 
facility and materials, labor, services, travel and 
transportation for facility construction start-up and test.
     Equipment purchase and start-up testing.
     Cost to provide equipment, facilities, and 
services related to safety and environmental protection.
     Financial and legal services and costs, including 
other professional services and fees necessary to obtain 
required licenses and permits and to prepare environmental 
report and data.
     Interest cost and other normal charges affixed by 
lender.
     Necessary and appropriate insurance and bonds of 
all types.
     Costs of start-up and commissioning.
     Cost of obtaining licenses to intellectual 
property necessary to design, construct and operate the 
project.
     Machinery, equipment and storage facilities to 
support the collection and storing of raw materials for the 
production of cellulosic ethanol.
     Other necessary and reasonable cost approved by 
the Secretary.

                          Maximum Loan Amount

    Loans would be limited to a maximum of $200 million per 
borrower. Loans greater than $10 million require national 
office concurrence.Loan Guarantee Limits
    $160 million (80 percent of $200 million) It is important 
for all parties involved in financing or owning renewable 
energy projects to have something at risk, therefore, POET does 
not support a 100 percent loan guarantee.

                  Loan to Appraise Market Value Ratios

     80 percent Real Estate
     75 percent receivables
     75 percent inventory
     80 percent machinery and equipment

                             Interest Rate

    Interest rates for loans may be fixed or variable. The rate 
is negotiated between the lender and borrower and will not be 
more than those rates customarily charged to other borrowers in 
similar circumstances. The variable rate must be tied to a 
nationally published rate. Variable rates cannot be adjusted 
any more than every 30 days.

                      Borrower Equity Requirements

    A minimum of 15 percent tangible balance sheet equity is 
required for exiting business. A minimum of 25 percent tangible 
balance sheet equity is required for new businesses. Personal 
and corporate guarantees are not required. Tangible balance 
sheet equity will be determined accordance with generally 
accepted accounting principles (GAAP).

                        Maximum Repayment Terms

      Working capital--7 years
      Machinery and equipment--10 years or useful life
      Real estate--20 years
      Combination real estate, machinery and 
equipment--15 yearsFees and Costs

    No subsidy costs should be assessed for potential future 
costs to the Federal Government for making payments due to lack 
of cash-flow or if upon liquidation, the proceeds received do 
not fully repay the loan. A one-time guarantee fee not to 
exceed one half of 1 percent of the guarantee principle amount 
along with an annual renewal fee not to exceed one tenth of 1 
percent. It is our belief that a subsidy payment by the 
borrower defeats the purpose of a guaranteed loan program. 
Other typical lender costs may also be incurred.

                    Appraisals and Appraisal Report

    Appraisals and appraisal report prepared by an independent, 
qualified fee appraiser will be required on property that will 
serve as collateral. Appraisals will be made in accordance with 
the accepted format and standards of the industry.

                               Collateral

    All collateral pertaining to the specific project supported 
by the guarantee shall secure the entire loan. Repayment of the 
loan must be reasonably assured. Personal and corporate 
guarantees are not required.

                              Loss Sharing

    In the event of default if the liquidation of the 
collateral or cash-flow payments do not repay the guaranteed 
and un-guaranteed portions of the loan, shortages would be 
shared on a pro-ratio basis, 80 percent of the shortage being 
paid by the guarantor and 20 percent of the shortage being 
covered by the holder of the unguaranteed portion of the debt.

                       Loan Covenants/Conditions

    Normal and customary commercial lending covenants that are 
reasonably acceptable to financial institutions. Contingencies 
of issuing the guarantee based on successful completion and 
start-up of the project without financial deterioration are not 
acceptable. A clause of this type will eliminate the value to a 
lender since the lender must commit the loan prior to 
commencing construction or expansion. The lenders greatest risk 
is during construction and start-up.

                                 Report

    Once the project has been constructed, the lender must 
provide the agency annual financial reports from the borrower.
    Servicing Liquidation. Knowledgeable and adequate staff 
resources are essential to providing prompt response to loan 
guarantee applications and ongoing loan servicing requests.
    Annual financial statements should continue to be required. 
Lender services and liquidates with appropriate agency 
concurrence.
    POET is honored to testify to the Energy & Commerce 
Subcommittee on Energy & Air Quality. On behalf of the 
renewable fuels industry, we applaud the Department of Energy's 
efforts in supporting the Advanced Energy Initiative through 
loan guarantees. Without the enhancements to the loan guarantee 
program as previously outlined, the industry would have 
difficult, and in some cases impassable, financial barriers to 
conduct research and development, validate, and commercialize 
renewable fuels technology, particularly cellulosic ethanol.
    Thank you for the opportunity to submit recommendations. 
POET looks forward to working in partnership with the Congress 
and the administration to reach the national goal of 35 billion 
gallons of renewable fuel produced per year by the year 2017.
                              ----------                              

    Mr. Boucher. Thank you very much, Mr. DeVos. Mr. Crane, we 
will be happy to hear from you.

