U.S. House of Representatives

Committee on Oversight and Government Reform

Darrell Issa (CA-49), Chairman

The Department of Energy’s Disastrous Management of Loan Guarantee Programs

STAFF REPORT

U.S. HOUSE OF REPRESENTATIVES

112

CONGRESS

March 20, 2012

Executive Summary

After conducting a substantial review of the Department of Energy’s (DOE) loan

guarantee program, it is clear that the significant losses absorbed by taxpayers as a result of

Solyndra’s collapse is just the beginning. The investigation conducted by the House Committee

on Oversight and Government Reform has uncovered numerous examples of dysfunction,

negligence and mismanagement by DOE officials, raising troubling questions about the

leadership at DOE and how it has administered its loan guarantee programs.

By the expiration of § 1705 program in September 2011, the DOE had approved 27

projects totaling more than $14.5 billion in guaranteed loans. Inexplicably, DOE management

has turned a blind eye to the risks that have been glaringly apparent since the inception of the

program.

This report will demonstrate how DOE loan commitments exposed taxpayer funds to

excessive risk as a result of DOE’s bias toward approving loans without regard to warning signs.

The Committee identified many cases where the DOE disregarded their own taxpayer

protections, ignored lending standards and eligibility requirements and, as a result, amassed an

excessively risky loan portfolio. After review of internal emails, staff have identified instances

demonstrating that when DOE faced barriers that placed loan approvals at risk, DOE staff simply

sought to justify and overcome the barriers, rather than giving the barriers due consideration.

DOE has overseen a process wrought with misdirection, changing and expanding

requirements, unexplained delays, gross mischaracterizations, and a never-ending cycle of

excuses. Not only does it appear that DOE purposely directed taxpayer funds at a failing

enterprise, DOE’s action robbed taxpayers of genuine investment toward renewable energy.

Key Findings

• The Committee has identified a pattern indicative of poor management and a bias toward

unconstrained lending that resulted in the creation of a high risk, speculative and

undiversified loan portfolio that could ultimately result in substantial loss of taxpayer

dollars. (pg. 3)

• From the very inception of the program, warnings signs existed pointing to a likely loss

of taxpayer dollars that went ignored by Administration officials. (pg. 7)

• DOE invested a disproportionate amount of its funds into solar technology leaving

taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed

projects employed solar technology – that represented 80 percent of DOE’s funds. (pg. 7)

• The billions of dollars in loan guarantees and cash grants directed at a Spanish firm,

Abengoa, reveal the excessive risks associated with directing that volume of subsidy to a

single firm. Abengoa managed to obtain a DOE loan commitment for the lowest rated

project across the entire DOE Junk portfolio – which received an extraordinarily low

CCC rating and was still approved by DOE for a direct loan to the project. This

overinvestment in this single firm will likely cause substantial harm to the taxpayer. (pg.

12)

• DOE’s failure to diligently oversee costs and set prudent limitations on executive

compensation while it distributed billions of dollars in loan commitments has created a

significant moral hazard that has created enormous risks for DOE and taxpayer funds.

(pg. 14)

• Beacon Power Corp, the second recipient of a § 1705 loan guarantee, paid three

executives more than a quarter million dollars in bonuses in March 2010. Eighteen

months later, Beacon declared bankruptcy – leaving taxpayers to repay the loan. (pg. 13)

• BrightSource Energy, recipient of a $1.6 billion loan guarantee to build a solar generation

facility, has spent more than $56 million on a desert tortoise relocation program.

BrightSource has indicated that the exploding cost of tortoise relocation program

threatens to derail the entire $1.6 billion project – leaving taxpayers on the hook for the

enormous sums on money spent on construction thus far. (pg. 14)

• DOE has engaged in a disturbing pattern of suspending the approval of a credible project

that adheres to all stated standards, only to later approve massive funding for a project

proven to be nowhere nearly as far along in the process as DOE purported. DOE’s

favoritism significantly harmed numerous companies that had relied on the promise of

1705 financing. The perception is that DOE actively misleads applicants about the status

of their loan application, thereby encouraging these firms to misallocate capital, which

has led to financial harm. (pg. 17-19)

• DOE loan commitments exposed taxpayer funds to excessive risk as a result of DOE’s

bias toward approving loans without regard to warning signs. The Committee identified

many cases where the DOE disregarded their own taxpayer protections, ignored lending

standards and eligibility requirements and, as a result, amassed an excessively risky loan

portfolio. After review of internal emails, staff have identified instances showing that

when DOE faced barriers that placed loan approvals at risk, DOE staff simply sought to

justify and overcome the barriers, rather than giving the barriers due consideration. (pg.

22)

• Substantial evidence indicates that in two cases officials in the Loan Programs Office

deliberately mischaracterized substantively identical technologies as dissimilar.

Additionally, there is evidence that applicants, with the encouragement of department

officials, intentionally mischaracterized their projects as “innovative” in an effort to

access the Federal Financing Bank and defeat these prudential requirements. (pg. 23-28)

• There appears to be a significant amount of evidence indicating that DOE manipulated

analysis and strategically modified evaluations in order to issue loans to First Solar that

would qualify under the statutory guidelines. An application that should otherwise fail,

but instead passes under improper influence and through manipulation of analysis, results

in the defrauding of taxpayers and misappropriation of assets. (pg. 32)

• DOE Violated the Statutory Requirement that Projects Commence Construction by

September 30, 2011. (pg. 32)

• In almost every public statement about its loan guarantee program, DOE touts job

creation. DOE’s Loan Programs Office webpage proudly proclaims that DOE expects

the loans and loan guarantees to “employ” over 60,000 people. The site also breaks

down the number of jobs created or saved by each loan or loan guarantee, and issues

press releases for specific projects discussing job creation. These figures are misleading

and attempt to pass off jobs that already existed as new jobs. (pg. 37-40)

• Solopower accepted $40 million of Oregon taxpayer money in addition to DOE’s

approval of a $197 million loan via the Federal Financing Bank (FFB). They received

this federal assistance despite a rather dire prediction of Solopower’s prospects by

Standard & Poor’s (S&P) which predicted that Solopower will fail to meet its debt

obligations. (pg. 47)

• Despite warnings from both S&P and its own internal analysis regarding risky business

models, DOE proceeded with a $25 million grant for Beacon Power. In April 2010, S&P

evaluated the loan guarantee project and assigned it a dismal CCC+ credit rating noting

that “Beacon is currently an unprofitable start-up” and that “significant exposure to

commodity price volatility” could significantly hurt the company. S&P ran two default

scenarios, both of which demonstrated that taxpayers would lose millions. (pg. 49)

• Fitch Ratings evaluated the Abound Solar project, which was approved for a $400 million

conditional loan guarantee, and assigned it a junk credit rating. Fitch gave the project a

credit rating of “B” (worse than Solyndra’s) with a recovery estimate of only 45%. Fitch

labeled the project “highly speculative” and described Abound as lagging in technology

relative to its competitors, failing to achieve stated efficiency targets, and expecting that

Abound Solar will suffer from increasing commoditization and pricing pressures.

Abound Solar announced on March 1

that it would stop producing solar panels and

would fire 180 employees, even though it has already received $70 million from DOE.

(pg. 50-51)

• On June 15, 2010, DOE announced that it would conditionally issue a $98.5 million

partial loan guarantee to Nevada Geothermal Power Company. The loan did not finance

any new construction and therefore did not help to create a single new job. Yet, in the

press release for the project, Secretary Chu and Senate Majority Leader Harry Reid

touted Blue Mountain’s potential, with Senator Reid stating, “I am glad to see economic

recovery funding being used to put Nevadans to work on a project that will help us

achieve energy independence…” DOE’s awarding of this loan guarantee raises questions

about why DOE was investing significant taxpayer resources in an entity with well-

established financial difficulties. Nevada Geothermal has a well documented history of

major financial problems. By the time DOE conditionally approved the loan guarantee,

Nevada Geothermal had already violated contract terms and debt covenants relating to

financing from its primary lender, TCW. According to Nevada Geothermal’s financial

statements, the firm would not avoid default without the benefit of a loan guarantee. (pg.

53-54)

I. Introduction

A. A History of Federal Government Loan Guarantees

For decades federal loan guarantees supported a variety of policy objectives, “including

home ownership, university education, small business growth, international development, and

others.”

In 1976, the Congressional Budget Office (CBO) defined loan guarantees as “a loan or

security on which the federal government has removed or reduced a lender's risk by pledging to

repay principal and interest in case of default by the borrower.”

Loan guarantees supporting

“clean” energy-related projects began in the 1970s as a response to the perception of record high

oil prices for the foreseeable future and the notion that the country was in the midst of an “energy

crisis.”

The Energy Security Act of 1980 authorized $20 billion for the development of a synthetic

fuels industry via a new government enterprise, the U.S. Synthetic Fuels Corporation (SFC).

Loan guarantees were among the public finance tools available to SFC. The Great Plains coal

gasification project was the only one of the five SFC projects to utilize a loan guarantee. The

Great Plains project (located in Beulah, ND), “which converts lignite coal into pipeline-quality

methane (the primary component of natural gas), received a $2 billion federal loan guarantee

(approximately $1.5 billion of the loan guarantee was actually used) to construct the plant.”

Because the value proposition of the project hinged on gas prices remaining high for a long

period of time, in 1985, when gas prices dropped below the level at which Great Plains was cost

competitive, the project “was not able to meet debt service requirements and subsequently

defaulted on its loan obligations.”

The Office of Alcohol Fuels at DOE, created by the Energy Security Act of 1980, had the

authority to issue $265 million in loan guarantees for projects related to alcohol fuels.

Three

projects received loan guarantees. Of them, “one had to refinance its loan, one experienced

technology performance complications, and one ceased operations.”

After the failures of loan

guarantees via the Energy Security Act of 1980, clean energy loan guarantees were not again

funded until the American Recovery and Reinvestment Act of 2009.

A recent report from the Congressional Research Service points out that in 1976 the

Congressional Budget Office (CBO) identified inherent problems with loan guarantees that were

relevant then and are still relevant today. The background paper, titled “Loan Guarantees:

PHILLIP R. BROWN, CONGRESSIONAL RESEARCH SERVICE, LOAN GUARANTEES FOR CLEAN ENERGY

TECHNOLOGIES: GOALS, CONCERNS, AND POLICY OPTIONS (Jan. 17, 2012), available at

http://www.crs.gov/pages/Reports.aspx?PRODCODE=R42152&Source=search, [hereinafter Brown]

CONGRESSIONAL BUDGET OFFICE, LOAN GUARANTEES: CURRENT CONCERNS AND ALTERNATIVES FOR CONTROL

(Aug. 1978).

Brown, supra note 1.

Id.

Title XVII of the Energy Policy Act of 2005 created the renewable energy loan guarantee program at the

Department of Energy but did not provide funding for loan guarantees. See generally 42 U.S.C. §§ 16511-16514.

Current Concerns and Alternatives for Control,” explains that loan guarantees disorient risk

evaluation:

When commercial lenders originate loans that are guaranteed by the

government, these lenders may be more concerned with the adequacy of

the loan guarantee agreement than by the actual risk of the project. As a

result, projects may not receive an adequate amount of due diligence by

the lender, therefore increasing the federal government's risk exposure.

The CBO also notes that “while such guarantees reduce the risk of loss to lender and

borrower, they cannot reduce the project's risk of economic failure.”

Furthermore, the paper

explains that loan guarantees can be attractive to Congress because the costs, on paper, appear

small but fail to fully account for unforeseen risks.

Failing to heed these warnings has led to

widespread taxpayer losses from loan guarantees, from Great Plains in 1985 to Solyndra and

Beacon Hill in 2011.

B. An Overview of the DOE Section 1703 and 1705 Loan Programs

Congress first authorized the Department of Energy’s Loan Guarantee Program under

title XVII of the Energy Policy Act of 2005.

The program purportedly incentivizes energy

innovation by making it easier for companies to secure loans for projects that employ new

technologies to promote energy efficiency, renewable energy, and advanced transmission.

Section 1703 specifically authorizes the Secretary of Energy to make loan guarantees for projects

that employ innovative technology to reduce greenhouse gas emissions.

To date, the DOE has

conditionally approved three projects under § 1703, totaling $10.4 billion in guaranteed loans.

The American Recovery and Reinvestment Act of 2009 significantly expanded the

Secretary’s loan guarantee authority under a newly-created § 1705.

This section authorized the

Secretary to issue loan guarantees for renewable energy projects – including those employing

non-innovative technologies – that commenced construction no later than September 30,

2011.

Brown, supra note 1.

Additionally, in contrast to loan guarantees issued under § 1703, the project sponsor did not have

to pay for the cost of the loan guarantee because the government covered the credit subsidy

Id.

42 U.S.C. §§ 16511-16514.

U.S. DEP’T OF ENERGY LOAN GUARANTEE PROGRAM, LOAN GUARANTEE SOLICITATION ANNOUNCEMENT: FED.

LOAN GUARANTEES FOR PROJECTS THAT EMPLOY INNOVATIVE ENERGY EFFICIENCY, RENEWABLE ENERGY, AND

ADVANCED TRANSMISSION AND DISTRIBUTION TECH. (July 29, 2009) [hereinafter Innovative Solicitation].

42 U.S.C. § 16513(a)

U.S. Dep’t of Energy Loan Programs Office, List of Programs, available at https://lpo.energy.gov/?page_id=45

42 U.S.C. § 16516

42 U.S.C. § 16516(a)

costs.

The short timeframe for eligibility and the congressional appropriation of the credit

subsidy cost reflect § 1705’s primary purpose: economic stimulus.

The DOE issued its first § 1705 loan guarantee solicitation on July 29, 2009.

By the

expiration of § 1705 program in September 2011, the DOE had approved 27 projects totaling

over $14.5 billion in guaranteed loans.

The DOE’s Loan Programs Office awards and

administers loan guarantees under three sets of official rules: the statutory requirements of §

1703 and 1705, the departmental regulations issued pursuant to statute, and the department’s

formal solicitations for loan guarantee applications.

This initial report focuses on the Department of Energy’s portfolio of loan guarantees

issued under § 1705 of Title XVII. These loan guarantees were issued under two solicitations

which differed in their eligibility requirements and financing method. The first solicitation

targeted projects that employed innovative technologies.

Naturally, these rules describe the

eligibility requirements with increasing specificity. The redundancy and specificity of these

criteria testifies to their importance; such prudential regulations make the difference between

responsible stewardship of the program and a taxpayer-financed earmark.

Under this solicitation, the project

sponsor could acquire the underlying loan from U.S. government through the Federal Financing

Bank.

The second solicitation created the “Financial Institution Partnership Program.”

This

program accepted projects that employed non-innovative (i.e., already commercialized)

technology, but required the project sponsor to acquire the underlying loan from a private

financial institution.

Committee staff evaluated renewable energy projects that received loan commitments

from DOE or from private lenders partnering with DOE. Staff identified a pattern indicative of

poor management and a bias toward unconstrained lending that resulted in the creation of a high

risk, speculative and undiversified loan portfolio. In this report, we consider all aspects of loan

commitments in the context of the broader marketplace to reveal the extent of the risk taxpayers

face as a result of competition within the domestic energy industry and the global renewable

energy industry.

C. Overview and Brief History of the ATVM Program

Innovative Solicitation, supra note 14 (“the Recovery Act provides that five billion nine hundred sixty five

million dollars ($5,965,000,000) in appropriated funds be made available until expended to pay the Credit Subsidy

Costs”).

American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, §3(a), 123 Stat. 115 (2009).

Innovative Solicitation, supra note 14.

U.S. Dep’t of Energy Loan Programs Office, List of Programs, available at https://lpo.energy.gov/?page_id=45

42 U.S.C. §§16511-16516; 10 C.F.R. § 609 (2011); Innovative Solicitation, supra note 14; U.S. DEP’T OF ENERGY

LOAN GUARANTEE PROGRAM OFFICE, LOAN GUARANTEE SOLICITATION ANNOUNCEMENT: FED. LOAN GUARANTEES

FOR

COMMERICAL TECH. RENEWABLE ENERGY GENERATION PROJECTS UNDER THE FIN. INST. P’SHIP PROGRAM (Oct.

7, 2009) [hereinafter FIPP Solicitation].

Innovative Solicitation, supra note 14.

Id.

FIPP Soliciation, supra note 23.

Id.

The Advanced Technology Vehicle Manufacturing (ATVM) Program was created in

2008 as part of § 136 of the Energy Independence and Security Act of 2007.

According to the

U.S. Department of Energy (DOE), the purpose of the ATVM Program is to provide “direct

loans to support the development of advanced technology vehicles and associated components in

the United States.”

The Energy Independence and Security Act set aside $25 billion for direct

loans and appropriated another $7.5 billion to support these loans.

To qualify for a direct loan

under the ATVM Program, the project and the sponsoring company must meet several criteria.

First, in order to be eligible for a loan a company must either manufacture an advanced

technology vehicle (ATV) or manufacture components for ATVs. Companies must also be

“financially viable without the receipt of additional federal funding for the proposed project

other than the ATVM loan.”

DOE defines “advanced technology vehicle” as a light duty

vehicle that meets Clean Air Act regulations established by the U.S. Environmental Protection

Agency (EPA) and is 125 percent of the average of the Corporate Average Fuel Economy

(CAFE) for similar vehicles.

The loan must finance the reequipping, expanding, or

establishing of a manufacturing facility in the United States or the costs of engineering

integration performed in the United States.

As of February 2012, the ATVM Program loaned $8.3 billion to five projects.

Most

notably, two of the largest companies in the country, Ford Motor Company and Nissan North

America, received over $7.3 billion to retool and upgrade manufacturing facilities for vehicles

that were deemed ATVs by DOE.

Fisker Automotive and Tesla Motors received $529 million

and $465 million, respectively, from the ATVM program.

Fisker produces plug-in hybrid

electric vehicles in a manufacturing plant in Delaware.

Its first vehicle, the Karma, costs well

over $100,000 to purchase.

Tesla produces three models of plug-in electric cars at its

manufacturing plant in California. Finally, The Vehicle Production Group LLC received a $50

million loan to support the creation of a factory-built wheelchair vehicle that runs on compressed

natural gas.

Advanced Technology Vehicles Manufacturing Incentive Program, 73 Fed. Reg. 66,721, 66,722 (Nov. 12, 2008)

(to be codified at 10 C.F.R. pt. 611).

DOE had conditionally granted a loan of $730 million to Severstal North America,

a steel subsidiary of OAO Severstal, a multi-billion dollar Russian company, to produce

U.S. Dep’t of Energy Loan Programs Office, Description of ATVM program, available at

https://lpo.energy.gov/?page_id=43

Advanced Technology Vehicles Manufacturing Incentive Program, 73 Fed. Reg. 66,721, 66,722 (Nov. 12, 2008)

(to be codified at 10 C.F.R. pt. 611).

U.S. Dep’t of Energy Loan Programs Office, Description of ATVM program, available at

https://lpo.energy.gov/?page_id=43

Advanced Technology Vehicles Manufacturing Incentive Program, 73 Fed. Reg. 66,721, 66,722 (Nov. 12, 2008)

(to be codified at 10 C.F.R. pt. 611).

U.S. Dep’t of Energy Loan Programs Office, Description of ATVM program, available at

https://lpo.energy.gov/?page_id=43

Id.

U.S. Dep’t of Energy Loan Programs Office, Projects: Fisker Automotive, available at

https://lpo.energy.gov/?projects=fisker-automotive; U.S. Dep’t of Energy Loan Programs Office, Projects: Tesla

Motors, available at https://lpo.energy.gov/?projects=tesla-motors

Mike Ramsey and Neal E. Boudette, Fisker Hires Former Chrysler CEO, WALL ST. J., Feb. 29, 2012.

Id.