  STATEMENT OF CHRISTOPHER CRANE, PRESIDENT AND CHIEF NUCLEAR 
                   OFFICER, EXELON GENERATION

    Mr. Crane. Mr. Chairman, Ranking Member Hastert and members 
of the subcommittee, thank you for the opportunity to be here 
today to talk about one of the more important elements of the 
Energy Policy Act of 2005, the energy loan guarantee program. 
It is truly absolutely imperative that this program goes 
forward with the right construct to support the development, 
future development of new nuclear.
    My name is Christopher Crane. I am the president and chief 
nuclear officer of Exelon Nuclear. We have 17 operating nuclear 
plants, which is approximately 20 percent of the U.S. industry. 
Exelon is the largest nuclear operator in the United States. 
Exelon is currently actively pursuing new nuclear development. 
We are developing an application for a construction and 
operating license for a new nuclear plant. Several sites are 
being explored for that facility today. In addition, recently 
we received an early site permit from the Nuclear Regulatory 
Commission which certifies our Clinton, IL site where we 
currently operate one reactor.
    I am appearing here today on behalf of Exelon and also on 
behalf of the Nuclear Energy Institute. The Nuclear Energy 
Institute is the Washington-based policy organization. There i 
am the chairman of NEI's New Plant Oversight Committee, which 
consists of the chief executives or the chief nuclear officers 
of the companies that are planning developing applications for 
construction and operating license for new facilities.
    As I said, the loan guarantees are crucial. The loan 
guarantees address the most significant financing challenges 
facing new nuclear plant construction, the cost of base load 
projects relative to size, market value and financing 
capability of companies that will build them. New nuclear 
projects are from $4 billion to $5 billion undertakings and 
that is at the least. Although $4 billion to $5 billion 
projects are not unique to the energy business, such projects 
are typically built by larger companies with market bases 10 to 
15 times higher than the largest electric companies.
    The combined market value of the 16 companies currently 
developing license applications for new nuclear plants 
represents approximately one-half the value of ExxonMobil. Even 
Exelon, my company, with a market value of approximately of $50 
billion, the largest U.S. electric power company, is not large 
enough to finance a single nuclear plant without Federal loan 
guarantees.
    The loan guarantees are equally important for unregulated 
companies operating in States that have restructured the 
electrical power industry and to regulated companies subject to 
cost of service regulation. In addition, capital markets that 
will provide debt financing for new nuclear projects regard 
loan guarantees as essential to protect investors against 
potential licensing, regulatory or political risks associated 
with new plant construction.
    The loan guarantees must cover 100 percent of the project 
debt. The Energy Policy Act authorizes the Secretary of Energy 
to guarantee up to 80 percent of the total loan, total project 
cost and in its August 2006 guideline, the energy loan 
guarantee program, the Department of Energy determined that the 
guarantee would cover only 80 percent of the project debt, not 
80 percent of the project cost, which I think has been well-
covered here today. This approach would reduce the value of the 
guarantee substantially and runs counter to the Federal loan 
guarantee program.
    Currently, the fiscal year 2007 budget includes $238 
million in new loan guarantees, $177 billion of those are 
provided at 100 percent loan coverage. The 2008 fiscal year 
budget includes $289 billion in loan guarantee commitments and 
$217 billion provide 100 percent coverage. The program must 
have rigorous project evaluation criteria. The process of 
evaluating the projects have to be rigorous, disciplined. It 
must employ transparency for the project risk evaluation 
criteria, similar to commercial banks.
    Flexibility is essential. The terms of the project, the 
structure between the duration of the project. Some projects 
may need to be guaranteed for the 30-year term authorized by 
the Energy Policy Act and others may have shorter durations. 
The loan volume limitations must recognize the higher cost of 
major energy projects. The President's budget proposes $9 
billion loan volume limitation with only $4 billion of the $9 
billion allotted to large power projects like nuclear plants.
    Given the costs of new energy infrastructure, including the 
costs of the generation facilities, a robust, viable loan 
guarantee program will require significantly larger amounts of 
volumes for future fiscal budgets.
    In conclusion, the U.S. electric industry faces a major 
challenge financing, building the generation assets required, 
the transmission and distribution infrastructure necessary to 
support the U.S. economy's growth and maintain reliability. And 
that is why we feel it is imperative that these issues are 
addressed to guarantee the growth.
    [The prepared statement of Mr. Crane follows:]

                     Statement of Christopher Crane

    Chairman Boucher, Ranking Member Hastert, members of the 
subcommittee, thank you for the opportunity to appear today to 
provide the nuclear energy industry's views on one of the most 
important elements of the Energy Policy Act of 2005. The energy 
loan guarantee program is an absolute imperative to support the 
financing and construction of new nuclear power plants in the 
United States. I believe I speak for the entire electric power 
industry in thanking this committee of its consistent and even-
handed leadership in matters of energy policy and environmental 
policy, and I appreciate your interest in ensuring effective 
implementation of this loan guarantee program.
     My name is Christopher Crane. I am president and chief 
nuclear officer of Exelon Nuclear. With 17 nuclear power 
plants, approximately 20 percent of the U.S. nuclear fleet, 
Exelon is the largest nuclear operator in the United States. 
Exelon is also actively pursuing new nuclear development: We 
are developing an application for a construction/operating 
license for a new nuclear plant, and are exploring several 
potential sites for that facility. In addition, we recently 
received an early site permit from the Nuclear Regulatory 
Commission, which certifies that our site in Clinton, Illinois, 
where we operate one nuclear reactor, meets all necessary 
criteria for construction of a new nuclear unit.
    I am appearing today on behalf of Exelon and on behalf of 
the Nuclear Energy Institute, the nuclear industry's 
Washington-based policy organization. I am Chairman of NEI's 
New Plant Oversight Committee, which consists of the chief 
executives or chief nuclear operating officers of the companies 
that are developing applications for construction/operating 
licenses (COLs) for new nuclear power plants. NEI's New Plant 
Oversight Committee is charged with establishing industrywide 
consensus on regulatory, financial and other significant policy 
issues associated with new nuclear plant development. The New 
Plant Oversight Committee has various Task Forces focusing on 
specific issues related to new nuclear plant development, 
including a Finance Task Force, which has been deeply involved 
in implementation of the energy loan guarantee program.
    Nuclear energy is a strategic national asset, and new 
nuclear power plants are essential if the United States hopes 
to meet its energy and environmental goals. Consider the 
following facts:
     Nuclear power is essential in any program to reduce 
greenhouse gas emissions. The average nuclear plant avoids 
seven million metric tons of carbon dioxide (CO\2\) each year. 
The 682 million metric tons prevented by America's 103 nuclear 
power plants in 2005 is equal to the annual emissions from 96 
percent of the country's passenger cars. In addition, nuclear 
power plants also avoid emissions of criteria pollutants like 
sulfur dioxide, nitrogen oxides and mercury, thereby reducing 
the clean air compliance burden and costs that would otherwise 
fall on power plants and industries burning fossil fuels. 
Nuclear power plants can reduce pressure on natural gas supply, 
thereby helping to mitigate the volatility in natural gas 
prices. Compared to an equivalent-size gas-fired power plant, a 
1,000-megawatt nuclear plant saves approximately 54 billion 
cubic feet of natural gas per year, enough natural gas to serve 
over 600,000 residential customers.
     Construction and operation of a new nuclear power plant 
will provide substantial employment--1,400-1,800 jobs during 
construction on average (with peak employment as high as 2,400 
jobs at certain times), and 400-700 permanent jobs when the 
plant is operating. These permanent jobs pay 36 percent more 
than average salaries in the local area. The 400-700 permanent 
jobs at the nuclear plant create an equivalent number of 
additional jobs in the local area to provide the goods and 
services necessary to support the nuclear plant workforce.
    My Statement for the Record covers four major areas:

      The purpose and value of loan guarantees in 
supporting private sector investment, and the unique features 
of the energy loan guarantees provided by title XVII of the 
Energy Policy Act;
      The critical importance of loan guarantees in 
supporting the financing of new nuclear generating capacity in 
the United States;
      The nuclear energy industry's perspective on the 
minimum conditions necessary for a successful energy loan 
guarantee program, and
      The nuclear industry's concerns about 
implementation of this program by the Executive Branch in the 
20 months since enactment of the Energy Policy Act of 2005.

                The Purpose and Value of Loan Guarantees

    Federal loan guarantees are widely used by the Federal 
Government to support financing of projects that (1) have 
substantial public value, and (2) would not otherwise be able 
to secure financing on reasonable terms. Federal loan 
guarantees are used for ongoing programs--to support rural 
electrification, development of transportation infrastructure, 
shipbuilding, low-income housing and, through agencies like the 
Export-Import Bank and the Overseas Private Investment 
Corporation, to support U.S. companies developing projects 
overseas. Federal loan guarantees are also periodically used in 
specific emergency situations--as they were after the September 
11, 2001, terrorist attacks to support the U.S. airline 
industry. Title XVII of the 2005 Energy Policy Act authorizes 
the Secretary to provide guarantees for up to 80 percent of 
project cost for projects that (i) avoid, reduce or sequester 
air pollutants or greenhouse gases, and (ii) employ new or 
significantly improved technologies.
    At the end of the 2006 fiscal year, $1.12 trillion in 
Federal loan guarantees were outstanding, and the President's 
fiscal year 2008 budget projects $290 billion in new loan 
guarantee commitments. The President's fiscal year 2008 budget 
proposes $9 billion for the DOE title XVII Loan Guarantee 
Program, which represents 3 percent of new government-wide loan 
guarantee commitments projected in fiscal year 2008, and less 
than 1 percent of the current portfolio of outstanding Federal 
loan guarantees.
    Under the Federal Credit Reform Act (FCRA) of 1990, loan 
guarantees are scored in the Federal budget on a risk-adjusted 
basis, based on the budget subsidy cost methodology specified 
in FCRA. The actual amount of new Budget Authority to cover new 
loan guarantee commitments in fiscal year 2008 is $2.7 billion 
(or less than 1 percent of the face value of the new loan 
guarantee commitments). The budget subsidy cost represents the 
net present value of the risk-adjusted cost to the government 
of the loan guarantee at the time it is issued--e.g., the net 
present value of the loan payoff in the event of a default, 
less any fees paid by the project to the government and any 
recoveries (from pledged collateral) made by the government in 
the event of a default. In this calculation, both the loan 
payoff amount and any recoveries are estimated on a risk-
adjusted basis--i.e., the face amounts are adjusted by the 
probability of a default.
    The title XVII loan guarantee program is unique among 
Federal loan guarantee programs in that project developers are 
expected to pay the budget subsidy cost of the loan guarantee. 
This ``self-pay'' or ``user-financing'' feature offsets the 
risk-adjusted cost to the government of providing the 
guarantee. The self-pay amount is retained by the government 
regardless of whether the project defaults or not. If there is 
no default, the self-pay amount represents a financial return 
to the Treasury for agreeing to assume the risk during the 
period that the guarantee was in effect. Given a rational 
approach to implementation, in which projects are selected 
based on a high likelihood of commercial success with the loan 
guarantees, there will be minimal risk of default and therefore 
minimal risk to the taxpayer.
    The title XVII loan guarantee program is a financing tool, 
which should be modeled on the successful financing practices 
already employed by the Federal Government (through such 
agencies as the Export-Import Bank and the Overseas Private 
Investment Corp.). By allowing projects to overcome the 
barriers that preclude private financing, the loan guarantee 
program is designed to stimulate investment in high-capital-
cost projects that are in the nation's best interest because 
they improve U.S. energy security, meet growing electricity 
demand, reduce emissions, accelerate the commercialization of 
advanced technologies, and ensure the reliable operation of the 
electricity system.
    In addition, loan guarantees provide substantial consumer 
benefits. The cost of electricity to all consumers--
residential, commercial and industrial--will increase 
significantly in the years ahead, due to sustained upward 
pressure on natural gas prices, and heavy capital investment in 
new transmission facilities, environmental control 
technologies, and new generating capacity. A sustained period 
of upward pressure on electricity prices has negative 
implications for U.S. economic growth and the competitiveness 
of American industry in a global marketplace. An effective loan 
guarantee program can reduce electricity costs significantly, 
providing substantial benefits to electricity consumers. For 
example, according to financial modeling performed by the 
Nuclear Energy Institute:

     (1)A new nuclear plant with an overnight capital cost of 
just over $2,800 per kilowatt will produce electricity for 
approximately $84.00 per megawatt-hour in its first year of 
operation, if the plant is financed with equal amounts of debt 
and equity (assuming debt financing was available for such a 
project, which is unlikely).
    (2) The same plant, with a Federal loan guarantee for 80 
percent of project cost, will produce electricity in its first 
year for approximately $59 per megawatt-hour, because of the 
higher leverage and the fact that debt is less costly than 
equity.
    (3) The plant financed with a loan guarantee thus delivers 
a consumer benefit of $25 per megawatt-hour, or approximately 
$275 million per year for the average new nuclear plant.