U.S. Dep’t of Energy Loan Programs Office, Projects: The Vehicle Production Group LLC, available at

https://lpo.energy.gov/?projects=the-vehicle-production-group-llc

advanced high strength steel (AHSS) used to make component parts for ATVs.

Almost 100

companies have applied for loans through the program; however, an overwhelming majority still

await a decision from DOE on the status of their applications.

II. The DOE Portfolio of Loan Commitments

DOE committed to issuing 27 loans or loan guarantees under the § 1705 program. These

loan commitments total in excess of $16 billion. At the outset, the ratings agencies rated 23 of

these loans as non-investment grade categories, also known as “Junk,” due to their poor credit

quality, while the other four were rated BBB, which is at the lowest end of the “investment”

grade of categories. Overall, DOE’s 1705 portfolio’s initial unweighted average rating was BB-,

which is considered “Junk grade.” According to Fitch, a ‘BB’ rating is speculative and indicates

an elevated vulnerability to default risk.

Press Release, Department of Energy Offers Severstal Dearborn, LLC a $730 Million Conditional Loan

Commitment for Michigan Project, U.S. Dep’t of Energy, July 13, 2011.

Accordingly a BB- is on the low end of what are

considered to be “speculative investments,” barely escaping the classification of “highly

speculative” investments.

Tim Logan, Loans for Green Car Plants are in Limbo, Stltoday.com, Mar. 16, 2012, available at

http://www.stltoday.com/business/local/loans-for-green-car-plants-are-in-limbo/article_89f33f3c-6ebf-11e1-89a9-

0019bb30f31a.html.

Fitch Ratings, Definitions of Ratings and Other Forms of Opinion (2011), available at

http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf

Company Rating

Parent

Rating

Recovery

Estimate

Agency

Date of

Rating

Date of

Loan

Loan Size

(Millions)

FIPP

FFB

Solyndra, Inc BB- 89% Fitch 8/7/2009 Sept 2009 535 FFB

Beacon Power Corporation CCC+ S&P 4/30/2010 Aug 2010 43 FFB

Kahuku Wind Power LLC BB+ 85-90% Fitch 5/26/2010 July 2010 117 FFB

Nevada Geothermal Power Company Inc BB+ 75-80% Fitch 7/20/2010 Sept 2010 78.8 FIPP

Abound Solar B 45% Fitch 11/4/2010 Dec 2010 400 FFB

Caithness Shepherds Flat, LLC BBB- 90-95% Fitch 11/12/2010 Oct 2010 1040 FIPP

Abengoa Solar, Inc (Solana) BB+ BB 80% Fitch 12/2/2010 Dec 2010 1446 FFB

U.S. Geothermal, Inc (Malheur County, Oregon) BB 64% S&P 12/29/2010 Feb 2011 97 FFB

Record Hill Wind, LLC BB+ AAA S&P 1/7/2011 Aug 2011 102 FFB

LS Power (Transmission Line project) BB+ 90-95% Fitch 1/21/2011 Feb 2011 343 FFB

BrightSource Energy, Inc - Ivanpah I BB+ 55% Fitch

1/25/2011 Apr 2011 1600 FFB

BrightSource Energy, Inc - Ivanpah II BB 55% Fitch 1/25/2011

Apr 2011 FFB

BrightSource Energy, Inc - Ivanpah III BB+ 55% Fitch 1/25/2011

Apr 2011 FFB

NRG Solar, LLC (Agua Caliente) BB+ B+ 90-95% Fitch 5/13/2011 Aug 2011 967 FFB

SoloPower Inc CCC+ S&P 7/11/2011 Aug 2011 197 FFB

NextEra Energy Resources, LLC (Genesis Solar) BBB+ BBB+ 84.50% S&P 7/21/2011 Aug 2010 681.6 FIPP

Cogentrix of Alamosa, LLC B 44-55% Fitch 7/22/2011 Sept 2011 90.6 FFB

1366 Technologies Inc B 65-70% Fitch 7/25/2011 Sept 2011 150 FFB

Abengoa Solar, Inc (Mojave Solar) BB BB 70-75% Fitch 7/27/2011 Sept 2011 1200 FFB

Granite Reliable Power, LLC BB BBB- 75-80% Fitch 8/10/2011 Sept 2011 135.12 FIPP

Ormat Nevada, Inc BB S&P 8/13/2011 Sept 2011 280 FIPP

Exelon (Antelop Valley Solar Ranch) BBB- A- 90-95% Fitch 8/17/2011 Sept 2011 646 FFB

SolarReserve Inc, LLC (Crescent Dunes) BB 80-85% Fitch 8/19/2011 Sept 2011 737 FFB

Prologis (Project Amp) BB B+ 80-90% Fitch 8/21/2011 Sept 2011 1120 FIPP

Mesquite Solar I, LLC (Sempra Mesquite) BB+ BBB+ 80-85% Fitch 8/23/2011 Sept 2011 337 FFB

NRG Energy (California Valley Solar Ranch) BB+ B+ 85-90% Fitch 8/23/2011 Sept 2011 1237 FFB

NextEra Energy Resources, LLC (Desert Sunlight) BBB- A- 85-90% Fitch 8/24/2011 Sept 2011 1199.2 FIPP

Abengoa Bioenergy Biomass of Kansas LLC CCC BB 65-70% Fitch 8/26/2011 Aug 2010 132.4 FFB

Within the range of non-investment grade credit risk, six of the Junk loans were rated at

the lower tiers of the range. Specifically, these six projects or loans received ratings within

either the “B” or “CCC” categories under the Fitch or Standard and Poor’s classifications.

Despite lending to highly speculative and troubled projects, the government only charged

those green energy firms its own cost to borrow money. In other words, the government sought

no profit or compensation for credit risk. Given the extent of losses already apparent, the failure

to seek any compensation for credit risk inevitably means the taxpayer will lose substantial

funds. This is distinguishable from normal business practices, where banks or investment firms

charge a premium or require more upfront capital as a condition for agreeing to finance riskier

projects; thus, if the project were to go completely under, the banks would have some capital to

show for the losses.

A. DOE’s High Risk Loan Portfolio

At an October 2011 press conference, after the collapse of Solyndra, President Obama

commented on the 1705 loan portfolio saying that “we knew from the start that the loan

guarantee program was going to entail some risk, by definition. If it was a risk-free proposition,

then we wouldn’t have to worry about it. But the overall portfolio has been successful.”

As this report reveals, it appears that taxpayer losses associated with Solyndra are just the

tip of the iceberg. Clues warning of this risk have been apparent from the inception of the

program. This does not bode well for the future of DOE’s loan portfolio. Moreover, most of the

energy projects funded under 1705 continue construction or just plan to begin construction. As

projects proceed and spend their capital, additional weaknesses will be exposed and more loan

recipients will begin to fail.

However, the risk conceded by President Obama is larger than he or Secretary Chu have

publically acknowledged. Left unsaid is the continuing and mounting risks taxpayers face with

each additional disbursement of funds.

Secretary Chu has done very little to mitigate these risks. In the first instance, DOE

failed to abide by the number one investment rule of thumb – diversify your portfolio. Instead of

making investments in a broad range of emerging technologies, DOE sunk 80% of its funds into

either solar manufacturing or solar generation projects.

This overemphasis on one type of

technology leaves taxpayers vulnerable to changes in the market for solar energy. After

Solyndra collapsed, Energy Secretary Steven Chu claimed that “this company and several others

got caught in a very, very bad tsunami” and then blamed China and the recession in Europe.

[C]hanges in business or economic conditions center upon the intermediate

and longer term pricing of PV solar panels which are now under extreme

competitive pressures. Fitch expects PV pricing pressures throughout the

term of the DOE loan and this factor will be the largest challenge facing

Solyndra and the largest credit risk incurred in repayment of the Fab 2 loan

according to its terms.

Secretary Chu neglected to mention the extraordinarily clear warning by Fitch Ratings (Fitch)

prior to DOE’s commitment. Specifically, Fitch stated:

As the above excerpt reveals, prior to approving Solyndra, Fitch warned DOE that

extreme competition within the solar panel market threatened pricing of solar panels in the

coming months and years and that this was the greatest risk to Solyndra’s survival. Even

News Conference by the President, The White House (October 6, 2011), available at:

http://www.whitehouse.gov/the-press-office/2011/10/06/news-conference-president.

U.S. Dep’t of Energy, Loan Program office, Our Projects, available at https://lpo.energy.gov/?page_id=45

Matthew Wald, Panel Hears Defense of Loan to Solyndra, N.Y. TIMES, Nov. 17, 2011, available at:

http://www.nytimes.com/2011/11/18/business/energy-environment/energy-secretary-defends-solyndra-loan.html.

Solyndra rating report letter to Wilbeur Stover, FitchRatings, p.1 (August 7, 2009).

knowing this, DOE chose to invest billions of taxpayer dollars despite the clear warning - 16 of

the 27 section 1705-backed projects employed solar technology,

In compiling this report, staff considered many troubling issues that deserve attention,

yet, because of the magnitude of problems associated with this program, only a share of the

concerns could be investigated. Committee staff, therefore, considers this an initial report. The

following sections examine the various actions that DOE took while building its financially

vulnerable portfolio that jeopardizes billions in taxpayer funds.

the very technology that

experts were warning about. These loans for solar projects totaled more than $13 billion – more

than 80% of the total portfolio. DOE also concentrated its investments in two solar companies in

particular, Abengoa and First Solar, to such an extent that financial troubles with either company

would affect a significant portion of the loan portfolio. In addition to over investing in solar, the

Federal government also permitted “double dipping,” wherein a company received multiple

federal grants and loans to cover the cost of a project, thereby reducing the company’s “skin in

the game.” DOE also allowed large and financially sound parent entities to undercapitalize their

loan guarantee projects, which effectively shifted the risk away from the company to the

taxpayer. It appears that for most DOE loan recipients, a low cost loan, in and of itself was

insufficient to attract private investors.

B. Major Risk Factors to the Loan Portfolio

1. Falling Natural Gas Prices Hurt Renewable Projects

In addition to the poor credit risk determinations of 1705 recipients, the falling price of

natural gas poses a material risk to the sustainability of these renewable energy projects. This

section of the report attempts to explain how the market for natural gas has evolved and how it

interacts with the market for renewable technologies.

Advances in hydraulic fracturing (“fracking”) technology over recent years dramatically

improved domestic natural gas and natural gas liquids production. Over the past few months, in

particular, this increase in production resulted in an extraordinary decline in the domestic price

of natural gas, substantially widening the efficiency gap between fossil fuels and renewable

technologies.

In other words, natural gas has become so cheap that other energy technologies

are having difficulty competing, even after federal subsidies.

The high price of oil incentivizes fracking for natural gas liquids, which supply valuable

raw materials to oil refiners.

In areas where fracking produces both natural gas and gas liquids,

frackers often produce natural gas at a loss, but, in the aggregate, profit due to the high price of

gas liquids.

U.S. Dep’t of Energy, Loan Program office, Our Projects, available at https://lpo.energy.gov/?page_id=45

This unique result reduces the responsiveness of natural gas producers to the price

See U.S. Energy Info. Admin., Monthly Natural Gas Gross Withdrawals, available at

http://205.254.135.7/dnav/ng/hist/n9010us2m.htm.

See Natural Gas Supply Ass’n, Processing Natural Gas, available at

http://www.naturalgas.org/naturalgas/processing_ng.asp#seperateng; see also Emanuel V. Ormonde, IHS Inc.,

Natural Gas Liquids, available at http://chemical.ihs.com/CEH/Public/Reports/229.2500/

See Peter Gardett, AOL Energy, A Little Liquid Gas and Oil Goes a Long Way for Energy Producers (Feb. 17,

2012), available at http://energy.aol.com/2012/02/17/a-little-liquid-gas-and-oil-goes-a-long-way-for-energy-

producers/

of natural gas. This ability to continue to profit from the premium price of gas liquids changes

the economics of natural gas production enabling a secular decline in natural gas prices.

The resulting low natural gas price reduces the market price for power generation in most

areas, as natural gas fired generators usually set the market clearing price. Below is a chart

reflecting natural gas prices since 1992.

Today’s low prices for natural gas have not been seen

since the 1990’s and, when adjusted for inflation are at historically low levels. While this is

good news for consumers of electricity who will benefit from lower rates, this is bad news for the

renewable energy industry.

a. Low Natural Gas Prices Reduce Power Purchase Agreement Revenues for Renewable

Projects

As natural gas powered generation provides the market clearing price in most regions

within the United States, the recent drop in natural gas prices lowered market prices for power.

These falling power prices reduce the expected value of anticipated Power Purchase Agreements

(PPAs), which are agreements that provide power purchasers, such as utilities and suppliers of

energy, such as renewable energy generators, with certainty over future prices. The energy

industry relies on PPAs to manage risks associated with the purchase and sale of power. The

pricing of PPAs largely depends on expectations with regard to future power prices. The recent

Federal Reserve Bank of St. Louis, Economic Data, Natural Gas Price: Henry Hub, Louisiana, available at

http://research.stlouisfed.org/fred2/series/GASPRICE

collapse in natural gas prices reduced the potential revenue for PPAs that have not yet been

executed.

Lower natural gas prices increase the risks of renewable energy projects that have not yet

entered into long term contracts to sell the power they expect to generate because buyers of their

product now have cheaper options. Project Amp and other projects that fail to meet benchmarks

necessary to maintain a PPA, suffer the risk that they cannot negotiate agreements sufficient to

support the cost of the renewables project, even with the benefit of multiple substantial subsidies.

Accordingly, it is reasonable to expect utilities to seek an exit from expensive PPAs

whenever the renewable company fails to meet certain benchmarks, whether those benchmarks

relate to commercial operation date, insufficient output, reliability or other variables. In other

words, given the falling price of power in areas where natural gas is the marginal supplier, it is

reasonable to expect revenues from risky renewables projects to be at risk to these falling power

prices. If a PPA with a solar producer reflects a price based on markets where $4.00 per million

British thermal unit (MMBtu) of natural gas was prevalent, the utility paying for that solar power

might act on any opportunity to renegotiate or exit the unprofitable PPAs now that natural gas

prices are below $3.00. Specifically, as DOE-backed projects come online over the next few

years, any failure to meet the production or capacity requirements stated in the PPA may enable

the power purchaser to exit or renegotiate the contract, subjecting the renewable project to lower

power prices, and thus lower revenues for the company than was predicted at the time DOE

negotiated the loan agreement.

In other words, given that power prices have fallen since these projects executed PPAs,

there is substantial risk that the power purchasers will find a way out from the PPAs they entered

into with the renewable projects. A PPA provides the renewable project security that it will earn

a specific amount of revenue. If a party, such as a Utility, that is purchasing power from the

renewables project can find a way out of the PPA, this places the revenue of the project at risk.

If the renewable projects are forced to renegotiate at current market prices, they will suffer a

substantial loss of revenue.

This is particularly concerning in the case of newer technologies, where many of these projects

may fail to achieve target operation dates, or may not generate as much power as the contract

requires simply as a matter of not having enough experience with the newer technology. Given

this risk, many of these projects face the danger of losing the benefit of a higher priced PPA.

One good example comes from the recent reports that First Solar’s solar panels are suffering

higher failure rates in the desert. This unexpected underperformance will reduce the output of

their plants. Such output is a key performance variable considered in the PPA.

b. Low Gas Prices Reduce Demand for Solar Panels

Falling market prices for power as described above impacts all aspects of renewable

projects. Despite solar panel prices, the demand for solar panels declines as the relative

economic benefits of their installation fall. Solar companies currently suffer from excessive

competition in panel manufacturing, and also likely face decreasing demand as a result of the

competition from cheaper natural gas generation. To the extent low natural gas prices persist,

this represents a sea-change that threatens the viability of all solar manufacturing investment that

DOE and Treasury subsidized.

2. DOE’s Failure to Diversify

a. DOE Overinvests in Solar Manufacturing despite Ample Warnings

DOE should have averted some of the risks it created in its portfolio by diversifying its

investments across renewable energy technologies. DOE’s investment in multiple solar

manufacturers added to a heated global competition that was already creating an excessive

supply of solar panels. These manufacturers were forced to compete both against each other and

other solar companies worldwide. As a result, the average selling price per watt for solar panels

has continued its decline.

Despite Solyndra’s fall, there remains excessive competition in the manufacturing of

solar panels. Just this past month, both Abound Solar and First Solar cut solar panel production

globally, reflecting this excessive supply and heated competition.

While U.S. solar generation

projects can take advantage of falling panel prices to offset a share of the impact of reduced

power prices, it appears solar manufacturers that suffer both supply and demand shocks can only

survive through continued provision of subsidies. Unfortunately for these manufacturers, there is

growing evidence that the subsidies are drying up.

With regard to subsidies on a global scale, Germany, the leader in solar subsidies, having

invested over $130 billion to date, is now giving up the habit. According to news reports:

Germany once prided itself on being the “photovoltaic world champion”,

doling out generous subsidies—totaling more than $130 billion, according to

research from Germany’s Ruhr University—to citizens to invest in solar

energy. But now the German government is vowing to cut the subsidies

sooner than planned and to phase out support over the next five years. What

went wrong?

Using the government’s generous subsidies, Germans installed 7.5 gigawatts

of photovoltaic capacity last year, more than double what the government had

deemed “acceptable.” It is estimated that this increase alone will lead to a

$260 hike in the average consumer’s annual power bill.

According to Der Spiegel, even members of Chancellor Angela Merkel’s staff

are now describing the policy as a massive money pit. Philipp Rösler,

Cassandra Sweet and Ryan Tracy, Loan Reicipient Abound to Cut Jobs, Retool Colorado Factory, WALL ST. J.,

Feb. 29, 2012, available at http://online.wsj.com/article/BT-CO-20120229-719672.html; Ehren Goossens, Solar

Suppliers Head for First Demand Drop as Subsidy Cut, B

LOOMBERG NEWS, Mar. 9, 2012, available at

http://www.bloomberg.com/news/2012-03-09/solar-panel-sales-seen-dropping-first-time-in-decade-feeding-glut-

energy.html

Germany’s minister of economics and technology, has called the spiraling

solar subsidies a “threat to the economy.”

The ratings agencies fully informed the DOE of their expectations for falling panel

prices due to excessive global competition. Both Germany and the U.S. appear to be phasing out

subsidies over the coming years, and this should eventually help reduce the excessive supply;

however, it does so at the expense of the subsidized solar firms. In other words, the apparent

cure to the oversupply is the outright shuttering of a large share of solar panel manufacturers

worldwide.

b. DOE Overinvested in Abengoa and First Solar Projects

As DOE failed to diversify the portfolio sufficiently across industries, DOE also failed to

diversify across award recipients. A single Spanish firm, Abengoa, received an aggregate $2.45

billion in loans and loan guarantees plus $818 million in Treasury cash grants.

This reveals

excessive risk and subsidies provided to a single firm via multiple subsidiaries. Abengoa has a

credit rating of BB, which is considered Junk, thus making this concentration of investment in

one company speculative and highly questionable. Exemplifying the risk DOE took in the case

of Abengoa, Abengoa managed to obtain a DOE loan commitment for the lowest rated project

across the entire DOE Junk portfolio; Abengoa Bioenergy Biomass of Kansas received an

extraordinarily low CCC rating and yet the DOE approved a direct loan to the project.

Bjørn Lomborg, Germany is cutting solar-power subsidies because they are expensive and inefficient, SLATE,

Feb. 18, 2012, available at

http://www.slate.com/articles/news_and_politics/project_syndicate/2012/02/why_germany_is_phasing_out_its_sola

r_power_subsidies_.html

See FitchRatings credit report for Mojave Solar, LLC, dated July 27, 2011, where DOE committed to an $862

million loan and Treasury committed to a $340 million grant; FitchRatings credit report for Abengoa Solar, Inc.’s

Solana Generating Station, dated December 2, 2010, where DOE committed to a $1.445 billion loan guarantee and

the Treasury committed to a $455 million grant; and, FitchRatings credit report for Abengoa Bioenergy Biomass of

Kansas, dated August 26, 2011, where DOE committed to a $130 million loan and Treasury committed to a $23

million grant.