The Critical Importance of Loan Guarantees In Supporting the Financing 
                   of New Nuclear Generating Capacity

    It will be a formidable challenge to finance the advanced 
electric generating technologies needed to (1) meet growing 
U.S. demand for baseload electricity over the next 15 to 20 
years, (2) increase energy independence, and (3) meet more 
stringent environmental standards.
    The new nuclear plants now in the early stages of 
development are capital-intensive projects and will require a 
level of capital investment that will strain the financing 
capability of the U.S. electric sector, particularly since that 
investment in new generating capacity coincides with a period 
of heavy capital investment by the electric sector in 
transmission, distribution and environmental control 
technologies. Consensus estimates suggest that the industry, 
over the next 15 years, must invest between $750 billion and $1 
trillion in new generating capacity, new transmission and 
distribution infrastructure and environmental controls. This 
new capital spending represents a major challenge to the 
electric power industry.
    All of these investments are necessary to ensure the 
continued safe and reliable operation of the United States 
electricity system.
    Addressing this challenge successfully will require 
innovative approaches to financing, combining all the financing 
capabilities and tools available to the private sector, the 
Federal Government and State governments.
    The loan guarantee program authorized by title XVII of the 
Energy Policy Act of 2005 is one of those tools and is 
essential to support the financing of new nuclear plants. The 
loan guarantee program will allow companies to employ project 
financing on a non-recourse basis. The ability to use non-
recourse project finance structures offsets the most 
significant financing challenge facing new baseload power plant 
construction--the cost of baseload projects relative to the 
size, market value and financing capability of companies that 
will build them. New nuclear projects are $4-5 billion 
undertakings at least. Although $4-5 billion projects are not 
unique in the energy business, such projects are typically 
built by much larger companies with market values 10-15 times 
higher than the largest electric companies. All the companies 
that have announced plans for new nuclear power plants have a 
combined market value only slightly more than one-half the 
market value of ExxonMobil. Even Exelon, my company, with a 
market value of approximately $40 billion, is not large enough 
to finance a single nuclear plant without the Federal loan 
guarantees.
    Project financing, supported by loan guarantees, also 
allows a more efficient, leveraged capital structure to reduce 
project cost by lowering the weighted average cost of capital, 
and thus provides a substantial consumer benefit in the form of 
lower electricity prices. Loan guarantees also mitigate the 
impact on the balance sheet of these large capital projects 
which would otherwise place stress on credit quality and bond 
ratings.
    Loan guarantees are equally important to unregulated 
companies, operating in states that have restructured their 
electric power industries, and to regulated companies subject 
to cost-of-service regulation. Unregulated companies will be 
hard-pressed to build nuclear power plants and other large 
capital-intensive baseload projects except on a project finance 
basis with the debt financing secured by the Federal 
Government. Unregulated companies do not have the capacity to 
finance these projects on balance sheet without access to 
project finance structures. Some regulated companies, 
especially those pursuing multiple generating and transmission 
projects at the same time, may also be limited in their ability 
to finance projects without project finance capability because 
of substantial pressure on credit quality and debt ratings.
    In addition, the capital markets that will provide the debt 
financing for new nuclear projects regard loan guarantees as 
essential to protect investors against potential licensing, 
regulatory and political risks associated with new nuclear 
plant construction.
    The 2005 Energy Policy Act included several incentives 
designed to stimulate investment in new nuclear power plants. 
These incentives were provided as a package to address 
different risks associated with new nuclear power plants. Our 
analysis of new nuclear plant financing, and our discussions 
with the banking community since the passage of the 2005 energy 
legislation, suggests that the loan guarantee program is 
clearly the most important of all the incentives in the Energy 
Policy Act.
    The Act provided a production tax credit for nuclear plants 
that file applications for construction/operating licenses 
before the end of 2008 and start construction by the beginning 
of 2014. These credits will improve the financial 
attractiveness of a nuclear project when it is in commercial 
operation, and help offset the economic risk associated with 
the first projects. Our major challenge is construction 
financing, however, and the construction period is when a new 
nuclear project most needs investment support. The production 
tax credit does not help address the construction risks and 
financing challenge during construction.
    The Energy Policy Act also provides a form of insurance--
called standby support--to protect project developers against 
delays caused by licensing or litigation over which they have 
no control. But this insurance protection is severely limited. 
The insurance covers debt service up to certain limits for a 
limited period of time, but would not cover other substantial 
costs borne by a nuclear plant subject to a delay in commercial 
operation. Although standby support addresses a limited portion 
of the risk associated with potential delays experienced by the 
first six plants, I do not believe the standby support will be 
a critical factor in any board of directors' decision to 
authorize construction of a nuclear power plant.
    The loan guarantee program is, therefore, the single most 
important instrument provided by the Energy Policy act to 
support financing of new nuclear generating capacity. Yet we 
are almost two years past passage of the Energy Policy Act, and 
we still do not have final regulations to implement the loan 
guarantee program, the Department of Energy does not have staff 
to evaluate projects, neither the Congress or the White House 
have provided sufficient loan authorization to support even one 
new nuclear plant, and we have no idea what a loan guarantee 
will cost.