See FitchRatings credit report for Abengoa Bioenergy Biomass of Kansas, dated August 26, 2011.

Abengoa’s prospects look dim due to its investments in Europe, particularly Spain, and

suffer the risk of declining subsidies as Spain contends with its own declining credit quality and

the potential need for a bailout of its own government in the coming months or years. Now that

Germany and Spain cut back solar subsidies, this will undoubtedly harm the European renewable

investments of Abengoa.

3. DOE Allowed “Double Dipping” – Multiple Subsidies to Single Projects

Even if Abengoa investments initially appeared attractive to DOE,

overinvestment in this single firm will likely cause substantial harm to the taxpayer. DOE

similarly overinvested in First Solar, as we describe in Section III; the taxpayer will undoubtedly

suffer losses from that investment as well.

The junk quality loan portfolio of loan guarantees amassed by DOE reflects funding that

substantially exceeds the amounts loaned by DOE. To understand the full extent of funds

invested into these renewable firms, all state and federal subsidies need to be considered. For

example, most of the 1705 projects benefitted from multiple enormous subsidies, such as grants

that covered a third of the cost to build a generation facility, low interest DOE loans, state

subsidies, beneficial access to power grids and mandates that require renewable production

See Ben Sills, Spain Halts Renewable Subsidies to Curb $31 Billion of Debts, BLOOMBERG NEWS, Jan. 27, 2012,

available at http://www.bloomberg.com/news/2012-01-27/spain-suspends-subsidies-for-new-renewable-energy-

plants.html. See also Germany to Axe Solar Panel Installations by More than Half in 2012 (Jan. 19, 2012),

available at http://www.greenworldinvestor.com/2012/01/19/germany-to-axe-solar-panel-installations-by-more-

than-half-in-2012/.

known as renewable portfolio standards. Such mandates result in premium pricing for power

generated by renewable technologies.

Even with the benefit of these massive government subsidies, DOE continues to hold a

portfolio of “Junk” grade loans and commitments. This defies the natural assumption that layer

upon layer of government subsidies, and billions in costless equity should at some point cause an

entity to become profitable; however, given the poor quality of the DOE portfolio, this has failed

to occur.

4. DOE Allowed Large Energy Companies to Undercapitalize Projects and Shifted Risk to

Taxpayers

Even when a company had significant assets to cover a project, DOE put the taxpayer at a

greater risk because of the way they structured the guarantee. In four cases among the 27 loan

guarantees and Federal Financing Bank (FFB) loans, the parent or project sponsor that sought the

benefit of a loan guarantee or FFB loan had a credit rating significantly above that of the project

itself. In other words, in four cases, the borrower undercapitalized the project and refused to

extend a parental guarantee.

As a result, the taxpayer takes on greater risk, despite the borrowers’ ability to increase

funding to the project. The most egregious use of this technique was in the case of Record Hill,

LLC, where AAA rated Yale University created a project with a rating of only BB+. The idea

that Yale would take a substantial taxpayer subsidy and still seek to protect its remaining assets

from the liabilities of Record Hill reflects Yale’s view of the Record Hill project and its

disregard for taxpayers. It is inconceivable that any normal bank would take these kinds of risk

when loaning money. Banks traditionally insist on a number of provisions to “protect” their

investment. Yet DOE and Treasury did just the opposite, and essentially let these companies

dictate terms favorable to them and not to the taxpayer. The result is when the company defaults

on their obligations, the taxpayer is left with little to no remedy.

3. Systemic Risks from “Crony Capitalism” and Wasteful Spending

There is evidence a number of loan guarantee recipients have engaged in clearly profligate

spending. Such wasteful spending threatens the financial viability of the recipient companies,

creating risks to both the DOE’s loan commitment portfolio and taxpayer dollars. It is

particularly troubling that this waste often takes the form of large cash bonuses to company

executives – such payments feed the perception that taxpayer funds are being used to line the

pockets of green energy executives.

Beacon Power Corp, the second recipient of a § 1705 loan guarantee, paid three

executives more than a quarter million dollars in bonuses in March 2010.

See M.J. Beck Consulting LLC, Renewable Portfolio Standards, available at

http://mjbeck.emtoolbox.com/?page=Renewable_Portfolio_Standards (“With few exceptions, utilities are allowed

to recover the additional cost of procuring renewable power.”); see also Katerina Dobesova, Jay Apt, and Lester B.

Lave, Are Renewable Portfolio Standards Cost-effective Emission Abatement Policy? (Carnegie Mellon Electricity

Industry Center, Working Paper CEIC-04-06), available at

http://wpweb2.tepper.cmu.edu/ceic/pdfs/CEIC_04_06.pdf.

Eighteen months

later, Beacon declared bankruptcy, leaving taxpayers to repay the loan. Adding insult to this

injury, these bonuses were explicitly linked to the executives securing the DOE loan guarantee.

Similarly, bankruptcy records show Solyndra doled out executive payments just months prior to

its late August collapse and early September bankruptcy.

The Department appears to recognize the unacceptability of this crony capitalism. DOE

has stated, “We take our role as stewards of taxpayer dollars very seriously, and as such, we will

make clear to loan recipients our view that funds should not be directed toward executive

bonuses when the rest of the company is facing financial difficulty.”

In Solyndra’s case, former

executives have stated that DOE explicitly allowed federal funds to be used to pay out executive

bonuses.

Good government groups have severely criticized the DOE’s administration of the loan

guarantees with respect to executive compensation. Citizens Against Government Waste has

stated that “[g]iving a bonus to the executives under these circumstances is rewarding failure

with our money with no chance of getting it back. Taxpayers need some representation here.

They didn't really get it.”

The DOE has not

explained why they waited three years into the program to finally take this view, or what – if any

– concrete steps they will take to protect taxpayer monies.

Wasteful spending is not limited to executive compensation alone. BrightSource Energy,

recipient of a $1.6 billion loan guarantee to build a solar generation facility, has spent more than

$56 million on a desert tortoise relocation program.

Furthermore, BrightSource will build 50

miles of intricate fencing, at a cost of up to $50,000 per mile, designed to prevent relocated

tortoises from climbing or burrowing back into the solar generation facility.

The DOE’s failure to diligently oversee costs and set prudent limitations on executive

compensation while it distributed billions of dollars in loan commitments created a significant

moral hazard that has created enormous risks for DOE and taxpayer funds.

BrightSource has

indicated that the exploding cost of tortoise relocation program threatens to derail the entire $1.6

billion project – leaving taxpayers on the hook for the enormous sums on money spent on

construction thus far.

C. Harm Posed to Our Economy

The DOE loan guarantee and ATVM loan programs may harm capital formation within

the capital markets. As the government makes low cost loans available, private capital cannot

compete with the subsidized low interest loans. As a result, many private investors and lenders

cease to compete in the same space or may choose to invest in those subsidized firms that

anticipate government loans. As intended, government subsidies redirect capital to less efficient

Ronnie Greene and Matthew Mosk, Green Firms Get Fed Cash, Gives Execs Bonuses, Fail, ABC NEWS, Mar. 6,

2012, available at http://abcnews.go.com/Blotter/green-firms-fed-cash-give-execs-bonuses-

fail/story?id=15851653#.T1ZAcnm8hSx

Id.

Julie Cart, Saving desert tortoises is a costly hurdle for solar projects, L.A. TIMES, Mar. 4, 2012.

Id.

industries, causing a misallocation of capital. To the extent investors target subsidized firms,

those funds that would have sought a more profitable opportunities that would have yielded

greater efficiencies and benefits for the economy, instead invest in relatively less profitable

industries, where the government subsidy compensates for the lost profit.

To the extent government loans programs proceed, the government must maintain the

highest integrity in the allocative process. If government fails to impose a fair and impartial loan

process that prioritizes genuinely eligible borrowers, then the government further misallocates

capital within the subsidized industry, increasing economic harm. Relatively better businesses

may suffer losses while waiting for subsidies that never materialize. Lower quality firms, with

strong political ties, may succeed in gaining government support with inferior products,

reflecting a multi-factored misallocation of capital.

The failure to maintain integrity and abide by the law when implementing the

DOE loan program significantly impacts those that failed to receive subsidies as well.

On February 28, 2012, Bright Automotive announced it was shutting down operations.

In a poignant and blunt letter to the Secretary, Bright Automotive’s management team

laid the blame squarely on the unprofessionalism and mismanagement of the DOE loan

guarantee program. Bright Automotive described a process wrought with misdirection,

changing and expanding requirements, unexplained delays, gross mischaracterizations,

and a never-ending cycle of excuses:

Bright Automotive

February 28, 2012

Secretary Steven Chu

U.S. Department of Energy

Washington, D.C.

Dear Secretary Chu,

Today Bright Automotive, Inc will withdraw its application for a loan under the

ATVM program administered by your department. Bright has not been explicitly

rejected by the DOE; rather, we have been forced to say “uncle”. As a result, we

are winding down our operations.

Last week we received the fourth “near final” Conditional Commitment Letter

since September 2010. Each new letter arrived with more onerous terms than the

last. The first three were workable for us, but the last was so outlandish that most

rational and objective persons would likely conclude that your team was

negotiating in bad faith. We hope that as their Secretary, this was not at your

urging.

The actions – or better said “lack of action” -- by your team means hundreds of

great manufacturing and technical jobs, union and non-union alike, and

thousands of indirect jobs in Indiana and Michigan will not see the light of day. It

means our product, the Bright IDEA plug-in hybrid electric commercial vehicle,

will not provide the lowest total cost of ownership for our commercial and

government fleet customers, saving millions of barrels of oil each year. It means

turning your back on a bona fide step forward in our national goal to wean

America away from our addiction to foreign oil and its implications on national

security and our economic strength.

In good faith we entered the ATVM process, approved under President Bush with

bi-partisan Congressional approval, in December of 2008. At that time, our

application was deemed "substantially complete." As of today, we have been in

the “due diligence” process for more than 1175 days. That is a record for which

no one can be proud.

We were told by the DOE in August of 2010 that Bright would get the ATVM loan

"within weeks, not months" after we formed a strategic partnership with General

Motors as the DOE had urged us to do. We lined up and agreed to private capital

commitments exceeding $200M – a far greater percentage than previous DOE

loan applicants. Finally, we signed definitive agreements with state-of-the-art

manufacturer AM General that would have employed more than 400 union

workers in Indiana in a facility that recently laid-off 350 workers. Each time your

team asked for another new requirement, we delivered with speed and excellence.

Then, we waited and waited; staying in this process for as long as we could after

repeated, yet unmet promises by government bureaucrats. We continued to play

by the rules, even as you and your team were changing those rules constantly –

seemingly on a whim.

Because of ATVM's distortion of U.S. private equity markets, the only

opportunities for 100 percent private equity markets are abroad. We made it clear

we were an American company, with American workers developing advanced,

deliverable and clean American technology. We unfortunately did not

aggressively pursue an alternative funding path in China as early as we would

have liked based on our understanding of where we were in the DOE process. I

guess we have only ourselves to blame for having faith in the words and promises

of our government officials.

The Chairman of a Fortune 10 company told your former deputy, Jonathan Silver,

that this program “lacked integrity”; that is, it did not have a consistent process

and rules against which private enterprises could rationally evaluate their

chances and intelligently allocate time and resources against that process. There

can be no greater failing of government than to not have integrity when dealing

with its taxpaying citizens.

It does not give us any solace that we are not alone in the debacle of the ATVM

process. ATVM has executed under $50 million of transactions since October of

2009. Going back to the creation of the program, only about $8 billion of the

approved $25 billion has been invested. In the meantime, countless hours, efforts

and millions of dollars have been put forth by a multitude of strong

entrepreneurial teams and some of the largest players in the industry to advance

your articulated goal of advancing the technical strength and clean energy

breakthroughs of the American automotive industry. These collective efforts have

been in vain as the program failed to finance both large existing companies and

younger emerging ones alike.

Our vehicle would have been critical to meet President Obama's stated goal of

one million plug-in electric vehicles on the road in 2015 and his commitment to

buy 100 percent alternative fueled vehicles for the Federal Fleet. So, we are not

the only ones who will be disappointed.

The ineffectiveness of the DOE to execute its program harms commercial

enterprise as it not only interfered with the capital markets; it placed American

companies at the whim of approval by a group of bureaucrats. Today at your own

ARPA-E conference, Fred Smith, the remarkable leader of FedEx, made the

compelling case to reduce our dependence on oil; a product whose price is

manipulated by a cartel which has caused the greatest wealth transfer in our

history from the pockets of working people and businesses to countries, many of

whom are not our allies. And yet, having in hand a tremendous tool for progress

in this critically strategic battle -- a tool that drew the country’s best to your door

-- you failed not only in the deployment of funds from ATVM but in dissipating

these efforts against not just false hope, but false words. For us, this is a

particularly sad day for our employees and their families, as well as the

employees and families of our partners. We asked our team members on countless

occasions to work literally around the clock whenever yet another new DOE

requirement came down the pike, so that we could respond swiftly and accurately.

And, we always did.

Sincerely,

Reuben Munger Mike Donoughe

CEO COO

Bright Automotive is not alone in its frustration, as at least three additional companies,

U.S. Geothermal, Inc., RenTech, and Tenaska, have suffered substantial harm at the hand of

DOE’s favoritism and blatant disregard of the law.

U.S. Geothermal, Inc.

U.S. Geothermal, Inc. submitted a DOE loan guarantee application for a geothermal

power project in San Emidio, California. Like Bright Auto, U.S. Geothermal received several

“clear assurances the DOE considers San Emidio a priority project and that [the] credit review

Letter, Reuben Munger and Mike Donoughe, Bright Automotive, to the Honorable Steven Chu, Sec’y of Energy,

Feb. 28, 2012 (on file with author).

process could be accomplished within the required timeframe.”

Relying on these statements

and assurances, U.S. Geothermal took action to advance the project and ensure full readiness and

compliance with DOE’s stated requirements. The company incurred numerous expenses,

including fees to legal counsel and engineers, as well as resources devoted to the completion of

engineer reports and a term sheet.

Most significantly, consistent with a DOE requirement for

priority treatment within the 1705 program, U.S. Geothermal executed a 25 year PPA.

U.S. Geothermal has taken every step to ensure that the San Emidio project embodies the

“quality” and “readiness” requirements DOE has emphasized. The project, which “would be one

of the smaller and more straight-forward transactions,” was ready to enter the credit approval

process by May 2011, only to be abruptly notified that DOE decided to suspend work on this

loan guarantee.

DOE, in a draft letter to U.S. Geothermal, stated “there are a number of projects that are

closer to the conditional commitment stage than yours, and we expect these projects, if they

reach financial close, to utilize all of our remaining appropriation.”

In this draft letter,

Jonathan Silver further provided that “the decision does not reflect the merits of the project, but

rather the timing and funding constraints of the program.”

According to its letter, U.S. Geothermal suffered substantial harm as a result of DOE’s

decision to violate the terms of its own program in providing loan commitments to ineligible

projects. The company incurred significant expenses in its efforts to meet DOE’s standards and

secure the financing it needed to proceed. The greatest harm will result from the PPA U.S.

Geothermal entered into in reliance on DOE statements, which now contractually obligates them

to provide power for 25 years or suffer penalties.

This claim is dubious at best. As is

revealed in Section III of this report, Project AMP failed to meet the eligibility requirement

relating to commencement of construction; nonetheless, it received a $1.4 billion FIPP-based

DOE loan guarantee commitment on September 30, 2011. Antelope Valley Solar Ranch failed

to meet the “innovativeness” requirement and the “one technology per sponsor rule.” Despite

this, Antelope Valley succeeded in gaining a $646 million FFB direct loan commitment. These

two projects consumed an enormous share of DOE’s appropriation yet clearly were not “closer to

the conditional commitment stage.”

According to U.S. Geothermal’s letter, in the

absence of a DOE loan guarantee, the terms of the PPA create a significant obstacle to obtaining

commercial financing for their project going forward.

Rentech

Letter, Daniel Kunz, U.S. Geothermal President & CEO, to Jonathan Silver, U.S. Dep’t of Energy Loan Program

Office, Executive Director (May 11, 2011).

Id.

Draft letter, Jonathan Silver, U.S. Dep’t of Energy Loan Program Office, Executive Director, to Daniel Kunz,

President of U.S. Geothermal (no bates stamp and no date).

Id.

Letter, Daniel Kunz, U.S. Geothermal President & CEO, to Jonathan Silver, U.S. Dep’t of Energy Loan Program

Office, Executive Director (May 11, 2011).

Id.

Rentech submitted a proposal for financing for its Northwest Florida Renewable Energy

Center Project (NWFREC). Like Bright Automotive and U.S. Geothermal, Rentech had

progressed according to plan and adhered to DOE’s prescribed schedule. In coordination with

DOE staff, Rentech had taken such steps as signing sponsor payment letters, setting up necessary

infrastructure, and entering the due diligence process.

Despite making every effort to fulfill all the requirements DOE laid out, DOE, again,

unexpectedly suspended the approval process for the NWFREC Project.

Tenaska

Given the steps

Rentech took to ensure all requirements were being fulfilled, DOE seems to have made a

decision based on favoritism rather than the law, choosing to fund larger, ineligible projects over

a number of more suitable alternatives.

Tenaska sought financing for Imperial Solar Energy Center South (IESC South), a solar

power project in Imperial County, California. Like the others, this company also received a letter

from DOE suspending the loan approval process, indicating that other projects were closer to the

conditional offer stage.

Prior to receipt of DOE’s letter, Tenaska had been working in coordination with DOE

staff and was finalizing the execution of the required term sheet.

Given the steps Tenaska appears to have taken prior to the suspension,

this is unlikely.

Additionally, the company

was progressing through the due diligence stage and expected its preliminary Credit Assessment

from Fitch in the very near future.

The similarity of concerns and claims made by Bright Automotive, U.S. Geothermal,

Rentech and Tenaska make clear that DOE actively mislead applicants about the status of their

loan applications, thereby encouraging these firms to misallocate capital, which has led to

financial harm. When considered in the context of the excessively large loan guarantees

provided to Abengoa, First Solar and ProLogis, and the outright violations associated with

Antelope Valley and Project AMP, the claims of these companies bring to light the extent of

harm that can result when a regulator fails to maintain integrity and allows inappropriate bias and

influence to distort its decisions.

It appears that, once again, DOE suspended the approval of

a credible project adhering to all stated standards and working closely with DOE staff, only to

later approve massive funding for a project proven to be nowhere nearly as far along in the

process as DOE purported. DOE’s favoritism significantly harmed yet another company that had

relied on the promise of 1705 financing.

To the extent that political connections and lobbying efforts influenced the DOE loan

program, this increases the potential harm to our capital markets and our economy. The large

Letter, D. Hunt Ramsbottom, Rentech, President & CEO to Jonathan Silver, U.S. Dep’t of Energy Loan Program

Office, Executive Director (May 9, 2011).

Id.

Letter, David W. Kirkwood, Tenaska, Vice President & Treasurer, to Jonathan Silver, U.S. Dep’t of Energy Loan

Program Office, Executive Director (May 17, 2011).

Id.

Letter, David W. Kirkwood, Tenaska, Vice President & Treasurer, to Jonathan Silver, U.S. Dep’t of Energy Loan

Program Office, Executive Director (May 17, 2011).

number of troubling relationships between industry and government officials reflects an

environment where fair impartial loan determinations did not occur, resulting in poor decisions.

For example, First Solar gained a unique advantage relative to its peers by mastering its

relationship with government as we describe in Section III. Just six months after DOE provided

First Solar three loan commitments totaling $2.4 billion, the Committee learned that DOE’s

prized achievement under the First Solar scheme, First Solar’s Mesa solar panel manufacturing

plant, will delay its startup and cut jobs while cutting back global production by 60%. We also

learned Abound Solar, a solar panel manufacturer that received a $400 million DOE loan

commitment, has since failed.