Nuclear Energy Industry Perspective on the Minimum Conditions Necessary 
             For a Successful Energy Loan Guarantee Program

    The loan guarantee must cover 100 percent of project debt. 
The Energy Policy Act authorizes the Secretary of Energy to 
guarantee up to 80 percent of total project cost. In its August 
2006 Guidelines for the energy loan guarantee program, the 
Department of Energy determined that the guarantee would cover 
only 80 percent of the project debt, not 80 percent of the 
project cost. This approach would reduce the guarantee to ``80 
percent of 80 percent''--e.g., only 64 percent of the total 
project cost would be covered by the guarantee. The investment 
banks that will provide the debt financing for new nuclear 
projects have indicated that it will not be possible to fund 
the remaining ``20 percent of 80 percent'' in the un-guaranteed 
debt markets on commercially reasonable terms.
    In addition, there is no basis in law or administrative 
practice for restricting the guarantee to 80 percent of project 
debt. The policy limiting coverage under Federal loan 
guarantees to 80 percent of the loan amount is an 
administrative guideline in OMB Circular No. A-129. It is not a 
statutory requirement, and the Federal Credit Reform Act of 
1990 does not address the issue of percentage loan coverage for 
Federal loan guarantees.
    OMB Circular A-129 )part II, section 3a) states that 
``[p]rivate lenders who extend credit that is guaranteed by the 
Government should bear at least 20 percent of the loss from a 
default'' (emphasis added). Thus, the policy is not mandatory 
but suggestive in nature. Circular A-129 also provides 
flexibility in the application of the guideline on 80 percent 
loan coverage. It states: ``The policies and standards of this 
Circular do not apply when they are statutorily prohibited or 
are inconsistent with statutory requirements'' (emphasis 
added). The guideline for 80 percent coverage of debt is 
inconsistent with the requirement in EPAct section 1702 (c), 
which authorizes that ``a guarantee by the Secretary shall not 
exceed an amount equal to 80 percent of the project cost.'' The 
application of Circular No. A-129 would prevent the Secretary 
from ever reaching the statutory cap. Administrative practice 
in other Federal loan guarantee programs also allows for 
flexibility in setting loan guarantee limits up to statutory 
caps.
    The fiscal year 2007 budget included $238 billion in new 
loan guarantee commitments; $177.2 billion of that provided 100 
percent loan coverage. The fiscal year 2008 budget proposal 
included $289 billion in new loan guarantee commitments; $217 
billion of that provided 100 percent loan coverage. Clearly, 
100 percent coverage of the debt portion of the financing is 
the rule in Federal loan guarantee programs, and the approach 
taken by DOE in its August 2006 Guidelines is an egregious 
exception to that rule.
    The Program Must Have Rigorous Project Evaluation Criteria. 
The process of evaluating projects and selecting those that 
qualify for loan guarantees must be rigorous and disciplined, 
employing transparent project finance risk evaluation criteria 
of the kind used by commercial banks, rating agencies, and 
other government agencies (like the Export-Import Bank) that 
operate successful loan guarantee programs.
    We believe the Department of Energy should focus the loan 
guarantee program design on credit analysis and underwriting of 
the kind any bank would employ to lend money. We believe the 
pending rulemaking should establish a set of risk-based 
evaluation criteria to ensure that credit risks are rigorously 
analyzed, quantified, scored and appropriately priced or 
mitigated. The Department then should have the flexibility, as 
provided in the statute, to structure loan guarantees that will 
enhance the statutory objective of commercializing innovative 
technologies, with projects that are financially sound and have 
the financial capacity to repay the underlying loan obligation 
guaranteed by the U.S. government. This process would be 
supplemented by third-party consultants and reports that are 
standard for project financings, such as independent engineers, 
fuel consultants, insurance advisors and market studies.
    This approach, using rigorous credit analysis and risk 
assessment, will minimize taxpayer risk.
    Flexibility is essential. The implementing regulations 
should provide a high degree of flexibility--e.g., on the term 
of the loan of the guarantee, and the percentage of debt in the 
project. This will allow project sponsors to structure projects 
as best suits their needs. Different technologies and different 
companies will wish to employ different levels of debt in their 
project capital structure. Different technologies and companies 
may choose different durations for the loan guarantee--in some 
cases, projects may need a guarantee for the full 30-year term 
authorized by the Energy Policy Act, while others will need a 
shorter duration. Such differences in project capital 
structure, percentage of debt being guaranteed and duration of 
the guarantee should be reflected in the credit subsidy costs 
paid by the project sponsor.
    Subsidy cost and calculation. The implementing regulations 
should include a transparent methodology to calculate the 
credit subsidy cost that will be paid by the project as a loan 
guarantee fee, and that subsidy cost should be reasonable and 
commercially viable, in line with those of other Federal loan 
guarantee programs. Project sponsors should be allowed to 
include the credit subsidy cost as part of the total project 
cost, and finance it over the term of the guarantee. This is 
standard practice in other Federal loan guarantee programs, 
including the Export-Import Bank.
    The Loan Volume Limitation Must Recognize the High Cost of 
Major Energy Projects. The President's fiscal year 2008 budget 
proposes a $9-billion loan volume limitation, with only $4 
billion of the $9 billion allocated to large power projects 
like nuclear power plants. Given the cost of new energy 
infrastructure projects (including new nuclear plants, coal 
gasification plants and coal-to-liquids projects), a robust and 
viable loan guarantee program will require significantly larger 
annual loan volumes in future fiscal years.

 Nuclear Industry Concerns about Implementation of the Loan Guarantee 
                            Program to Date

    On August 8, 2006, the Department of Energy published 
initial guidelines (DOE Guidelines) under which it will 
implement the loan guarantee program, accompanied by an initial 
solicitation for projects. Nuclear projects were not included 
in the initial solicitation. The Department indicated that 
nuclear projects will be covered by formal regulations to be 
developed over the next year.
    In terms of supporting financing of new nuclear and 
advanced coal-based baseload power plants, the DOE Guidelines 
significantly erode the value of the loan guarantee program 
authorized by title XVII. The procedures outlined in the 
guidelines are so restrictive that they would not support 
construction and financing of new baseload power plants. If the 
regulations now being developed mirror the guidelines published 
in August 2006, the loan guarantee program would not support 
new advanced nuclear power plants, and will thus fail to 
fulfill part of the statutory intent to spur construction of 
new, cleaner baseload capacity.
    The industry's major sources of concern with the August 
2006 DOE Guidelines are discussed below.
     EPAct title XVII authorizes loan guarantees up to 80 
percent of total project cost. The DOE Guidelines limit 
coverage to 80 percent of the loan amount (80 percent of 80 
percent), with flexibility to guarantee above 80 percent, but 
never 100 percent.
    Industry Position. There is no basis in law or 
administrative practice for restricting the guarantee to 80 
percent of project debt. If incorporated into the implementing 
regulations, this restriction would reduce the value of the 
loan guarantees by approximately one-half, increase the 
project's capital costs and thereby compromise project 
economics.
    As discussed above, the policy limiting coverage under 
Federal loan guarantees to 80 percent of the loan amount is an 
administrative guideline, not a statutory requirement. 
Administrative practice in other Federal loan guarantee 
programs also allows for flexibility in setting loan guarantee 
limits up to statutory caps.
     Any commercial debt brought into a project must be 
subordinate to the government-guaranteed debt. Pari passu 
financing structures would be prohibited under the DOE 
Guidelines.
    Industry Position. It is not uncommon in Federal Government 
loan guarantee programs to have a second tranche of non-
guaranteed commercial debt in a project. Any such commercial 
debt is, however, typically pari passu with the guaranteed 
debt. The requirement in the DOE Guidelines that any commercial 
debt must be subordinate to the guaranteed debt will 
significantly restrict the interest of commercial lenders and 
the availability of financing for the program, especially in 
view of the size of the projects. By making this program less 
attractive to top-tier lenders and effectively requiring more 
expensive sub-debt financing structures, the financeability of 
a project is significantly compromised. Furthermore, the 
guidelines appear to prohibit the substitution of equity for 
the unguaranteed portion of debt. As a result, this restriction 
could actually erode a project's creditworthiness, rather than 
enhancing the credit structure.
     The DOE Guidelines should clarify that the guaranteed debt 
is non-recourse beyond the project.
    Industry Position. The statute makes clear (section 
1702(g)(4)(B)) that, in the event of default, the loan 
guarantee is non-recourse beyond the project: ``If the borrower 
defaults on an obligation, the Secretary shall notify the 
Attorney General of the default ''. On notification, the 
Attorney General shall take such action as is appropriate to 
recover the unpaid principal and interest due from--(i) such 
assets of the defaulting borrower as are associated with the 
obligation; or (ii) any other security pledged to secure the 
obligation.''
    This non-recourse provision is essential for successful 
project finance structures. If the guaranteed loan is recourse 
beyond the project--e.g., to the balance sheet of a project 
sponsor--the rating agencies will impute that debt to that 
project sponsor's balance sheet, and require the company to 
increase the amount of equity in its capital structure in order 
to maintain its overall debt rating. This would offset much of 
the economic benefit of the guarantee.
    The DOE Guidelines, however, are equivocal on the issue of 
recourse, at best. The Guidelines require the Secretary of 
Energy, before finalizing a loan guarantee agreement, to ensure 
that ``the prospective borrower has pledged project assets and 
other collateral or surety, including non-project-related 
assets, as determined by the Secretary to be necessary as 
assurance for the repayment of the loan.'' The implementing 
regulations should clarify that guaranteed loans will require 
security in only the project assets, contracts and agreements.
    A project sponsor should, at its discretion, have the 
flexibility to pledge additional assets or other forms of 
security as collateral (e.g., to reduce the credit subsidy cost 
of the loan guarantee), and the implementing regulations should 
provide this flexibility.
     The DOE Guidelines require a project sponsor to obtain a 
credit assessment of the project in the absence of the loan 
guarantee from a nationally recognized debt-rating firm.
    Industry Position. Because the loan guarantee will be a 
critical factor affecting the project's economics--e.g., 
interest costs and leverage factor--and since the industry 
believes it would be impossible to obtain financing for an 
advanced nuclear project with 80percent leverage absent the 
Federal loan guarantee, obtaining a credit assessment for the 
project without the guarantee is not likely to be useful. Such 
an assessment would likely demonstrate why these innovative 
technologies require loan guarantees to obtain financing. It 
would be more appropriate to evaluate the creditworthiness of 
the project taking into account the loan guarantee. An 
independent analysis of the project by consulting engineer or 
other reputable firm would provide more relevant information 
for assessing project viability and risk. In fact, such an 
analysis would be required by the lenders in order to evaluate 
the project.
    The rating agency requirement represents an unnecessary 
expenditure of time and funds. To the extent that DOE requires 
a third-party credit assessment of the project as part of its 
credit analysis, or in the determination of Subsidy Cost, 
project sponsors should not be limited to utilizing one of the 
rating agencies and should have the ability to obtain the 
credit assessment from other acceptable independent firms.
     The DOE Guidelines exclude the subsidy cost as well as 
fees paid for administrative costs from project cost.
    Industry Position. The DOE Guidelines exclude the subsidy 
cost and the fees paid for administrative costs of issuing a 
loan guarantee from the definition of project cost. These costs 
are financing costs incurred and expended by the sponsors and 
should be included in project cost. These exclusions are 
inconsistent with the treatment of similar costs in commercial 
project financing and in other Federal programs. For example, 
the exposure fee charged by Ex-Im Bank is not only counted as a 
project cost, but borrowers can elect to have that cost 
financed under the Ex-Im Bank loan or loan guarantee.