Following Solyndra, such a rapid pace of failure for solar projects, including the industry

leader First Solar, leads us to expect many more solar projects will follow. As a result of these

failures, we should also expect supply disruptions to solar generation projects, breaches of

supply contracts, job loss, and dislocation to harm other taxpayer-backed solar firms. Based on

these projections, it appears the DOE loan program, in the aggregate, will place a drag on the

entire economy as investors in these firms and taxpayers face losses and bankruptcies.

D. The “Independent” Review of the Loan Guarantee Program

In October 2011, the White House ordered that an independent review be conducted by

outside consultants in response to emerging problems, uncovered by the Solyndra scandal, with

DOE’s Loan Guarantee Programs.

The review, led by an “independent consultant,” former

Obama Administration Assistant Secretary of the Treasury, Herbert Allison, found serious

systemic problems related to DOE management and issuance of loan guarantees.

- A lack of clarity in the lines of authority within the loan program office;

Among the

findings, Allison reported that DOE’s loan program office suffers from structural weaknesses.

The report finds:

- A lack of balance between those with governmental experience and those with

“substantial private sector experience and skill in project management and finance;”

- A lack of clear guidance regarding DOE’s standard of “reasonable prospect of

repayment;”

- A lack of clarity with regard to DOE’s goals and tradeoffs with respect to financial goals

versus policy goals; and

- The fees charged to companies to administer the program are not adequate to last through

the duration of the loan guarantees.

While the institutional and managerial recommendations from the independent review are

appropriate and helpful, the report falls short because it fails to consider whether political

pressure played a role in the decision-making process at DOE. Additionally, the review does not

THE WHITE HOUSE, REPORT OF THE INDEPENDENT CONSULTANT’S REVIEW WITH RESPECT TO THE DEPARTMENT

ENERGY LOAN AND LOAN GUARANTEE PORTFOLIO (Jan. 31, 2012), available at

http://www.whitehouse.gov/sites/default/files/docs/report_on_doe_loan_and_guarantee_portfolio.pdf

Id.

provide much insight into taxpayer risks – the independent review looks at “credit subsidy

costs,” which represent the net present value of the expected lifetime cost to taxpayers of these

loans. Credit subsidy costs, however, do not fully capture the risks to which taxpayers are

subjected. According to the non-partisan Congressional Research Service, the independent

review “did not calculate expected losses that may be realized by the project portfolio, and the

report states that eventual losses cannot be predicted [using the accounting methods adopted by

the review].”

Furthermore, it has been widely reported that the independent review found the cost to

taxpayers of the loan programs to be lower than originally projected. This reading of the report

neglects to explain how these calculations came about. The independent review evaluated 30

loans and loan guarantees, broken down into three categories created by the independent

consultant: utility-linked loans and loan guarantees (“projects for the generation or transmission

of alternative sources of energy”

In other words, unforeseen risks exist within DOE’s portfolio which may have

future budgetary implications but are incalculable using governmental accounting methods.

); Non-utility-linked loans and loan guarantees (generally,

projects that bear greater technological risk; Beacon Power and Solyndra would fall into this

category); and Ford and Nissan loans (loans to these two companies were broken out because

these “projects are more typical of traditional secured corporate loans”).

When looked at in the aggregate, the costs of the program have, in fact, decreased since

the DOE’s estimates at the time of origination.

However, this optimistic outlook is driven

largely by the third category of loans and loan guarantees – those given to Ford and Nissan. The

costs of the first two categories – utility-linked loans and non-utility-linked loans – increased by

14 percent and 71 percent, respectively, while the estimated cost of the Ford and Nissan loans

decreased by 95 percent. The large drop in the cost of the loan to Ford and Nissan was largely

driven by these two companies receiving credit ratings substantially greater than what DOE

believed they merited at the time of DOE’s loan origination.

Lastly, the review excludes costs associated with Beacon Power and Solynda when it

calculated taxpayer liabilities. This is a significant omission, as Beacon Power had drawn down

91 percent of its loan guarantee at a cost to taxpayers of $39 million, while Solyndra had drawn

Looking just at utility-linked and

non-utility-linked loans and loan guarantees, the expected cost to taxpayers has markedly

increased. The Allison report glosses over this pertinent fact.

Phillip Brown, James Bickley, Bill Canis, “Consultant Review of DOE’s Loan and Loan Guarantee Portfolio:

Summary and Analysis of Key Findings and Recommendations,” Congressional Research Service, Memorandum,

March 8, 2012.

THE WHITE HOUSE, REPORT OF THE INDEPENDENT CONSULTANT’S REVIEW WITH RESPECT TO THE DEPARTMENT

ENERGY LOAN AND LOAN GUARANTEE PORTFOLIO (Jan. 31, 2012), available at

http://www.whitehouse.gov/sites/default/files/docs/report_on_doe_loan_and_guarantee_portfolio.pdf

Phillip Brown, James Bickley, Bill Canis, “Consultant Review of DOE’s Loan and Loan Guarantee Portfolio:

Summary and Analysis of Key Findings and Recommendations,” Congressional Research Service, Memorandum,

March 8, 2012.

THE WHITE HOUSE, REPORT OF THE INDEPENDENT CONSULTANT’S REVIEW WITH RESPECT TO THE DEPARTMENT

ENERGY LOAN AND LOAN GUARANTEE PORTFOLIO (Jan. 31, 2012), available at

http://www.whitehouse.gov/sites/default/files/docs/report_on_doe_loan_and_guarantee_portfolio.pdf

Phillip Brown, James Bickley, Bill Canis, “Consultant Review of DOE’s Loan and Loan Guarantee Portfolio:

Summary and Analysis of Key Findings and Recommendations,” Congressional Research Service, Memorandum,

March 8, 2012.

down 98 percent, or $527 million. This is $566 million in costs to taxpayers from the loan

guarantee program that are completely ignored by the independent review.

III. DOE Violated Statutory, Regulatory, and Prudential Requirements

The Committee investigation and analysis reveals that, among many other concerns,

DOE loan commitments exposed taxpayer funds to excessive risk as a result of DOE’s bias

toward approving loans without regard to warning signs. In some cases it appears the bias may

stem from DOE’s susceptibility to effective lobbying efforts, conflicts of interest present in the

Administration, or from its overriding policy preference for renewable technology.

The

Committee identified many cases where the DOE disregarded their own taxpayer protections,

ignored lending standards and eligibility requirements and, as a result, amassed an excessively

risky loan portfolio. After review of internal emails, staff have identified instances when DOE

faced barriers that placed loan approvals at risk, DOE staff simply sought to justify and

overcome the barriers, rather than giving the barriers due consideration. .

A. DOE Repeatedly Violated Requirements Intended to Ensure Innovation and

Manage Risk

1. Regulatory Requirements

The Energy Policy Act specifies that the Secretary may only make loan guarantees under

§1703 for projects that employ “new or significantly improved technologies.”

DOE’s

implementing regulation defines this as an energy technology “that is not a Commercial

Technology, and that has either (1) Only recently been developed, discovered, or learned; or (2)

Involves or constitutes one or more meaningful and important improvements in productivity and

value, in comparison to Commercial Technologies in use in the United States. . . .”

In applying

this definition, it is important to bear in mind the congressional intent underlying title XVII: to

incentivize innovative technologies.

The Loan Program Office’s (LPO) first solicitation, issued on July 29, 2009, targeted

innovative projects that satisfied the statutory and regulatory requirements of §1703.

The LPO’s second solicitation, issued on October 7, 2009, created the Financial

Institution Partnership Program (FIPP) under § 1705.

Projects

approved under this solicitation could access 100% financing through the Federal Financing

Bank.

An example of evidence indicating a strong ideology: Jonathan Silver, the former Director of the Loan Program

Office (LPO) stated in an email to Matthew Winters dated June 9, 2011, in relation to a Treasury review of First

Solar cost estimates, “Well done. Sorry you have to deal with all this. Hope the real story of how those folks tried

to kill deals that would have moved the needle and created jobs because of a slavish attachment to a flawed and

limited world view comes out.”

This loan guarantee solicitation was

42 U.S.C. § 16513(a)(2).

10 C.F.R. § 609.2 (2011).

Energy Policy Act of 2005, Pub. L. 109-58, title XVII, 119 Stat. 1117 (2005).

Innovative Solicitation, supra note 14.

FIPP Solicitation, supra note 23.

open to non-innovative (i.e., already commercialized) projects, but the project sponsor had to

secure the loan itself from a private lender. This structure reflects a reasonable and prudent

application of the Department’s loan guarantee authority: a project that employs commercialized

technology would only need a federal loan guarantee if it was an inherently high-risk venture.

The Department prudently sought to mitigate this risk by requiring that it be shared with a

private financial institution.

A second requirement in the Code of Federal Regulations only allows for “one

technology per project sponsor.”

Nonetheless, in issuing these loans, DOE disregarded these constraints, often with the

explicit encouragement of department officials. Substantial evidence indicates that, in two

cases, officials in the Loan Programs Office deliberately mischaracterized substantively identical

technologies as dissimilar.

Section 609.3(a) states that a Project Sponsor or Applicant

may only submit one Pre-Application or Application for one project using a particular

technology. The rule prohibits an Applicant from submitting a Pre-Application or Application

for multiple projects using the same technology. This common-sense requirement mitigates the

risk to taxpayer dollars by ensuring diversity, while increasing the potential for innovation within

the Department’s loan guarantee portfolio.

In other cases, DOE labeled a technology as “innovative” when it

clearly should have been classified as a “proven technology” merely because the particular

model had not been sold in the United States.

2. The First Solar Scheme

Additionally, there is evidence that applicants,

with the encouragement of department officials, intentionally mischaracterized their projects as

“innovative” in an effort to access the Federal Financing Bank and defeat these prudential

requirements.

a. Overview

First Solar manufactures thin film cadmium telluride solar panels and also provides

prefabricated solar plants, where buyers can purchase a ready to run solar generation facility that

uses First Solar’s cadmium telluride panels.

First Solar sought to create four turnkey projects

with the assistance of DOE loan guarantees and direct loans. Contrary to the law governing

DOE loans, these four projects relied on virtually identical solar technology. Accordingly, First

Solar’s use of the same technology across the four projects resulted in potential violations of

federal regulations and the underlying loan solicitations. Specifically, through DOE’s funding of

three First Solar projects, DOE and First Solar may have violated regulations imposing the

innovativeness requirement

and violated the regulation that allows only one technology per

project sponsor.

10 C.F.R. § 609.3(a) (2011).

See discussion infra Part III.A.2.

See discussion infra Part III.A.2.e.

See First Solar, Product and Services, available at http://www.firstsolar.com/Products-and-Services/Products

The Energy Policy Act specifies that the Secretary may only make loan guarantees under §1703 for projects that

employ “new or significantly improved technologies.” 42 U.S.C. § 16513(a)(2). DOE’s implementing regulation

defines this as an energy technology “that is not a Commercial Technology, and that has either (1) Only recently

been developed, discovered, or learned; or (2) Involves or constitutes one or more meaningful and important

First Solar submitted applications for two of the projects, Topaz and Desert Sunlight,

under the DOE’s FIPP solicitation that allowed for non-innovative projects. The other two

projects, Agua Caliente and Antelope Valley Solar Ranch, sought and succeeded in gaining an

advanced position in the application process by purchasing existing projects from Nextlight

Renewable Power (“Nextlight”) that previously filed applications with DOE. However, the

projects purchased from Nextlight had applied under the DOE’s “innovative” solicitation.

First Solar always intended to use the same technology across all four projects. However,

given the innovativeness requirement that applied to Agua Caliente and Antelope Valley Solar

Ranch, as a result of Nextlight’s original applications, these projects still needed to be deemed

innovative. Additionally, the two projects needed to comply with the one technology per project

sponsor requirement. This latter requirement meant that the two “innovative” projects also

needed to be differentiated from each other to qualify.

First Solar’s Agua Caliente and Antelope Valley Solar Ranch received funding despite

the fact that each project may have violated the regulations described above. In the next section,

we describe these violations in greater detail, provide the motives of DOE and the

Administration, and offer documentation indicating DOE manufactured evidence of compliance

with these rules while internally conceding their failure to adhere to the law.

b. The Manufacturing Plant that Motivated Action on All Four First Solar Projects

While DOE publicly talked about the merits of each First Solar project individually,

internal DOE emails indicate that DOE favored First Solar projects and viewed them collectively

because DOE sought to enable First Solar to build a new manufacturing plant in Arizona.

The

logic was simple: four solar generation projects would provide sufficient demand to justify and

support locating a new First Solar manufacturing plant in Arizona.

The White House planned to use this new manufacturing plant and the jobs that it

supported as evidence of the indirect benefits of DOE loan guarantees for the economy.

Documents and e-mails obtained by the Committee offer unique insight on how decisions were

made. In an e-mail from Jonathan Silver, Executive Director of the Loan Programs Office at

DOE, to Deputy Energy Secretary Daniel Poneman in May of 2011 demonstrates DOE’s plan to

group the First Solar deals as a package. Silver wrote that “First [S]olar deals need to be

considered as a package since they support the building of a manufacturing plant to service their

collective needs.”

We have often talked about how the 3 FSLR [First Solar] projects were are (sic)

considering will support the building of a manufacturing facility in Arizona. Can

The White House supported this packaging idea. In an email to other DOE

officials from June 2011, Matthew Winters, Senior Advisor for Loan Programs at DOE, wrote:

improvements in productivity and value, in comparison to Commercial Technologies in use in the United States…”

See 10 C.F.R. § 609.2 (2011).

Section 609.3(a) states “[a] Project Sponsor or Applicant may only submit one Pre-Application or Application for

one project using a particular technology. The rule prohibits an Applicant from submitting a Pre-Application or

Application for multiple projects using the same technology. See 10 C.F.R. § 609.3(a) (2011).

Email from Jonathan Silver, DOE, May 31, 2011 (on file with author)

Id.

one you (sic) please quickly draft a 1-2 sentence blurb that states exactly how this

is the case, and give the location, size, and expected construction date of the mfg

facility? This will go into a document for the White House that describes the

manufacturing impact of the projects in our pipeline.

100

c. The Collective Application of First Solar

(emphasis added)

The DOE’s treatment of the First Solar applications during the credit review process

demonstrates the Department realized the projects all employed the same non-innovative

technology. DOE considered packaging three First Solar projects as one vote in front of the

DOE credit review board (the Antelope Valley, Topaz, and Desert Sunlight projects), despite the

projects coming from different solicitations (innovative versus commercial). Margot Anderson,

a Senior Advisor at DOE, wrote an email on June 25, 2011, before the DOE credit review board

voted to grant conditional guarantees to three First Solar projects (Antelope Valley, Topaz, and

Desert Sunlight), asking “[S]hould it be three separate votes or one vote for all three

projects?”

101

Despite ultimately approving credit individually for each project, the next email shows

the extent to which DOE wanted “all of the deals to look exactly alike”:

While the credit review board appears to have voted separately for all three

projects, this conversation reinforces the mindset within DOE that all First Solar projects

represented a package and not individual projects.

Our question is simply “is there an issue if we bring all of the First solar projects

including the various IEs (Luminate and Burns and Roe) into the same room to

discuss the terms of the deals?” Essentially, we want all of the deals to look

exactly alike. First Solar has suggested the meeting so they are on board the IEs

are OK with it but one brought up the [Non-Disclosure Agreement] issue and I

want to get that resolved. Jonathan want[s] the meeting to happen this week or

early next, to get these projects going.

102

With this plan to package the First Solar deals, DOE granted conditional loan guarantees

to four First Solar projects that used First Solar’s cadmium telluride photovoltaic solar panels.

103

DOE describes this technology as “commercially proven” and “deployed since 2001.”

104

Yet,

DOE was classified two of First Solar’s projects as innovative and ignored the “one sponsor per

technology per solicitation.”.

105

100

Email from Matthew Winters, DOE, June 14, 2011. (Emphasis added).

101

Email from Margot Anderson, DOE, June 25, 2011.

102

Email from Jeffrey Walker, DOE, to Susan Richardson and Kimberly Heimert, DOE, Subject “Bridge [Non

Disclosure Agreements] for this unusual circumstances,” (March 29, 2011, 8:21 AM).

103

DOE did not finalize First Solar’s Topaz project and only gave final approval to three First Solar projects. Upon

finalization of its DOE loan guarantees, First Solar sold all of its development projects to large utilities, such as

Exelon and NextEra.

104

“Energy Department Finalizes Loan Guarantee to Support California Solar Generation Project,” U.S. Department

of Energy, September 30, 2011. Available at:

https://lpo.energy.gov/?p=5324.

105

This scheme coincidentaly improved the financing terms of the programs by enabeling the government to provide

a 100% direct loan as opposed to an 80% loan guarantee. Specifically, those entities approved under the innovative

path received direct federal loans from the Federal Financing Bank (FFB) for 100% of the sought after amount. Had

these entities gone through the commercial path, they would need to borrow from a private lender who would then

d. First Solar’s Acquisition of NextLight's Projects to Enable All Four Projects to

Proceed Together

To understand why DOE manipulated the First Solar applications one must understand

how these projects came to pass. First Solar purchased NextLight Renewable Power in a deal

that included NextLight’s two pending DOE loan guarantee projects—Agua Caliente and

Antelope Valley Solar Ranch—in April of 2010.

106

DOE had invited both NextLight projects

into the due diligence level in the loan application process,

107

indicating that both continued to

progress successfully towards ultimate approval. NextLight had applied for innovative loan

guarantees for both projects. Under Nextlight’s applications, the Agua Caliente project would

use amorphous silicon technology, and the Antelope Valley project would use crystalline silicon

solar technology.

108

When First Solar purchased NextLight, it planned to switch to its own proven – and non-

innovative - technology relying on cadmium telluride panels for both projects. However, First

Solar wanted to keep both projects in the innovative technology queue. First Solar faced two

challenges to keep both projects in the innovative queue. First, the company had to prove that

both projects used innovative technology; while using First Solar cadmium telluride panels for

the projects that would not qualify as innovative. Second, First Solar had to ensure that both

projects used different “innovative” technologies, otherwise the projects would violate the DOE

rule that one company could only sponsor one project using a specific innovative technology

under the innovative technology solicitation.

e. Failure to Prove Innovativeness; Resorting to Falsification

First Solar planned to qualify both projects for the innovative solicitation by

incorporating relatively minor new technologies into the solar plants. The Agua Caliente project

would use standard First Solar cadmium telluride panels, but would use an inverter “fault ride-

through and dynamic voltage regulation” technology

109

that would help the plant stay operational

even if the sun did not shine constantly on a particular day.

110

receive at most an 80% guarantee. Therefore, the non-innovative entities benefitted from the false “innovative”

designation in that they received fully guaranteed funding, as opposed to partially guaranteed, reducing their cost of

borrowing. The other two First Solar projects received partial loan guarantees as part of the Financial Institution

Partnership Program.

First Solar relied on this inverter

106

Dealbook, First Solar Buys NextLight for $285 Million, N.Y. TIMES, April 29, 2010 available at

http://dealbook.nytimes.com/2010/04/29/first-solar-buys-nextlight-for-285-million/.

107

Email from Daniel Tobin, Director of Loan Programs Intake Division and Senior Investment Officer, U.S. Dep’t

of Energy (July 23, 2010).

108

Internal Memo from Dong Kim, Chief Engineer of the Technical and Project Management Division, U.S. Dep’t

of Energy, to David Frantz, Director of Loan Guarantee Program Office, U.S. Dep’t of Energy (July 25, 2010).

109

Press Release, U.S. Dep’t of Energy, Department of Energy Finalizes a $967 Million Loan Guarantee to Support

the Agua Caliente Solar Project (Aug. 5, 2011) available at

http://energy.gov/articles/department-energy-finalizes-

967-million-loan-guarantee-support-agua-caliente-solar-project.

110

U.S. Dep’t of Energy, Internal Memo, “Next Light Antelope Valley Technical Eligibility Re-Evaluation” (July

21, 2010); See also email from Cathy Grover, Luminate, to Robin L Sampson, U.S. Dep’t of Energy (Mar. 30, 201,1

3:39 PM EST), which stated, “The Project’s inverter that we show currently specified is an SMA 630CP … From a

design perspective, switching to the 720CP (from the 630CP, if this is in fact what First Solar is doing), has no real

impact on the electric energy production values.”

to qualify the Agua Caliente project as innovative.

111

An email between DOE staff describes the lack of innovativeness of this inverter

technology, stating, “The Project’s inverter that we show currently specified is an SMA 630CP

… From a design perspective, switching to the 720CP (from the 630CP, if this is in fact what

First Solar is doing), has no real impact on the electric energy production values.”

However, the innovativeness of this

inverter technology is highly questionable based on the following issues identified through the

review of email communications and internal DOE reports.

112

A DOE

whitepaper reveals that more than 200 of these allegedly “innovative” inverters had been in use

in Germany, Italy and Spain since September 2010.

113

Directly calling into question any determination that this technology is innovative, the

DOE whitepaper provides that these inverters are “commercially ship[ped] today in the United

States as well.”

While, according to the rule, foreign

commercial use of a technology is not a bar to deeming domestic use innovative, the broad

commercial use in Europe reflects the disrespect DOE applies to the actual innovativeness

requirement.

114

The report explains that “the technology being implemented is not new as

compared to traditional turbine-based generators” and is commercially manufactured in

Colorado.

115

These facts emailed among DOE staff undermine any determination of

innovativeness and clearly indicate that Agua Caliente failed to satisfy the requirements designed

to spur development of new technologies.

116

First Solar also planned to use this inverter technology to make the Antelope Valley

project innovative; however, even if the technology were innovative with regard to Agua

Caliente, its second application to Antelope Valley would violate the one technology per project

sponsor requirement.

117

To overcome this obstacle, First Solar added a “single axis tracking”

system for the Antelope Valley project to differentiate it.

118

111

See “NEXT LIGHT ANTELOPE VALLEY TECHNICAL ELIGIBILITY RE-EVALUATION” attachment (July

21, 2010) to email from Sarah Hetznecker, U.S. Dep’t of Energy, to Patrick Gorman, U.S. Dep’t of Energy, Subject:

“here is the antelope valley re-evaluation memo” (July 22, 2010 9:06 AM).

This system simply allowed the

panels to track the sun – a technology that has been around for decades. Additionally, First Solar

The Antelope Valley Project will use the new Fault Ride-Through Technology inverters that are

being used in the Agua Caliente Project and were the basis for new and significantly improved

technologies as compared to commercial technologies’ for that project. While this is being used

on both of these projects, it will meet the definition of “new of [sic] Singificantly Improved

Technology and it is not a Commercial Technology, because it is not being used in three or more

commercial projects in the US in the same general application and it has not been in operation for

5 years. In addition, First Solar will use single axis tracking on 50 MW of the 230 MW for the

Antelope Valley Project. Based up on the re-evaluation, we conclude that the project will meet the

eligibility criteria

112

Email from Cathy Grover, Luminate, to Robin Sampson, U.S. Dep’t of Energy (March 30, 2011, 3:39 PM).

113

“Antelope Valley Solar Ranch 1 Project: Inverter Implementation Whitepaper” (May 18, 2011) (Email from

Sarah Hetznecker to Jeffrey Walker (May 22, 2011, 12:14:03 PM)).

114

Id.

115

Id.

116

See supra note 87.

117

See supra note 91.

118

Dong Kim, U.S. Dep’t of Energy Memo, “First Solar (Next Light) Antelope Valley Solar Ranch One Technical

Eligibility Re-Evaluation”(Aug. 4, 2010).

only planned to install this system on 50 MW of the plant’s 230 MW capabilities, less than 25%

of the plant.

119

Rather than force First Solar’s Antelope Valley project to step out of the innovation

queue, DOE quickly created a memo that allegedly justified the project remaining “innovative.”

The memo claimed that the Antelope Valley project would use three different innovative

technologies: Fault Ride-Through Technology, Dynamic Voltage Regulation, and single axis

tracking.

120

Internal DOE emails reveal a rushed process that left certain DOE officials

questioning the validity of the analysis.

121

DOE officials also heavily edited the memo to

deemphasize First Solar’s other pending projects and the fact that the Antelope Valley project

used the same “innovative” technology as the Agua Caliente project.

122

More importantly, on June 23, 2011, Dong Kim, Director of the Technical and Project

Management Division, (who had edited the DOE memo on Antelope Valley’s innovativeness

referenced above) wrote an email indicating that the allegedly innovative tracking technology did

not constitute innovativeness, was not considered innovative originally, and also pointed out that

others continuously revised documents to incorrectly reflect that the trackers were “innovative.”

Kim wrote:

Someone keeps changing [Antelope Valley Solar Ranch] Technical slides to

include single axis trackers as an innovation. Be clear that this not an

innovation. The record will show that we did not grade this as innovative

during intake review. It will not stand up to scrutiny if compared with CVSR

[California Valley Solar Ranch] trackers. Whoever continues to make this change

needs to understand that Technical does not support the 20 percent of the CVSR

field with trackers as an innovative component.

123

The apparent cover-up that led to Kim’s stern email indicates that DOE staff sought to

maintain a false finding of “innovative” for the single axis trackers.

(emphasis added)

DOE’s August 4, 2010, memo claimed that the Antelope Valley project used three

innovative technologies. However, DOE’s Director of the Technical and Project Management

Division revealed that the single axis trackers did not qualify as innovative and DOE’s own press

release demonstrated that the Agua Caliente project already used both the fault ride-through and

the dynamic voltage regulation technologies.

124

119

Id.

Since Agua Caliente had already received a loan

guarantee using this “innovative” technology, Antelope Valley was barred from relying on the

same technology for its innovativeness-based application. As a result, Antelope Valley provided

120

Id.

121

Email from Susan Grodin, U.S. Dep’t of Energy (Aug. 3, 2010) (stating that “this memo was cobbled together

from different sources and in so doing, an obvious piece was left out”).

122

Dong Kim, U.S. Dep’t of Energy, Technical memo (July 25, 2010) (discussing that DOE’s tracked changes on

the memo reveal that DOE removed references to First Solar’s Desert Sun and Topaz projects from the second

paragraph and removed an entire paragraph discussing how the Antelope Valley project and the Agua Caliente

project use the same Fault Ride Through Technology).

123

Email from Dong Kim, U.S. Dep’t of Energy (June 23, 2011).

124

Press Release, U.S. Dep’t of Energy, Department of Energy Finalizes a $967 Million Loan Guarantee to Support

the Agua Caliente Solar Project (Aug. 5, 2011) available at

http://energy.gov/articles/department-energy-finalizes-

967-million-loan-guarantee-support-agua-caliente-solar-project.

no innovative technology that would justify its eligibility for a DOE loan. DOE should have

deemed First Solar’s Antelope Valley project ineligible under the innovativeness solicitation.

f. Persistent Pressure to Approve the First Solar Projects and Achieve the Master Plan

of Building a Manufacturing Facility

First Solar kept pressure on DOE to approve the three projects in the final weeks

leading up to DOE’s issuance of conditional loan guarantees. On May 18, 2011, Jens

Meyerhoff, an executive at First Solar, wrote a letter to Jonathan Silver implicitly

threatening that First Solar might not commit to completing construction on the Arizona

manufacturing plant if DOE did not approve all three First Solar loan guarantees.

Meyerhoff wrote:

A failure to receive DOE and U.S. government agency approvals for these

projects or missing the September 30 statutory deadline under the 1705

program would seriously jeopardize the financing for the Agua Caliente,

Antelope Valley Solar Ranch, Desert Sunlight and Topaz projects. As you

know, a major reason for choosing to build the manufacturing plant in

Mesa, AZ was to provide solar modules to these large and important U.S.

projects.

We will invest more than $300 million in the factory, put people in Mesa

to work at a long-dormant industrial site that once was home to an

automotive testing facility, and create high tech green jobs that did not

exist before…

…First Solar consciously made the decision to build a new U.S.

manufacturing center to support and recycle economic benefits created by

favorable U.S. political support for renewable energy, including the 1703

and 1705 DOE loan guarantee programs.

The DOE loan programs provide an important financing ‘bridge’ at a time

when the U.S. private debt markets have little or no experience financing

first-of-their-kind utility-scale solar projects, and the capital markets

remain constrained in the wake of the global financial crisis. If First

Solar’s project applications are not approved, or if they’re delayed beyond

September 30, we believe it could jeopardize our ability to close financing

(both debt and equity), jeopardize construction of 1,620 megawatts of

solar capacity and, frankly, undermine the rationale for a new

manufacturing center in Arizona.

125

First Solar also tried more friendly persuasion. Nikolas Novograd, Vice President

at First Solar, sent Bill Pegues at DOE a picture of the construction taking place at First

Solar’s Arizona plant. Pegues planned to use the construction picture to help persuade

members of the credit review board to vote for the First Solar projects. He forwarded the

picture to several DOE officials, commenting, “[H]ere’s a photo of the construction

125

Letter from Jens Meyerhoff, First Solar, to Jonathan Silver, Director of Loan Programs Office, U.S. Dep’t of

Energy (May 18, 2011) (emphasis added).

progress on the FSLR mfg plant in Mesa, Arizona as of Tuesday 6/14. I’ll bring several

copies to CRB [Credit Review Board] just in case we need them.”

126

Additionally, Rob

Gillette, CEO of First Solar, arranged a phone call with the Deputy Energy Secretary on

June 24, 2011, only days before the Credit Review Board met to decide whether to grant

conditional loan guarantees to the three First Solar projects.

127

By June 22, 2011, several days before the Credit Review Board approved

conditional loan guarantees for the projects, Secretary Chu’s office had already planned a

press release to announce the conditional loan guarantees for the First Solar projects that

relied upon job creation numbers from First Solar itself.

128

S1’s office hopes to offer an advanced story to a national reporter on all

three First Solar deals later today, with a story to run tomorrow along with

the press release…

Secretary Chu’s office

carefully coordinated the media strategy for the approval of the conditional loan

guarantees for the three First Solar projects. Sonia Taylor at DOE wrote in an email on

June 28, 2011, that

…If you haven’t already, can you all please notify the appropriate people

from First Solar and the other companies that the deal is official? I have

been working with First Solar (under the guise of ‘should the deal be

approved’), and they do not plan on writing a press release. Can you all

please see whether the banks plan on issuing a release? If so, we’ll need

to review it.

129

On June 30, 2011, DOE issued a press release that announced the conditional loan

guarantees for the three First Solar projects for around $4.5 billion.

(emphasis added)

130

The six paragraph

announcement only mentioned First Solar once and described the Antelope Valley

project as featuring “a utility-scale deployment of innovative inverters with voltage

regulation and monitoring technologies that are new to the U.S. market.”

131

DOE would eventually issue final loan guarantee offers to First Solar’s Antelope

Valley and Desert Sunlight projects on the final day of the 1705 loan guarantee program

(September 30, 2011).

The press

release did not mention the trackers on the Antelope Valley project.

132

126

Email from Bill Pegues, U.S. Dep’t of Energy (June 23, 2011).

Despite the issues surrounding the innovative nature of the

Antelope Valley project, DOE finalized a 100% loan guarantee worth $646 million for

the allegedly “innovative” project. Ultimately, DOE did not finalize First Solar’s Topaz

127

Email from Elizabeth Emanuel, U.S. Dep’t of Energy (June 24, 2011).

128

Email from William Pegues, U.S. Dep’t of Energy (June 22, 2011).

129

Email from Sonia Taylor, U.S. Dep’t of Energy (June 28, 2011).

130

Press Release, U.S. Department of Energy, DOE Offers Conditional Loan Guarantee to Support Nearly $4.5

Billion in Loans for Three California Photovoltaic Solar Power Plants (June 30, 2011) available at

https://lpo.energy.gov/?p=4873.

131

Id.

132

DOE did not finalize First Solar’s Topaz loan guarantee project.

project, but a subsidiary company of Warren Buffett’s Berkshire Hathaway purchased the

project from First Solar.

133

g. First Solar’s Financial Problems since the Loan Guarantees

Since DOE finalized First Solar’s three loan guarantees (for over $3 billion), First Solar

has encountered serious financial problems that put the DOE funded projects in jeopardy. First

Solar’s stock declined the greatest compared to of any S&P 500 companies in 2011 and has lost

over $100 per share over the past year.

134

First Solar has cut production of its solar panels

worldwide.

135

Based upon the company’s financial troubles, First Solar fired its CEO in

October.

136

Additionally, in March 2012, the Securities and Exchange Commission announced

an investigation into whether First Solar had improperly disclosed information about whether the

First Solar Topaz project would receive a loan guarantee from DOE.

137

More recently, First Solar has revealed problems that directly impact its three DOE loan

guarantee projects. First Solar’s Antelope Valley project had problems getting a permit and has

yet to receive any DOE funding.

138

First Solar announced in late February that it would

postpone manufacturing solar panels at its Mesa Arizona plant, which is still under construction,

because of financial problems.

139

First Solar intended for the Mesa facility to provide panels to

the four First Solar projects. This delay means that the indirect jobs that the White House

wanted to create with the three loan guarantees will likely never materialize, and raises questions

about whether First Solar will have problems supplying solar panels to its DOE loan guarantee

projects. Additionally, First Solar has revealed that it has needed to replace millions of dollars

worth of its solar panels under warranty because they did not last in hot climates.

140

h. Conclusion

Considering

all three of First Solar’s DOE-based solar generation projects are located in hot desert climates,

this issue raises serious concerns about whether the panels will work properly long term.

There appears to be a significant amount of evidence, based on documents received by

the Committee and supplied by DOE and others, indicating that DOE manipulated its analysis

and strategically modified evaluations in order to issue loans to First Solar that would qualify

133

Todd White and Marc Roca, Berkshire Buys $2 Billion Power Projects as Buffett Wagers on Solar Energy,

LOOMBERG, December 7, 2011 available at http://www.bloomberg.com/news/2011-12-07/berkshire-s-

midamerican-energy-to-buy-topaz-solar-farm.html.

134

“First Solar (FSLR) Worst Stock in S&P 500 This Year,” StreetInsider, December 30, 2011 available at

http://www.streetinsider.com/Insiders+Blog/First+Solar+(FSLR)+Worst+Stock+in+S%26P+500+This+Year/70468

26.html.

135

Patrick O’Grady, First Solar delays Mesa production plant, PHOENIX BUS. J., February 29, 2012 available at

http://www.bizjournals.com/phoenix/morning_call/2012/02/first-solar-delay-mesa-production-plant.html.

136

First Solar Ousts CEO, Shares Dive 24 Percent, REUTERS, October 25, 2011 available at

http://www.cnbc.com/id/45035458/First_Solar_Ousts_CEO_Shares_Dive_24_Percent.

137

Patrick O’Grady, SEC investigating First Solar, PHOENIX BUS. J., March 4, 2012 available at

http://www.bizjournals.com/phoenix/morning_call/2012/03/sec-investigating-first-sola.html.

138

Yuliya Chernova and Cassandra Sweet, California Solar Deal Hits a Snag, WALL ST. J., February 11, 2012

available at

http://online.wsj.com/article/SB10001424052970203646004577214973345400202.html.

139

O’Grady, supra note 132.

140

Ryan Randazzo, “First Solar replacing more solar panels,” The Arizona Republic, March 1, 2012 available at

http://www.azcentral.com/arizonarepublic/business/articles/2012/03/01/20120301first-solar-replacing-more-solar-

panels.html.

under the statutory guidelines. This is cause for serious concern. An application that should

otherwise fail, but instead passes under improper influence and through the manipulation of

analysis, results in the defrauding of taxpayers and misappropriation of assets.

141

B. DOE Violated the Statutory Requirement that Projects Commence Construction by

September 30, 2011

Furthermore,

any advantage to an applicant disadvantages other applicants and improperly diverts DOE

resources.

The Recovery Act states that the Secretary may only make loan guarantees under § 1705

for projects “that commence construction not later than September 30, 2011.”

142

This provision

is designed to effectuate the rapid deployment of renewable energy projects. Furthermore, §

3(b) of the Act mandates that the Secretary expend appropriated funds “as quickly as possible

consistent with prudent management,” so as to achieve the Act’s stated goal of economic

stimulus.

143

The DOE knowingly violated this explicit statutory mandate. The Department’s FIPP

loan guarantee solicitation from October 7, 2009, defined “commence construction on before

September 30, 2011” to mean that

This “shovel-ready” requirement also helps to mitigate risks associated with too

many unknown variables.

(i) the Borrower has completed all pre-construction engineering and design,

has received all necessary licenses, permits and local and national

environmental clearances, has engaged all contractors and ordered all essential

equipment and supplies as, in each case, can reasonably be considered

necessary so that physical construction of the Eligible Project may begin (or,

if previously interrupted or suspended, resume) and proceed to completion

without foreseeable interruption of material duration and (ii) such physical

construction (including, at a minimum, excavation for foundations or the

installation or erection of improvements) at the primary site of the Eligible

Project has begun (or resumed).

On September 30, 2011 – the last day of the program – the Secretary approved a $1.4

billion loan guarantee for Project AMP. Project AMP intends to install solar panels on the

rooftops of many of ProLogis’ extensive real estate holdings. However, as the September 2011

application approval deadline approached, Project AMP was nowhere near prepared to

commence construction, in part because it failed to secure contractual commitments to purchase

energy from its proposed solar generation facilities.

144

141

See discussion infra Part V.A. and V.B.

Construction cannot begin for any phase

of Project AMP until parties agree to a Power Purchase Agreement (PPA), which helps to ensure

sufficient revenue to justify an installation of solar panels. As of March 6, 2012, Project AMP

142

42 U.S.C. § 16516(a).

143

American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, §3(a), 123 Stat. 115 (2009).

144

Email from Eric Mogilnicki, WilmerHale, counsel to Bank of America, the lead lender for Project AMP (Mar. 6,

2012) (on file with author).

had not signed any PPAs, had not purchased any solar panels, and had not begun construction at

any locations.

145

Consistent with Project AMP’s lack of preparedness to commence construction, Fitch

Ratings imposed a “framework” methodology to rate the credit risk of Project AMP.

146

Fitch

explained that, due to a lack of negotiated prices, a lack of known product suppliers, and a lack

of PPAs, Fitch could not model cash flows or consider the credit quality of the businesses the

project would transact with.

147

For this reason, Fitch mandated the use of a framework approach

that imposed minimum credit quality requirements and other controls to ensure adequate credit

quality relating to future transactions.

148

Fitch also required that Project AMP return to Fitch to

receive ratings for each phase prior to seeking DOE loan disbursements consistent with the

framework approach.

149

As of March 6, 2012, Project AMP had not sought ratings for any phase

of Project AMP.

150

While the credit rating methodology appears appropriate given the circumstance, the need

to apply this approach reflects Project AMP’s failure to meet the specific requirements of the

law. Nonetheless, DOE approved Project AMP’s loan guarantee for $1.4 billion dollars. DOE

approval of this project on the final day with pressure from Secretary Chu reflects improper

influence and recklessness that led to an extremely large and inappropriate loan commitment.

This further clarifies the extent of Project AMP’s failure to commence

construction.