                               Conclusion

    The U.S. electric power industry faces a major challenge in 
financing and building the generation, transmission and 
distribution infrastructure necessary to support U.S. economic 
growth and maintain reliability. Simply maintaining nuclear 
power at its current position--approximately 20 percent of U.S. 
electricity supply-- will require construction of 50,000 
megawatts of new nuclear generating capacity (approximately 35 
large plants) by 2030. The U.S. nuclear industry is positioning 
itself to meet this challenge: 16 companies or groups of 
companies are now preparing license applications for as many as 
30 new nuclear plants.
    An effective loan guarantee program is essential to 
maintain this momentum.
    Given the cost of new nuclear power plants relative to the 
size of the companies that will build them, and given lenders' 
unwillingness to provide debt financing to new nuclear plants 
in the fact of unknown licensing and regulatory risks, the 
energy loan guarantee program is essential to support financing 
of a limited number of new nuclear plants. When investors gain 
confidence that these projects can proceed through construction 
and into commercial operation without regulatory or political 
interference, it is likely that the private capital markets 
will be prepared to undertake nuclear plant financing without 
the Federal credit support authorized by title XVII of the 
Energy Policy Act.
                              ----------                              

    Mr. Boucher. Thank you very much, Mr. Crane, and thanks to 
all of our witnesses for their testimony here this afternoon. 
The subcommittee very shortly, within approximately the next 6 
weeks, will begin constructing legislation that is designed to 
enhance American energy self-sufficiency. Key among our 
objectives will be to promote domestic alternatives to 
petroleum for transportation fuels and we have heard from a 
number of cellulosic ethanol producers and we heard from yet 
another here today about the importance of the Federal loan 
guarantee program to that objective. But it is important for a 
broad range of energy companies, including those represented 
here at the table and others.
    As you have heard in our questions to Mr. Spurgeon, there 
is general dissatisfaction on this subcommittee with the pace 
at which the loan guarantee program has been implemented by DOE 
to date and we would like to take appropriate steps in order to 
address those concerns. So in anticipation of the legislation 
we will soon be writing in this committee and taking to the 
House floor, there will be an opportunity for correction to the 
loan guarantee program.
    Today I would like to solicit your recommendations, if you 
have any, for steps that we could take legislatively that would 
accelerate the award of loan guarantees, improve on the program 
as you have heard it described by Mr. Spurgeon and your 
recommendations with regard to steps we could take would be 
very welcome. So if you have some suggestions, we would like to 
hear those. Any takers? Yes, Ms. Jorgensen.
    Ms. Jorgensen. Thank you, Mr. Chairman. One recommendation 
we have with respect to our specific project is because of the 
specific authorization language in EPAct and the set aside of 
the budget authority, what we would like to see happen now that 
the DOE has the program established is a concurrent development 
of our guarantee alongside of the regulations, so we could be 
going through the due diligence process, getting our scoring 
completed and getting a loan guarantee structured.
    It couldn't be issued until the regulations are final, but 
we could move alongside on a parallel path. That is one wish 
that would really change our in-service date and change the 
date we can start construction. As you develop a project, 
things kind of move around in terms of what your longest lead 
time item is and as described today, I would say this 
implementation of our loan guarantee has now become our longest 
lead time item. Thank you.
    Mr. Boucher. Thank you very much. So you are asking for 
what amounts to early action on the part of DOE before the loan 
guarantees can actually be issued in order to begin the, 
perhaps, informal process of reviewing and giving advice with 
regard to applications. Does that summarize your request?
    Ms. Jorgensen. That is right, Mr. Chairman. In implementing 
something as complicated as a loan guarantee program, I think 
the devil is always in the details when you are doing financing 
and when you actually delve into a project and structure a 
guarantee, you are going to identify the issues that, in an 
abstract reg-making process, you would never even stumble upon.
    Mr. Boucher. All right. Well, that is a good suggestion and 
I appreciate your making that. Mr. Crane.
    Mr. Crane. We felt the initial Act was sufficient, but it 
seems that clarification may be required on the volume limits. 
They seem to be more restrictive than when it was interpreted. 
We have already talked about the 80 percent of the total loan 
being required. If that may be helpful to bring the Department 
along further, those would be the two major items. There has to 
be some understanding that for the nuclear industry, we are not 
sure if it is five plants, 10 plants or 15 plants that is going 
to give the certainty to the market to be able to bring in the 
market participation but there will also have to be an 
understanding that it has be sustainable construction 
successfully prior to this program being terminated.
    Mr. Boucher. So you are asking for clarification that 80 
percent means 80 percent, not some lesser number?
    Mr. Crane. Definitely.
    Mr. Boucher. All right, thank you. Mr. DeVos.
    Mr. DeVos. Thank you. Two items that I would take a look at 
in the legislation are the fact that a first priority lien is 
required. My background is, I spent 30 years in lending by 
requiring the first lien for the guaranteed portion of the 
loan, you are putting the lender in a subordinate position on 
the un-guaranteed portion of the loan, that, I do not believe, 
would be acceptable for the lender. The second one would be the 
subsidy required the future costs to the Government in the case 
of default. I think it would be extremely difficult and be 
biased if I were to be requested to project what you are going 
to lose. I would say I wouldn't do this project if I thought I 
was going to lose money.
    Mr. Boucher. All right, thank you very much. My time has 
expired. I am pleased to recognize the gentleman from Illinois 