151

As we describe in Section D below, following DOE’s approval of Project AMP, natural

gas prices fell dramatically, resulting in substantially lower power prices in areas where natural

gas generation provides the marginal supply of power. Lower market prices for power reduce

potential revenue for all PPAs – in other words, solar power directly competes against natural

gas fired generation. Had Project AMP locked in PPAs at the time DOE approved its loan, this

loss of potential revenue would have been avoided. Given the lag between approval and PPA

negotiation, price risk materialized, likely reducing the aggregate value of Project AMP as a

direct consequence of Secretary Chu’s inappropriate approval.

Had DOE rejected Project AMP due to its failure to commence construction, the

government and participants in the project would have avoided misallocating capital to a project

that was premature.

C. DOE Violated the Statutory Requirement of “Superiority,” Illegally Benefiting

Banks at the Expense of Taxpayers

When it created the loan guarantee program, Congress took several steps to protect

taxpayer funds and limit the DOE’s risk exposure. These restrictions are recited in § 1702 of the

145

Id.

146

See Fitch Ratings, “Credit Rating for ProSun Project Company, LLC. - Project AMP” (August 21, 2011).

147

See id. for additional detail on ratings approach provided through discussions with Fitch Ratings staff responsible

for Project AMP ratings and Bank of America staff involved with Project AMP.

148

Id.

149

Id.

150

Mogilnicki, supra note 144.

151

See Ryan Tracy and Cassandra Sweet, Emails Show Chu’s Loan-Deal Role, WALL ST. J., Feb. 18, 2012 available

http://online.wsj.com/article/SB10001424052970204059804577229661338221828.html.

Energy Policy Act and by statute apply to all loan guarantees issued under title XVII.

152

One of

the most important risk-limiting provisions requires the Secretary to secure a superior claim to

any assets in the event of a default.

153

The statute unequivocally requires that these rights must

be “superior to the rights of any other person.”

154

This common-sense rule ensures that if the

U.S. government is on the hook to pay off creditors, it should be able recover at least some of its

losses.

This right to superiority over collateral is appropriate given that taxpayers enabled the

transaction through provision of a subsidy. Given the substantial risk associated with DOE loan

guarantees and the lack of any potential for the taxpayer to profit, the law required that the DOE

at least maintain a superior position with respect to collateral to protect taxpayers in the event

that a project failed. Private banks stand to profit if a project succeeds, while also avoiding

substantial downside risk if a project fails. Given these clear benefits to lenders, Congress

determined that lenders should not also gain parity with the DOE on the rights of collateral and

inserted the “superiority” provision to prevent weakening the taxpayer’s position.

In what can only be considered a preemptive bailout for banks, DOE eliminated taxpayer

protections by agreeing to share its rights in the collateral of failed projects with private lenders.

Notwithstanding the clarity of the statutory requirement and the policy basis for it, the DOE

enacted regulations that allowed banks to gain parity with the United States with regard to

collateral.

155

While this may have increased its lending authority, it did so by weakening the

taxpayer’s protections.

A review of the seven Financial Institution Partnership Program based loan guarantees

reveals that DOE agreed to share its collateral rights with the lenders for all FIPP loans issued

after enactment of the DOE regulations.

156

Instead of selectively sharing collateral for the safest

projects, DOE instead applied this approach to all FIPP loans, irrespective of the highly varying

deal terms, credit quality and loan amounts.

157

In no case did DOE withhold this benefit from

banks to protect taxpayers. In effect, DOE behaved as if its new interpretation of the law

mandated that banks be placed on par with taxpayers.

1. Superiority of Rights vs. Pari Passu Sharing

In the event of a default, a loan guarantee provides assurances to banks and other lenders

that they will recover 80% of the money loaned to the renewable energy project.

158

152

42 U.S.C. § 16512 (“… the Secretary shall make guarantees under this or any other Act for projects on such

terms and conditions as the Secretary determines, after consultation with the Secretary of the Treasury, only in

accordance with this section).

This money

comes from the American taxpayer. Under the system designed by Congress, while taxpayers

153

42 U.S.C. § 16512(g)(2)(B) (“The rights of the Secretary, with respect to any property acquired pursuant to a

loan guarantee or related agreement, shall be superior to the rights of any other person with respect to the property”).

154

Id.

155

74 Fed. Reg. 63,544 (Dec. 4, 2009) (to be codified at 10 C.F.R. pt. 609).

156

See “Terms and Conditions relating to loan agreements for all DOE-backed FIPP projects agreed to after

December 4, 2009” (on file with author).

157

Id.

158

See 42 U.S.C. § 16512(c) (stating “a guarantee by the Secretary shall not exceed an amount equal to 80% of the

project cost of the facility that is the subject of the guarantee…”).

are on the hook for at least 80% of the loan in case of default, they will at least be in first

position to try to recover their investment based on the sale of the defaulting company’s

assets.

159

The Department of Energy’s approach ignores the plain letter of the law. Section

1702(g)(2)(B) contains the Superiority of Rights provision (“Superiority”).

However, under the contracts awarded under § 1705, DOE included pari passu terms,

which puts a lender in a position equal to the taxpayer with respect to rights to collateral.

160

Consider the following hypothetical example:

Superiority

provides that “[t]he rights of the Secretary, with respect to any property acquired pursuant to a

guarantee, shall be superior to the rights of any other person with respect to the property.” The

statute clearly requires that DOE maintain superiority with regard to assets acquired as a result of

a guarantee, and, as a result, precludes sharing the collateral with other creditors. Such sharing

of collateral also flies in the face of the FIPP program requirements, which mandate loan

guarantees to cover no more than 80% of any loan.

DOE guarantees 80% of a billion dollar loan, which defaults. Upon default, the DOE

pays $800 million to the senior creditor protected by the DOE loan guarantee. Assume the

leftover assets are worth $500 million. Under this Administration’s pari passu construct, DOE

shares its senior rights to the recovery with the senior lenders, who already received $800 million

from the loan guarantee. Therefore, DOE recovers 80% of the $500 million recovery, or $400

million; the non-guaranteed lenders recover an additional 20% of the $500 million, which equals

$100 million.

Recall that the lenders already recovered $800 million for their guaranteed portion. This

means that in the aggregate, the private lenders that received the DOE loan guarantee recovered

$900 million of the total billion dollar loan or 90%. Yet the law intended for taxpayers to be in

first position with respect to the full $500 million in this hypothetical. Accordingly, Pari Passu

terms directly violate the FIPP solicitation requirements.

2. Congress Specifically Considered and Rejected Changes to the Superiority

Provision that Would Have Allowed for Pari Passu Credit Terms

Supporters of pari passu credit terms for DOE loan guarantees sought to change the law

to allow for such credit structures. On July 16, 2009, Senate Bill S. 1462, which would have

modified Title XVII to allow for pari passu credit terms by disabling the Superiority provision,

was passed by the Senate Energy and Natural Resources Committee, but failed to pass the full

Senate.

161

The time invested in drafting a bill and seeking to pass it in both the Senate and the

House reflects the effort and analysis that many lawmakers put into this issue. This is the

clearest evidence that Congress does not recognize the DOE’s authority to provide § 1705 loans

Also, in the last Congress, the House of Representatives passed “Cap and Trade,”

under H.R. 2454. That bill had an identical provision to disable Superiority under Title XVII.

H.R. 2454 also failed to become law.

159

See 42 U.S.C. § 16512(g)(2)(B).

160

Id.

161

See S. 1462, 111th Cong. § 103(b)(3) available at http://energy.senate.gov/public/_files/s1462pcs1.pdf.

with pari passu terms. Rather, the law requires Superiority to apply to any property acquired

pursuant to the original guarantee or binding agreement to provide a guarantee.

3. The Department of Energy Knowingly Violated the Law

Notwithstanding Congress’s rejection of these bills that were designed to weaken

taxpayer protections, on December 4, 2009, the DOE issued final regulations to allow for pari

passu treatment of DOE loan guarantees.

162

The Committee raised these concerns in a letter to the Secretary dated December 7,

2011.

By these actions, the DOE disregarded the law and

Congress. The specific approach used in both S. 1462 and H.R. 2454 highlights the fact that the

law currently does not allow for pari passu treatment specifically due to the Superiority

provision. DOE’s awareness of Congress’s failure to change the law indicates DOE understood

it may be violating the law when it provided loan guarantees with pari passu credit terms.

163

The Department of Energy responded by asserting that § 1702(g)(2)(B) only “governs

post-default rights of the Secretary, rather than conditions that must be met at the time the

Secretary determines to make a loan guarantee.”

164

Under the DOE’s interpretation of the

statute, “[o]nce the Secretary has actually acquired property through the Secretary’s right of

subrogation in a post-default situation, the statute provides that, as a matter of law, the

Secretary’s rights in that acquired property are superior to any other claimant with respect to that

requirement.”

165

The Department’s interpretation is lacking on three levels. First, the Secretary can only

secure his superior of rights in collateral before entering in a loan guarantee contract. To say §

1702(g)(2)(B) only applies after a default renders the provision useless. Second, the preceding

quotation from the DOE’s response letter evinces the circularity of its logic: once the Secretary

has actually acquired property through the right of subrogation, there is no need to provide for a

superiority of rights: he has already acquired the property. Finally, the Department’s

interpretation ignores Congress’ clear pronouncements of its understanding that § 1702(g)(2)(B)

prohibits pari passu terms. The DOE has never addressed these clear statements of

congressional intent.

IV. DOE Has Artificially Inflated Job Creation Statistics

One characteristic of ”green jobs” often touted by the Obama Administration is that green

industries rely heavily on manpower, a trait that “makes them especially alluring when it comes

to government-led job creation” measured in terms of jobs “created or saved.”

166

In studies

heralding the creation of large numbers of jobs in green jobs programs, there is a consistent

preference for inefficiency.

167

162

74 Fed. Reg. 63544, 63545 (Dec. 4, 2009) (to be codified at 10 C.F.R. pt. 609).

This is contrary to the fundamental economic principle that high

163

Letter from Darrell Issa, Chairman, H. Comm. on Oversight and Gov’t Reform, to the Honorable Steven Chu,

Sec’y of Energy (Dec. 7, 2011).

164

Letter from David G. Frantz, Acting Executive Director, Department of Energy Loan Program Office, to Darrell

Issa, Chairman, H. Comm. on Oversight and Gov’t Reform (Jan. 19, 2012).

165

Id.

166

Liz Wolgemuth, The Truth and Green Jobs, U.S. NEWS AND WORLD REPORT, Mar. 25, 2009 available at

http://money.usnews.com/money/careers/articles/2009/03/25/the-truth-about-all-those-green-jobs.

167

Witnesses Provide Various Definitions of Green Jobs Before House Workforce Panel, DAILY LABOR REPORT,

Apr. 4, 2009 at 60.

labor productivity is a measurement of an efficient and healthy economy.

168

The DOE’s 1705

Loan Guarantee Program follows this flawed principle precisely. According to a leading expert,

an economy based on “high paying, low-productivity jobs … would require an economic

structure unknown in human history.”

169

While the energy sector is a very large source of employment, it is a mistake to treat it as

a government jobs program. Dr. David Montgomery, Senior Vice President at NERA Economic

Consulting and a former CalTech professor, has explained:

It is a fundamental error in policymaking and economics to design or

justify federal support for new energy technologies as a jobs program.

It subverts the entire purpose of government involvement in R&D, and

is the greatest single cause of the continued failure of energy

technology programs.

170

However, even accepting the premise that it is appropriate to base a jobs program on

green energy development, the Administration fails at this objective.

In almost every public statement about its loan guarantee program, DOE touts job

creation. DOE’s Loan Programs Office webpage proudly proclaims that DOE expects the loans

and loan guarantees to “employ” over 60,000 people.

171

One example of DOE’s misrepresentation of jobs figures relates to a DOE loan guarantee

to Ford Motor Company. DOE proclaims that this project, funded through the ATVM program,

accounts for 33,000 of the 61,383 jobs. However, these jobs, which DOE represents to be

“permanent jobs created or saved,” already existed. Upon closer examination, it appears that

DOE reports that the DOE loan “converted” existing jobs to green energy jobs.

The site also breaks down the number

of jobs created or saved by each loan or loan guarantee, and issues press releases for specific

projects discussing job creation. These figures are misleading. In reality, the 60,000 number

includes jobs that existed at one time, but have since been eliminated; jobs that exist independent

of the loan program; and jobs that already existed, but are now considered “green jobs.”

172

168

Green Jobs and Red Tape: Assessing Federal Efforts to Encourage Employment: Hearing Before the Subcomm.

On Investigations and Oversight of the H. Comm. on Science, Space, and Technology, 112

Cong. (2011)

(testimony of W. David Montgomery).

Had no loan

occurred, presumably, the factory would continue to produce non-green energy vehicles; there is

no evidence that Ford planned to lay off 33,000 employees if the company had not received the

loan. This jobs statistic is also misleading given the statements of David Frantz, Acting

Executive Director Loan Program Office and Acting Director ATVM to Committee staff. Mr.

169

Andrew P. Morriss et. al., 7 Myths About Green Jobs, PERC Policy Series, No. 44, 2009 available at

http://www.perc.org/files/ps44.pdf .

170

Prepared Testimony of W. David Montgomery before the Subcomm. on Investigations and Oversight, H. Comm.

on Science, Space and Technology, Apr. 13, 2011, available at http://www.nera.com/nera-

files/Montgomery_Testimony_4_13_11.pdf

171

U.S. Dep’t of Energy Loan Programs Office, “Projects” available at: https://lpo.energy.gov/?page_id=45.

172

U.S. Dep’t of Energy Loan Programs Office, “Projects: Ford Motor Company” available at

https://lpo.energy.gov/?projects=ford-motor-company.

Frantz stated during a phone interview, “[ATVM] is not a jobs program. [Job creation] is not a

governing factor when we do a deal. It’s only a matter of record.”

173

DOE also includes failed projects and a project that refused DOE funding in its job

creation numbers. Despite Solyndra going bankrupt and firing all of its employees, as of

February 20

, 2012, DOE still lists Solyndra as creating 3,000 construction jobs (see figure

below). While those jobs may have briefly existed, touting jobs for a defaulted project that lost

hundreds of millions in taxpayer dollars and including those jobs in a total jobs count

prominently displayed on DOE’s website is inappropriate and misleading.

173

Interview with David G. Frantz Acting Director ATVM Program Jan. 13, 2012.

DOE continues to include in its list of projects a $105 million loan guarantee it finalized

with POET, LLC to build an ethanol plant. According to DOE’s website, POET, LLC’s loan

guarantee will create 40 permanent jobs and 200 construction jobs. However, POET announced

on January 23, 2012, that it had decided not to accept the DOE loan guarantee because it had

acquired private financing.

174

DOE also includes 180 jobs that Abound Solar announced, on February 29, 2012, it will

be laying off due to a “retooling” of manufacturing facilities. Abound struggles to compete with

Chinese manufactures that provide a comparable solar panel for a more competitive price. When

asked about the layoffs, Abound’s CEO, Craig Witsoe, stated, “We hate to have any job loss in

the company. But it was the right decision for the business."

Despite POET declining DOE’s money, as of February 20, 2012,

DOE had continued to include it in its job creation numbers (see figure below).

175

174

Timothy Gardner, Ethanol maker POET declines U.S. government loan aid, REUTERS, Jan. 23, 2012 available at

Of the $400 million DOE loan

guarantee received by Abound, the company had already drawn down $70 million at the time of

the layoffs.

http://www.reuters.com/article/2012/01/23/us-usa-ethanol-loanaid-idUSTRE80M20K20120123 .

175

Matthew Mosk, More Green Energy Layoffs: Colorado Solar Firm Cuts Workforce in Half, ABC NEWS, Feb. 29,

2012 available at

http://abcnews.go.com/Blotter/abound-solar-lays-off-180-workers/story?id=15816806.

DOE also incorporates jobs figures for Fisker Automotive (Fisker), which announced a

26 employee layoff on February 6, 2012, at their Wilmington, Delaware plant, as well as for

Beacon Power Corp, which filed for Chapter 11 bankruptcy in October 2011, eliminating 34

construction and permanent jobs.

In addition to misleading the public regarding the number of permanent jobs created by

the loan program, DOE obfuscates the number of jobs “created” by combining temporary and

permanent jobs. For each listed loan and loan guarantee project, DOE provides a figure for

permanent jobs and construction jobs. As loan projects generally require significant

construction, these projects predominantly create temporary construction jobs, which terminate

upon a project’s completion. For example, solar generation projects require few permanent

employees to maintain and operation the facility. In the case of Antelope Valley Solar Ranch,

DOE’s posting reflects 350 temporary construction jobs and only 20 permanent jobs.

Nonetheless, DOE reports the number of jobs “saved or created” as 370, even though 95% are

temporary.

V. The Broken Process for Awarding Loan Guarantees

A. External Pressures on the Program

DOE’s Inspector General explained that the administration of Recovery Act funds proved

to be “more challenging that many had originally envisioned,”

176

and specifically asserted that

“the loan guarantee program could not always readily demonstrate through documentation how it

resolved or mitigated relevant risks prior to granting loan guarantees.”

177

The Revolving Green Door

In addition to these

concerns, the Committee has also discovered the existence of a revolving door of persons who

worked at green energy investment groups only to later be hired by the Administration, which

present significant conflicts of interest. These connections raise the specter of undue influence

over the loan guarantee process.

Nancy Ann DeParle

Nancy Ann DeParle, the current Deputy Chief of Staff for Policy in the White House, had

a financial stake in the success of Granite Reliable, which received $168.9 million loan from

DOE. Prior to joining the White House, DeParle was a Managing Director of multi-billion dollar

private equity firm CCMP and she both had a financial interest in and sat on the Board of

Directors for Noble Environmental Power, LLC.

178

176

The Green Energy Debacle: Where Has All the Taxpayer Money Gone?: Hearing Before the Subcomm. on

Regulatory Affairs, Stimulus Oversight, and Government Spending of the H. Comm. on Oversight and Gov’t Reform,

112th Cong. (2011) (statement of Gregory Friedman, Inspector General, U.S. Dep’t of Energy).

Noble owned Granite Reliable, a wind

177

Id.

178

CCMP Capital Company Website available at http://www.ccmpcapital.com/.

energy project.

179

Prior to her departure, her position on Noble’s board of Directors positioned

her to understand the most confidential and material aspects of Noble Environmental and its

subsidiary Granite Reliable. DeParle misrepresented her relationship with Noble Energy,

claiming on disclosure forms that her interest had been divested, when in fact it had merely been

transferred to her 10 year old son.

180

During her time at the White House, Granite Reliable sought and, in September 2011,

obtained a partial guarantee of a $168.9 million loan.

181

Michael Froman

Granite Reliable’s application for a DOE

loan guarantee was made at least by early 2010, and probably earlier than that, according to

signed documents relating to the loan application. Noble sold Granite Reliable in December 2010

to Brookfield Asset Management, just 6 months prior to the conditional approval of the DOE

loan guarantee and deep into the application process. The DOE loan guarantee was conditionally

approved on June 2011 and finalized in September 2011. DeParle’s ownership stake in Noble,

which owned Granite Reliable, a beneficiary of a DOE loan, represents a clear conflict of

interest.

Michael Froman currently serves as the Deputy Assistant to the President and Deputy

National Security Advisor for International Economic Affairs.

182

He was a friend of President

Obama’s from law school,

183

and supported his political career by bundling over $200,000 for

his 2008 presidential candidacy.

184

Prior to his arrival at the White House, Froman was the Managing Director of Alternative

Investments at Citigroup,

185

where he managed infrastructure and sustainable development

investments.

186

Citigroup became a major investor in SolarReserve,

187

which ultimately received

a $737 million loan guarantee in September 2011.

188

179

Press Release, Noble Environmental Power, Noble Environmental Power Signs Agreement for the Sale of its

Interest in its New Hampshire Wind Project (Dec. 7, 2010) available at

http://www.noblepower.com/pressroom/documents/10-12-7_NEP-

SignsAgreementForSaleOfNHWindProject_Final.pdf.