for 5 minutes.
    Mr. Hastert. Mr. Cosgrove, I was somewhat, again, perturbed 
listening to your testimony. If I understood right, you said 
you were going to have a very difficult time projecting what 
the losses are because you really don't know what the losses 
are going to be and in fact, in this type of thing there never 
have been any losses, but yet you have to do that, accumulate 
what the cost of those losses may be so you can count them 
against the cost of those people who are borrowing the money. 
Is that correct?
    Mr. Cosgrove. That is correct.
    Mr. Hastert. So if there have never been any losses and we 
don't have a history, isn't there some type of actuarial thing 
that you can go to if you don't know? To me, it seems like you 
are a Government agency. If you don't know, you just make it so 
difficult that people won't do it.
    Mr. Cosgrove. No, this is not an impossible task, it is 
just that it is a difficult one and one that must be done 
carefully. These loans, we think, are probably more difficult 
to estimate the subsidy costs for because they are larger loans 
and therefore----
    Mr. Hastert. They are not really loans, they are loan 
guarantees, right?
    Mr. Cosgrove. They are loan guarantees. What we were 
concerned with is that DOE had not started the process of 
putting in place the mechanism for how they were going to do 
these, come up with these estimates. Obviously, other agencies 
do make these kinds of estimates. We have done, over the years, 
a number of reports on agencies like the Maritime 
Administration and their efforts to estimate subsidy cost. 
Those are also for large loans, large loan guarantees. It is 
not impossible; it is difficult to do and----
    Mr. Hastert. Well, if I might interrupt you and I 
understand that it is difficult to do, but it was pretty 
obvious, from the Department of Energy, that they weren't sure 
what they were going to do, either. I am not sure if they 
understood what they have to do. But the fact is, my question 
was isn't there any kind of an experience? You said there was, 
that you could go to an actuarial information on past coal 
projects or past nuclear projects.
    Mr. Cosgrove. I assume that there is. That was beyond the 
scope of our work and so it is not something specifically that 
I have to recommend to you today.
    Mr. Hastert. Let me ask you another question. Do you think 
that the GAO finding issued Friday that the DOE violated the 
Anti-Deficiency Act will delay the implementation of the 
program?
    Mr. Cosgrove. That opinion came out of our General 
Counsel's office and I am not prepared to talk about the 
details of that. I do have with me Susan Poling from our 
General Counsel's office who could answer questions. My 
understanding, however, is that that opinion applied to the 
past. Going forward, DOE has what it needs, both in terms of 
funds and authority to operate at least----
    Mr. Hastert. So you are not prepared to make a guess, I 
guess, as the gentleman before said whether it was going the 
implementation of the program or not?
    Ms. Poling. Mr. Hastert, I am Susan Poling. I am Associate 
General Counsel at the GAO and was part of the team that issued 
that opinion. And I would say definitely that it should not 
delay, in any way, their going forward, because as of February 
15, they have the appropriation, they have the amount, $4 
million, and they also have the appropriation for their 
administrative costs.
    Mr. Hastert. Thank you. That is the most concise answer I 
have had all day. Appreciate it. Mr. DeVos, is there a drop 
dead date when you, if you don't get a loan guarantee, your 
project can't go forward?
    Mr. DeVos. No, because we will pursue other alternatives, 
which will probably cost us higher interest rates on and so 
forth.
    Mr. Hastert. So if you don't have that Government guarantee 
that we mandated in 2005 laws, you are going to have to go 
someplace else?
    Mr. DeVos. Yes.
    Mr. Hastert. Mr. Crane, I understand that the 
administration believes that it is important for the private 
sector having a substantial financial interest in ensuring that 
the viability of these projects exist. For a $5 billion nuclear 
project, the project sponsor would have to have a billion 
dollar equity at risk, assuming a loan guarantee of 80 percent 
of the project costs. Do you agree that a billion dollars is 
sufficient to ensure the project sponsor's commitment to 
succeed?
    Mr. Crane. It is more than sufficient to ensure it will 
succeed. For our company, that is almost a year's bottom line.
    Mr. Hastert. In the event of a default, the equity 
investors receive no protection under a DOE title XVII loan 
guarantee. Their $1 billion investment is fully at risk. 
Doesn't provide a strong incentive, as you said, to ensure that 
the risk associated with the projects are fully evaluated and 
protected?
    Mr. Crane. We do. And the first recourse goes back to the 
equity holder.
    Mr. Hastert. Thank you. I yield back.
    Mr. Boucher. Thank you very much, Mr. Hastert. The 
gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. And I can be real quick. It is just a quick 
question for Ms. Jorgensen. Did I hear you correctly in saying 
that your biggest obstacle right now is the fact that the 
Federal bureaucracy has not given you certainty on a loan 
guarantee program?
    Ms. Jorgensen. Congressman, that is one of our issues that 
our project faces. The hardest thing for us, when you get to 
this point in the schedule, is that if you don't know with 
certainty when the loan guarantee will be issued, you can't get 
to the final stage of your engineering and procurement process, 
which is a 12-month process, so until you can estimate when you 
are going to land, when the loan guarantee could be issued, you 
can't move to that final financing.
    Mr. Shimkus. So I take that as a yes?
    Ms. Jorgensen. Yes.
    Mr. Shimkus. That's your biggest obstacle is the loan 
guarantee program. We are really excited about IGCC programs 
and I hope we can move expeditiously to get this thing 
resolved. That is all, Mr. Chairman. I yield back.
    Mr. Boucher. Thank you very much, Mr. Shimkus. My thanks to 
each of our witnesses. Your testimony has been extremely 
helpful to us today. There may be some follow-up questions that 
we will propound to you by letter and if so, your expeditious 
response would be appreciated. With the committee's thanks to 
our witnesses, this hearing stands adjourned.
    [Whereupon, at 4:50 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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