180

Nancy Ann DeParle, Executive Branch Personnell Public Financial Disclosure Report (Mar. 9, 2009) available at

http://www.scribd.com/doc/62509267/DeParle-Nancy-Ann-278-10A.

181

U.S. Dep’t of Energy Loan Programs Office, 1705 Program, “Projects: Granite Reliable” available at

https://lpo.energy.gov/?projects=granite-reliable.

182

Center for Responsive Politics, “Barack Obama Bundlers,” OpenSecrets available at

http://www.opensecrets.org/pres08/bundlers.php?id=N00009638.

183

Jonathan Weisman, Obama Taps Froman For Joint Security, Economic Post, WALL ST. J., Jan. 30, 2009

available at

http://online.wsj.com/article/SB123328110238231817.html.

184

OpenSecrets, supra note182.

185

DealBook, Citigroup Fund Hit a Speed Bump, N.Y. TIMES, July 20, 2009 available at

http://dealbook.nytimes.com/2009/07/20/citigroup-funds-hit-speed-bump/?ref=michaelfroman.

186

Press Release, Harvard Law School, Michael Froman ’91 joins White House in joint security, economic post

(Feb. 3, 2009) available at

http://www.law.harvard.edu/news/2009/02/03_froman.html.

Steve Westly

Steve Westly co-founded the Westly Group, a clean energy venture capital firm that,

according to DOE records, has reaped over $600 million in DOE loans for its portfolio of

investments.

189

One recipient company was Tesla Motors,

190

a premium electric vehicle

manufacturer to which DOE awarded a $465 million loan guarantee in January 2010.

191

Westly

also sat on Tesla’s Board of Directors in the company’s early days.

192

Westly is a personal friend of President Obama and bundled over $500,000 for his 2008

campaign.

193

Since the election, Westly has visited the White House multiple times for both

business and pleasure, and has privately dined with the President in small group fundraising

settings.

194

After President Obama’s election, Westly was rumored to have been a primary candidate

for Energy Secretary.

195

When Secretary Chu received the appointment, Westly was given the

opportunity to serve on an advisory board to the DOE, “a pivotal [sic] advisory committee that

made recommendations to the secretary on alternative energy policies.”

196

One committee

initiative included a recommendation to modify federal rebates for electric cars, a change that

would benefit companies such as Westly Group’s Tesla.

197

E-mails released by the White House

also indicate that Westly’s advisory role gave him access to Obama’s top advisors and senior

White House officials, including advisor Valerie Jarrett.

198

David Sandalow

187

Jim McElhatton, Feds guarantee $1 billion in new solar loans, WASH. TIMES, Sept. 28, 2011 available at

http://www.washingtontimes.com/news/2011/sep/28/feds-guarantee-1-billion-in-new-solar-loans/?page=all.

188

U.S. Dep’t of Energy Loan Programs Office, “1705 Program: Projects” available at

https://lpo.energy.gov/?page_id=45.

189

Carol D. Leonigg and Joe Stephens, Venture capitalists play key role in Obama’s Energy Department, WASH.

POST, Feb. 14, 2012 available at http://www.washingtonpost.com/politics/venture-capitalists-play-key-role-in-

obamas-energy-department/2011/12/30/gIQA05raER_story.html.

190

The Westly Group Company Website, “Portfolio” available at http://westlygroup.com/portfolio/.

191

U.S. Dep’t of Energy Loan Programs Office, Advanced Technology Vehicle Manufacturing Program, “Projects:

Tesla Motors” available at

https://lpo.energy.gov/?projects=tesla-motors.

192

Stephen Frank, “Steve Westly: the Lynchpin to Funny White House Loans,” California Political News and Views

(Oct. 17, 2011) available at

http://capoliticalnews.com/2011/10/17/steve-westly-the-linchpin-to-funny-white-house-

loans/.

193

Id.

194

Id.

195

Id.

196

Leonnigg and Stephens, supra note 189.

197

Frank, supra note 192.

198

Leonnigg and Stephens, supra note 189.

David Sandalow currently serves as the Assistant Secretary for Policy and International

Affairs at DOE, where he acts as Secretary’s Chu’s principal adviser on energy policy as well as

coordinates DOE’s foreign policy involvement.

199

Sandalow’s ties to the White House date back to the Clinton Administration, during

which he worked with President Clinton on environmental issues.

200

After having gained this

experience, Sandalow became the influential Chair of the Energy & Climate Working Group of

the Clinton Global Initiative.

201

He went on to advise President Obama’s presidential campaign

in 2008.

202

Prior to joining the Obama Administration, Sandalow was a senior advisor to Good

Energies, Inc., an energy-focused venture capital firm.

203

Good Energies is an investor in

SolarReserve,

204

a solar power company that received a $737 million loan guarantee from DOE

in September 2011.

205

Sanjay Wagle

Sanjay Wagle has most recently served as Renewable Energy Advisor to DOE under

Secretary Chu, where he helped oversee the $11 billion renewable energy program under the

Recovery Act.

206

Wagle was an Obama fundraiser for the 2008 presidential campaign, garnering

much of his support through his Clean Tech for Obama group. Another venture capitalist that has

acquired an influential role at DOE, his industry colleagues believed that Wagle, among others,

“would help ensure commercial successes from ‘the steady flow of dollars coming out of

DC.’”

207

Prior to arriving in Washington, Wagle was a principal at Vantage Point Venture Partners

(Vantage Point), a cleantech venture capital firm whose investments received $2.4 billion in

taxpayer funds.

208

199

Energy.gov, “About Us: David Sandalow” available at

Among them were Brightsource, which received $1.6 billion for solar

generation; Tesla Motors, which received $465 million for electric car manufacturing; and

http://energy.gov/contributors/david-sandalow; “Who

Runs Gov: David Sandalow,” W

ASH. POST available at http://www.washingtonpost.com/politics/david-

sandalow/gIQAR6wHAP_topic.html.

200

“Who Runs Gov: David Sandalow,” supra note 199.

201

Id.

202

Id.

203

Press Release, The White House, President Obama Announces More Key Administration Posts (Mar. 20, 2009)

available at

http://www.whitehouse.gov/the-press-office/president-obama-announces-more-key-administration-

posts-32009.

204

Good Energies Company Website, “Investments” available at

http://www.goodenergies.com/investment/companies.

205

U.S. Dep’t of Energy Loan Programs Office, 1705 Program, “Projects: SolarReserve, LLC” available at

https://lpo.energy.gov/?projects=solarreserve-llc-crescent-dunes.

206

Leonnigg and Stephens, supra note 189; Event Announcement, Full Circle Fund, Environment/Energy Circle

Meeting (Nov.16, 2011) available at

http://www.fullcirclefund.org/event.php?id=838.

207

Leonnigg and Stephens, supra note 189.

208

Id.

Mascoma, which received $80 million for an ethanol plant.

209

Wagle left Vantage Point and

moved to DOE shortly after Obama’s election, “just as the administration embarked on a

massive program to stimulate the economy with federal investments in clean-technology

firms.”

210

His former firm and the companies it invested in, therefore, had a large stake in the

financing decisions being made by DOE at the time.

211

Steve Spinner

Steve Spinner served as an advisor to Secretary Chu from April 2009 to September 2010.

In that position, Spinner helped oversee the strategic operations of the clean energy loan

guarantee program under the Recovery Act.

212

Spinner was previously an energy-focused

venture capitalist and high-tech consultant.

213

He is also an Obama bundler, having raised over

$500,000 for the President in 2008,

214

and over $200,000 thus far for 2012.

215

Spinner’s wife, Allison Berry Spinner, is a partner at Wilson Sonsini Goodrich & Rosati,

the law firm that represented Solyndra on matters related to the DOE loan.

216

According to

federal records, the firm received at least $2.4 million in federal funds for legal fees related to the

representation.

217

White House e-mails released late last year indicate that Spinner was influential in

securing the $528 million loan to now-bankrupt Solyndra. Many of those emails were written

just days after he signed an ethics agreement pledging that he would “not participate in any

discussion regarding any application involving” his wife’s law firm.

218

In one message to a DOE

official on August 28, 2009, Spinner wrote, “How hard is this? What is he waiting for? . . . I have

OVP and WH breathing down my neck on this.”

219

The e-mail went on to demand that the DOE

official “walk over there and force [the official working on the Solyndra evaluation] to give

[him] an answer.”

220

After just being contacted by Solyndra, Spinner inquires in another e-mail,

“Any word on OMB? Solyndra’s getting nervous.”

221

209

Id.

The e-mail correspondence occurring in

the final days before the Solyndra loan closed in September 2009 centers heavily on Spinner’s

210

Id.

211

Id.

212

Matthew Daly, Steve Spinner, Energy Department Advisor, Pushed Solyndra Loan, Emails Show, HUFFINGTON

POST, Oct. 7, 2011 available at http://www.huffingtonpost.com/2011/10/07/obama-fundraiser-pushed-

s_n_1000826.html.

213

Matthew Mosk, Obama Fundraiser Pushed Solyndra Deal From Inside, ABC NEWS, Oct. 7, 2011 available at

http://abcnews.go.com/Blotter/obama-fundraiser-pushed-solyndra-deal-inside/story?id=14691618#.TzrE9MXQIsI.

214

OpenSecrets, supra note 182.

215

BarackObama.com, “Obama For America Victory Fund 2012 Volunteer Fundraisers” available at

http://www.barackobama.com/pages/volunteer-fundraisers-Q2/.

216

Mosk, supra note 213.

217

Daly, supra note 212.

218

Mosk, supra note 213.

219

Id.

220

Id.

221

Id.

efforts to coordinate plans for either the President or Vice President to announce the first loan

approval at a scheduled visit to Solyndra.

222

Peter Weeks

Peter Weeks currently serves as Clean Energy Advisor at DOE, a position to which he

was appointed in March 2009.

223

To be clear, there is no apparent connection between Mr.

Weeks and a project that received a loan from DOE. However, his profound lack of experience

in the renewable energy arena before being named as a top DOE advisor causes some concern.

Prior to joining the Administration, Weeks’s resume consisted primarily of Democratic

campaign positions with groups such as Obama for America, Maine Democratic Party, Kerry for

President, and Gephardt for President.

224

His prior experience was limited to communications

and politics, and includes no record of any energy policy expertise.

225

According to Weeks, his work at DOE has included helping to “develop due diligence

and procurement plans of 200 awards worth over $10 billion,” as well as “manage two multi-

billion dollar energy tax programs.”

226

Additionally, Department e-mails also indicate that

Weeks participated in meetings with and had access to high-level officials,

227

including Ron

Bloom, giving him the opportunity to participate in decisions and exert some degree of

influence.

228

It is puzzling how someone without any prior energy, project management, or finance

experience would be appointed to a position with responsibilities of this magnitude and

particular nature. A private sector institution responsible for due diligence for billions of dollars

in loans would never trust someone with only campaign experience to be involved with such

technical issues. Given Weeks’s consistent history of strong support of the Democratic Party and

President Obama, his appointment adds to the perception that many of the Administration’s

decisions have been driven by politics as opposed to any viable, coherent, energy policy.

Weeks’s position at DOE appears to involve highly technical issues with high

stakes and great sensitivity.

VI. Concerns Relating to Section 1705 Loan Guarantee Recipients

A. Solopower at CCC+ Setting the Standard for Inappropriate Loan Commitments

222

Id.

223

Peter Weeks, Linked In, Profile available at http://www.linkedin.com/in/weekspeter.

224

Id.

225

Id.

226

Id.

227

E-mail from Peter Weeks, Clean Energy Advisor, U.S. Dep’t of Energy, to Brandon Hurlbut, Udai Rohatgi, Peter

Gage, Tom Reynolds, and Rachel Tronstein (Feb. 23, 2011, 6:36 PM EST) (on file with author).

228

Id.

Solopower is a European firm that seeks to build a solar factory in Oregon. Solopower

accepted $40 million of Oregon taxpayer money in addition to DOE’s approval of a $197 million

loan via the Federal Financing Bank (FFB).

229

We believe that [average selling price (ASP) per watt] could decline to

$1 or less within the next 1-2 years. From the output provided by the DOE,

we concluded that even if SoloPower achieves the efficiency and yield

projections of the DOE’s base case, an ASP of $1 or less would severely

strain SoloPower’s ability to meet its debt service obligations.

They received this federal assistance despite a

rather dire prediction of Solopower’s prospects by Standard & Poor’s (S&P). According to

internal documents obtained by the Committee, S&P warned DOE that:

230

In other words, S&P predicted that Solopower will fail to meet its debt obligations.

Additionally, the loan’s already extremely poor S&P rating of CCC+ appears to depend on

lender protections that prevent loan disbursements unless benchmarks are met:

It is to lenders’ advantage that the company will not have access to the

credit facility until it constructs and operates Line 1A at expected levels of

performance. Similarly, the company cannot make the first or subsequent

draws unless 30% of installed capacity is under contract to be sold.

231

According to S&P, these lender protections enable S&P to provide a CCC+.

232

The story of Solopower reflects a very concerning form of waste that creates substantial

uncertainty as a byproduct, tying up private investor capital and federal funds until the entity

fails (or succeeds) to achieve targeted benchmarks. If Solopower fails to achieve success

sufficient to receive DOE funds, then those private investors anticipating the benefit of DOE

loans will suffer substantial loss, resources will have been wasted, and employees will be let go

after a short time. However, if Solopower meets the requirements for disbursement, then the

likelihood for failure and loss to the taxpayer are significant as the base case for the panel

manufacturer’s production costs does not reflect expectations for sufficiently competitive

pricing.

In short,

the primary protection against losing $197 million of taxpayer money is the small chance that

Solopower will ever get the money. Without these protections, it can only be presumed that the

credit rating would fall to levels reflecting default.

What Solopower lacked in economic value, it made up for in political connections.

Unlike other 1705 loan guarantee recipients, Solopower exerted bipartisan political influence on

DOE through strong ties to both the Bush and Obama Administrations. Solopower itself built

the ties to the Obama Administration. Bruce Khouri, who served on the Board of Directors

233

229

Ted Sickinger, Solyndra Meltdown a Cautionary Tale for Oregon and SoloPower, its Latest Solar Bet, The

Oregonian, Sept. 27, 2011, available at http://www.oregonlive.com/business/index.ssf/2011/09/

solyndras_plight_casts_cautionary_tale_for_oregon_and_solopower_its_latest_solar_bet.html.

230

Standard &Poors Credit Report, Solopower, Inc., July 11, 2011 (on file with author).

231

Id.

232

Id.

233

Board of Directors, Solopower,available at http://www.solopower.com/brucekhouri.html (last visited Mar. 15,

2012).

and now serves as the Chief Commercial Officer,

234

donated $28,500 to the Democratic National

Committee’s “Obama Victory Fund” in 2008.

235

Lou DiNardo, who served as interim CEO

236

and now serves as Chairman of the Board of Directors, previously worked as a General Partner

at VantagePoint Venture Partners where DOE stimulus advisor Sanjay Wagle worked.

237

Solopower, based in San Jose, California, developed an ally in Democratic San Jose Mayor

Chuck Reed. Mayor Reed sent letters to DOE and talked with DOE’s Jonathan Silver in person

to advocate for and attempt to speed up Solopower’s loan guarantee.

238

Hudson Clean Energy Partners, the biggest investor in Solopower,

239

had strong ties to

the Bush-era DOE. Craig Cornellius, a member of the Board of Directors at Solopower and

Managing Director at Hudson Clean Energy Partners, and Alexander Karsner, a member of the

Hudson Clean Energy Partners Advisory Board, both worked in renewable energy positions for

DOE during the Bush Administration.

240

Another Managing Partner for Hudson Clean Energy

Partners, Neil Auerbach, donated tens of thousands of dollars to Republicans in 2008.

241

Hudson

Clean Energy Partners also retained BlueWater Strategies to lobby both branches of Congress

and the White House.

242

According to BlueWater Strategies’ website, Andrew Lundquist,

founder and Managing Partner, “led George W. Bush’s transition team for the Department of

Energy” and “served as a senior advisor and strategist on energy issues for the President and

Vice President.”

243

With its ties to DOE officials in both the previous and current Administrations,

Solopower had people on both sides of the political aisle that could use their influence to

pressure DOE into issuing and finalizing Solopower’s loan guarantee.

B. Beacon Power: Taxpayers Predictably Lose Millions

Led by CEO F. William Capp – an Obama donor

244

– Beacon Power became the second

1705 loan guarantee recipient to go bankrupt on October 31, 2011.

245

234

Management,Solopower,available at

Despite warnings from

http://www.solopower.com/management.html (last visited Mar. 15, 2012).

235

Federal Election Commission, FEC Form 3X filed by 2008 Obama Victory Fund, at 1650.

236

Press Release SoloPower Prepares for Market Entry and Names Lou DiNardo as Interim CEO, July 8, 2009,

available at http://www.solopower.com/ceov11.html.

237

Lou DiNardo,SoloPower, Aavailable at http://www.solopower.com/loudinardo.html (last visited Mar. 15, 2012).

238

Aaron Glantz, After Solyndra, a 2

Solar Energy Firm Is Scrutinized, N.Y. TIMES, Oct. 15, 2011, available at:

http://www.nytimes.com/2011/10/16/us/after-solyndra-a-2nd-solar-energy-firm-is-scrutinized.html?pagewanted=all.

239

Id.

240

Joel Gehrke, Solopower, a Connected Company with DOE Support, THE EXAMINER, Nov. 9, 2011, available at

http://campaign2012.washingtonexaminer.com/blogs/solopower-connected-company-doe-support.

241

Aaron Glantz, After Solyndra, a 2

Solar Energy Firm Is Scrutinized, N.Y. TIMES, Oct. 15, 2011, available at:

http://www.nytimes.com/2011/10/16/us/after-solyndra-a-2nd-solar-energy-firm-is-scrutinized.html?pagewanted=all.

242

Id.

243

Andrew D. Lundquist, available at http://www.bwstrategies.com/

index.php?option=com_content&task=view&id=35&Itemid=22 (last visited Mar. 15, 2012).

244

Center for Responsive Politics, available at http://www.opensecrets.org/indivs/

search.php?name=capp&state=MA&zip=&employ=&cand=&c2012=Y&c2010=Y&c2008=Y&sort=N&capcode=w

sp3w&submit=Submit+your+Donor+Query (last visited Mar. 15, 2012).

245

Dawn McCarty, Beacon Power, Backed by U.S. Loan Guarantees, Files Bankruptcy, BLOOMBERG, Oct. 31,

2011, available at: http://www.businessweek.com/news/2011-10-31/beacon-power-backed-by-u-s-loan-guarantees-

files-bankruptcy.html.

both S&P and its own internal analysis regarding risky business models, DOE proceeded with a

deal that will cost taxpayers millions in losses.

Before its demise, Beacon Power relied on funding from the federal government. DOE

gave Beacon Power over $25 million in grants.

246

However, the largest investment came when

DOE announced a conditional $43 million loan guarantee to Beacon Power on July 2, 2009, to

create a “20 megawatt flywheel energy storage plant” in Stephentown, New York.

247

In April

2010, S&P evaluated the loan guarantee project and assigned it a dismal CCC+ credit rating,

even though the rating incorporated the benefit of the $43 million loan guarantee.

248

The S&P

rating noted that “Beacon is currently an unprofitable start-up” and that “significant exposure to

commodity price volatility” could significantly hurt the company.

249

S&P ran two default

scenarios, both of which demonstrated that taxpayers would lose millions.

250

DOE conducted its

own risk analysis and also assigned Beacon Power a junk CCC+ rating.

251

DOE, however,

ignored these warnings and finalized the loan guarantee in August 2010.

252

As predicted, Beacon Power continued to remain unprofitable and burn through money at

a rapid rate. In the weeks leading up to its bankruptcy, Beacon Power began spending hundreds

of thousands of dollars on law firms.

253

When Beacon Power went bankrupt, DOE tried to

minimize the bad publicity by arguing that it had required “many protections for the taxpayer” in

the loan guarantee contract.

254

However, as Beacon Power continues to go through the

bankruptcy process, DOE now admits that taxpayers will likely lose millions on this bad

investment.

255

C. Abound Solar: Politics and a Risky Investment Collide

DOE could have avoided these loses by taking the warnings of S&P and its own

analysis seriously and not risking over $39 million on a company destined for failure.

246

Steven Mufson and Juliet Eilperin, Beacon Power Declares Bankruptcy; Second Loan Guarantee Recipient to

Falter, T

HE WASH. POST, Oct. 31, 2011, available at http://www.washingtonpost.com/national/health-

science/beacon-power-declares-bankruptcy-second-loan-guarantee-recipient-to-

falter/2011/10/31/gIQACNAaaM_story.html.

247

Press Release, Obama Administration Offers $59 Million in conditional Loan Guarantees to Beacon Power and

Nordic Windpower, Inc., U.S. Dep’t of Energy, July 2, 2009, available at: https://lpo.energy.gov/?p=834. Beacon

Power created a wholly owned subsidiary called Stephentown Regulation Services, LLC., that ran the DOE funded

flywheel energy storage plant and directly received the DOE loan guarantee. When Beacon Power, the parent

company, went bankrupt on October 31

, it decided to place its subsidiaries in bankruptcy as well. .

248

Letter from Swami Venkataraman, Standard & Poors, to Beacon Power, April 30, 2010 (on file with author).

249

Id.

250

Id.

251

Letter from David Frantz, Acting Executive Director of Loan Program Office, U.S. DOE, to Hon. Darrell Issa,

Chairman, H. Comm. on Oversight and Gov’t Reform, Feb. 14, 2012 (on file with author).

252

Beacon Power Corporation, U.S. Dep’tt of Energy, available at https://lpo.energy.gov/?projects=beacon-power-

corporation (last visited Mar. 15, 2012).

253

Beacon Power Bankruptcy Filings, Provided to Committee by U.S. DOE (on file with author).

254

Dawn McCarty, Beacon Power, Backed by U.S. Loan Guarantees, Files Bankruptcy, BLOOMBERG, Oct. 31,

2011, available at: http://www.businessweek.com/news/2011-10-31/beacon-power-backed-by-u-s-loan-guarantees-

files-bankruptcy.html.

255

Letter from David Frantz, Acting Executive Director of Loan Program Office, U.S. DOE, to Hon. Darrell Issa,

Chairman, H. Comm. on Oversight and Gov’t Reform, Feb. 14, 2012 (Stating “the DOE stands to recover more than

70 percent of the taxpayer’s investment.” However, even if DOE recovered 80 percent of its investment, taxpayers

would still lose millions).

On July 3, 2010, President Obama announced during his weekly radio address that DOE

would again invest hundreds of millions of dollars in a risky solar panel manufacturer. Much

like Solyndra, Abound Solar manufactures solar panels using unproven technology, received a

dismal credit rating for its loan guarantee, and has strong Democratic political connections. In

fact, DOE finalized Abound Solar’s loan in the same month that DOE worked to restructure the

failing Solyndra’s loan.

In between DOE issuing Abound Solar its $400 million conditional loan guarantee and

finalizing it in December 2010, Fitch Ratings evaluated the project and assigned it a junk credit

rating. Fitch gave the project a credit rating of “B” (worse than Solyndra’s) with a recovery

estimate of only 45%.

256

Despite including the benefit of the DOE loan guarantee in the rating

(which likely made the rating more favorable), Fitch labeled the project “highly speculative” and

described Abound as lagging in technology relative to its competitors, failing to achieve stated

efficiency targets, and expecting that Abound Solar will suffer from increasing commoditization

and pricing pressures.

257

In addition to these concerns, Fitch worried that Abound Solar needed

to raise more private money to build its new facilities and that, if it could not, Abound Solar

could default on its DOE loan.

258

Recently, Abound Solar began encountering the financial problems that Fitch predicted.

In line with Fitch’s prediction, Abound Solar has recently struggled to raise additional capital,

causing DOE to stop disbursing loan payments to the company.

259

More troubling, Abound

Solar announced on March 1

that it would stop producing solar panels and would fire 180

employees, even though it has already received $70 million from DOE.

260

256

Letter from Jason Paraschac, Senior Director, Fitch Ratings, to Steve Abely, Chief Financial Officer, Abound

Solar, Nov. 4, 2010 (on file with author).

Abound Solar

continues to claim publicly that it does not have serious financial problems and will survive;

257

See id. at 4

“Abound’s lagging conversion efficiency negatively impacts the panel’s installed costs which should

negatively impact expected panel [average selling prices]. In addition, Fitch expects further price pressures

in this market over the next 3-5 years…”

“Abound has not provided an explanation as to why gains in [solar panel] conversion efficiency have not

materialized as expected…”

“[Average selling price] assumptions in the new model are significantly below the prior plan. While this

may in part reflect the lower conversion efficiency of [Abound’s] solar panel, it is largely a reflection of

severe price contractions in the [solar photovoltaic panel] market over the past 24 months.”.

258

See id. at 7

“Abound must raise additional equity to fund the completion of its planned manufacturing facilities. An

inability to access equity markets could force an early default of the loan before construction is complete

but also before the loan is fully drawn down.”.

259

Yuliya Chernova and Cassandra Sweet, California Solar Deal Hits a Snag, THE WALL ST. J., Feb. 11, 2012,

available at: http://online.wsj.com/article/ SB10001424052970203646004577214973345400202.html.

260

Todd Woody, Abound Solar, Recipient of $400 Million Federal Loan Guarantee, Halts Production, FORBES,

Mar. 1, 2012, available at http://www.forbes.com/sites/toddwoody/2012/03/01/abound-solar-recipient-of-400-

million-federal-loan-guarantee-halts-production/.

however, its inability to raise capital and meet DOE’s requirements likely indicate serious

troubles ahead for the company, as predicted by Fitch.

Abound Solar has ties to Democratic politicians at the federal level and the state level in

Colorado. Bohemian Companies, LLC, founded by Pat Stryker, became an early investor in

Abound Solar (at the time AVA Solar) in October, 2008.

261

In addition to the initial funding, the

CEO of Bohemian Companies, Joseph Zimlich, has served as both a director

262

and a board

member of Abound Solar.

263

Pat Stryker is a major Democratic donor who Forbes included on

its 2011 list of top liberal spenders.

264

In 2008, Stryker donated $50,000 and bundled $87,500

for President Obama’s 2009 inauguration, and has given $35,800 to the 2012 Obama Victory

Fund.

265

Abound Solar also developed ties to Congressional Democrats. The company hired

then Democratic Congressman Paul Kanjorski’s nephew Russell as its vice president for

marketing.

266

Abound Solar supported the 2009 cap and trade bill in the House of

Representatives and funded an advertisement thanking then-Colorado Democratic

Congresswoman Betsy Markey for her vote in favor of the bill.

267

At the state level, then-Democratic Colorado Governor Bill Ritter strongly supported

Abound Solar and its application for a DOE loan guarantee. When Energy Secretary Chu visited

Colorado, Governor Ritter handed Secretary Chu a letter urging him to approve Abound Solar’s

loan guarantee because it would allow the company to expand and hire new workers.

268

The combination of Abound Solar’s junk credit rating, financial problems, and the

company’s political connections raise serious concerns about whether DOE based the decision to

invest $400 million on merit and whether taxpayers could again lose millions on a dubious solar

manufacturing project.

D. Ormat Nevada: Strong Ties to Harry Reid

Senate Majority Leader Harry Reid announced on September 23, 2011, that DOE

finalized a $350 million partial loan guarantee for three geothermal power plants owned by

Ormat Nevada, Inc.

269

261

Press Release, AVA Solar Completes $104 Million Equity Financing, Abound Solar, Oct., 2008, available at

Ormat also benefitted from the $98.5 million loan guarantee to Nevada

http://www.abound.com/news/ava-solar-completes-104-million-equity-financing.

262

Se: U. S. Securities and Exchange Commission Form D, AVA Solar, Inc., Dec. 21, 2010, available at:

http://sec.gov/Archives/edgar/data/1391624/000139162410000003/xslFormDX01/primary_doc.xml.

263

See The Board of Governors of the Colorado State University System, Colorado State University System,

vaailable at http://csusystem.edu/pages/board.asp.

264

Jon Bruner and Clare O’Connor, Liberal Spenders, FORBES, Sept. 21, 2011, available at

http://www.forbes.com/forbes/2011/1010/forbes400-11-networks-data-driven-liberal-spenders-bruner-oconner.html.

265

Keenan Steiner, Another Renewable Energy Loan Recipient Hires Lobbyists, has Fundraising Ties to Obama,

Sunlight Foundation, Nov. 30, 2011, available at http://reporting.sunlightfoundation.com/2011/ another-renewable-

grantee-hires-lobbyists-has-fundraising-ties-o/.

266

Bill O’Boyle, Kanjo Nephew Works at firm that Gets Loan, THE TIMES LEADER, July 13, 2010, available at

http://www.timesleader.com/news/Kanjo_nephew_works_at_firm_that_gets_loan_07-12-2010.html.

267

Thank You Betsy Markey, The Environmental Defense Action Fund, July 15, 2009, available at

http://www.youtube.com/watch?v=uvBD3XvRf2Y (last visited Mar. 15, 2012).

268

Cathy Proctor, Ritter Backing Colo. Companies Seeking Department of Energy Loan Guarantees, DENVER BUS.

J., May 17, 2009, available at http://www.bizjournals.com/denver/stories/ 2009/05/18/story5.html?page=all.

269

Press Release,Reid Announces Finalized Loan Guarantee for Ormat Geothermal Projects, United States Senator

Harry Reid, Sept. 23, 2011, available athttp://reid.senate.gov/newsroom/ pr_092311_geothermalloan.cfm.

Geothermal (see below) as Ormat received an almost $80 million engineering, procurement, and

construction contract to build Nevada Geothermal’s Blue Mountain plant.

270

Meaningful ties exist between the Senator and Ormat. Two of Ormat’s federal lobbyists

previously worked for Senator Reid. Ormat’s outside lobbyist, Kai Anderson of Cassidy and

Associates, served as Senator Reid’s Deputy Chief of Staff up until 2005.

271

Anderson lobbies

both the House of Representatives and the Senate for Ormat.

272

Anderson has given close to

$90,000 to Democratic candidates and campaign committees over the past three cycles, including

thousands to Senator Reid.

273

Ormat’s company lobbyist, Director of Policy and Business

Development Paul Thomsen, served as a “Regional Representative” for Senator Reid through

2005.

274

Thomsen gave thousands in political contributions to Senator Reid.

275

During Senator

Reid’s 2010 reelection campaign, Thomsen starred in a campaign ad for Senator Reid to

advertise the benefits of Ormat’s loan guarantee for Nevada.

276

In addition to Anderson and

Thomsen, Ormat’s President, Yoram Bronicki, gave thousands in political contributions to

Senator Reid.

277

E. Nevada Geothermal’s Blue Mountain Project

The strong ties between the company and the Senate Majority leader raise

questions about whether the DOE acted in the best interests of the American people when it

approved the loan guarantee.

On June 15, 2010, DOE announced that it would conditionally issue a $98.5 million

partial loan guarantee to Nevada Geothermal Power Company (Nevada Geothermal).

278

270

Nevada Geothermal Application for DOE Loan Guarantee, U.S. Dep’t of Energy, Nov. 2, 2009 (on file with

author).

This

loan enabled Nevada Geothermal to refinance the Blue Mountain Geothermal Project (Blue

Mountain) through John Hancock Financial Services (John Hancock). In other words, the DOE

271

Eric Lipton and Clifford Krauss, A U.S.—Backed Geothermal Plant in Nevada Struggles, N.Y. TIMES, Oct. 2,

2011, available at http://www.nytimes.com/2011/10/03/business/a-us-backed-geothermal-plant-in-nevada-

struggles.html?pagewanted=all; Kai S. Anderson, Congressional Staffer—Salary Data, Legistorm: Transparency’s

Sidekick, available athttp://www.legistorm.com/person/ Kai_S_Anderson/201.html.

272

See Lobbying Report for Cassidy & Associates, available at http://soprweb.senate.gov/

index.cfm?event=getFilingDetails&filingID=68E4AB5B-FB37-4072-AA8E-187A97BF8E66.

273

Center for Responsive Politics, available athttp://www.opensecrets.org/indivs/

search.php?capcode=t3hhk&name=anderson,%20kai&employ=&cand=&state=DC&zip=&all=n&old=N&c2008=Y

&c2010=Y&c2012=Y&sort=N&page=1.

274

Eric Lipton and Clifford Krauss, A U.S.—Backed Geothermal Plant in Nevada Struggles, N.Y. TIMES, Oct. 2,

2011, available at http://www.nytimes.com/2011/10/03/business/a-us-backed-geothermal-plant-in-nevada-

struggles.html?pagewanted=all ; Paul Thomsen, Congressional Staffer—Salary Data, Legistorm: Transparency’s

Sidekick, available at http://www.legistorm.com/person/Paul_Thomsen/30414.html; Legislative Hearing on H.R.

2170, H.R. 2171, H.R. 2172 and H.R. 2173 Before H. Comm. on Energy and Power, 112th Cong. (2011) (statement

of Paul A. Thomsen, Director of Policy and Business Development, Ormat Technologies, Inc.).

275

Center for Responsive Politics, available athttp://www.opensecrets.org/indivs/

search.php?name=&state=&zip=&employ=ormat&cand=&c2012=Y&c2010=Y&c2008=Y&sort=N&capcode=xbh

nq&submit=Submit+your+Donor+Query (last visited Mar. 15, 2012).

276

See Geothermal, Harry Reid 2010, June 10, 2010, available athttp://www.youtube.com/

watch?v=XvI_AY68BjQ&feature=plcp&context=C305c198UDOEgsToPDskIRhi7yhmpxqikeNWd9-nC0; Reid

Campaign Releases TV Ads on Clean Energy Jobs, Friends for Harry Reid, available

athttp://www.harryreid.com/index.php/news/release/reid_campaign_releases_tv_ads_on_clean_energy_jobs/.

277

Id.

278

Press Release, Energy Department Offers Conditional Commitment to Support Nevada Geothermal Development

with Recovery Act Funds,U.S. Dep’tt of Energy, June 15, 2010, available at: https://lpo.energy.gov/?p=805.

loan paid back a prior financial obligation of Nevada Geothermal. This was the first of DOE’s

“Financial Institution Partnership Program” (FIPP) loan guarantees, under Section 1705, where

private investment groups worked with DOE to provide financing to energy projects.

279

Less

than three months after the conditional approval, DOE finalized this loan guarantee, enabling

Nevada Geothermal to refinance a loan from TCW through John Hancock.

280

The loan did not finance any new construction and therefore did not help to create a

single new job. DOE’s awarding of this loan guarantee raises questions about why DOE was

investing significant taxpayer resources in an entity with well-established financial difficulties.

In the press release for the project, Secretary Chu and Senate Majority Leader Harry Reid

touted Blue Mountain’s potential, with Senator Reid saying that, “I am glad to see economic

recovery funding being used to put Nevadans to work on a project that will help us achieve

energy independence. Northern Nevada is the Saudi Arabia of geothermal energy and I thank

Secretary Chu for recognizing the Silver State’s enormous job-creating potential to produce

plenty of clean and affordable energy.”

281

It was known to him at that time, however, that the

loan would not create a single job, but instead simply refinance an existing loan, despite DOE’s

claim that it would create over 200 jobs.

282

1. Misuse of the DOE Loan Guarantee as a Tool to Bailout Creditors

Nevada Geothermal has a well documented history of major financial problems. By the

time DOE conditionally approved the loan guarantee, Nevada Geothermal had already violated

contract terms and debt covenants relating to financing from its primary lender, TCW.

According to Nevada Geothermal’s financial statements, the firm would not avoid default

without the benefit of a loan guarantee.

On October 2, 2011, The New York Times ran a story about the financial difficulties of

Nevada Geothermal, relying partially on a September 2011 Deloitte & Touche audit of the

company which stated “significant doubt about the company’s ability to continue as a going

concern.”

283

In response, DOE dismissed the financial problems of Nevada Geothermal and

instead pointed to the alleged financial health of Blue Mountain to argue that the loan guarantee

would be repaid.

284

Given that Nevada Geothermal’s principal operation is Blue Mountain’s

Faulkner I Power Plant, such a distinction has questionable merit.

285

279

Press Release, Department of Energy Issues Loan Guarantee Supported by Recovery Act for Nevada Geothermal

Project,U.S. Dep’tof Energy, Sept. 7, 2010, available at https://lpo.energy.gov/?p=787.

280

Id.

281

Id.

282

Loan Programs Office, U.S. Dep’t Of Energy, available at https://lpo.energy.gov/?page_id=45 (last visisted Mar.

15, 2012).

283

Eric Lipton and Clifford Krauss, A U.S.-Backed Geothermal Plant in Nevada Struggles, N.Y. TIMES, Oct. 2,

2011, available at http://www.nytimes.com/2011/10/03/business/a-us-backed-geothermal-plant-in-nevada-

struggles.html?pagewanted=all.

284

Peter Urban, DOE Remains Confident in Nevada Geothermal Plant, LAS VEGAS REVIEW-JOURNAL, Oct. 4, 2011,

available at http://www.lvrj.com/news/doe-remains-confident-in-nevada-geothermal-plant-131035678.html.

285

See Nevada Geothermal Power Inc., Consolidated Financial Statements, June 30, 2010 at 6, available

athttp://www.nevadageothermal.com/i/pdf/Annual_Financials_2010.pdf.

As noted above, at the time DOE approved the conditional loan guarantee, Nevada

Geothermal had already violated terms to the loan agreement with its primary creditor, TCW.

Based on financial disclosures, Nevada Geothermal avoided default as a result of TCW’s

granting a waiver and extension in anticipation of the John Hancock financing backed by the

DOE loan guarantee. The resulting DOE bailout of Nevada Geothermal was planned out in

advance, as made clear by Nevada Geothermal’s March 31, 2010 Financial Statements:

The Company has engaged John Hancock to provide long term debt up

to $95 million which will be used to pay down the TCW loan and to fund

additional drilling. However, this potential John Hancock loan is subject to

due diligence and final credit committee approval by John Hancock. There is

no certainty that the anticipated debt financing through John Hancock will be

obtained. Failure to obtain the John Hancock loan, or a similar loan from

another lender, and/or unsuccessful drilling may result in a default under

the terms of the TCW loan agreement. In the event of a default TCW

may elect to call the loan and execute upon the security, which would

result in a material adverse effect on the Company, including delay or

indefinite postponement of operations and further exploration and

development of our projects with the possible loss of such assets.

286

The story continued to unfold in Nevada Geothermal’s June 30, 2010 Financial

Statements, where the plan to bailout their lender, TCW, was successfully executed by DOE:

(emphasis

added)

As at June 30, 2010, the Company was not in compliance with the

terms of the TCW loan. The non-compliance results from the Company having

exceeded the maximum loan amount of $180 million, and having exceeded the

drilling expenditure budget by more than $3.8 million, as well as some instances

of technical non-compliance with other loan terms .… As a result, for balance

sheet purposes, the TCW long-term loan has been classified as a short-term

liability. On November 20, 2009, TCW agreed in principle to waive the non-

compliance until March 31, 2010 in return for 4.5 million NGP Inc. warrants

exercisable at CAD 1.50 (Note 21(f)). Subsequently, TCW agreed to extend the

agreement in principle, without change, until the John Hancock loan

[guaranteed by DOE

287

286

Nevada Geothermal Power, Inc., Consolidated Financial Statements, Mar. 31, 2010, at 11, available at

http://www.nevadageothermal.com/i/pdf/Q3_March_31_2010.pdf.

] closed. The John Hancock loan was closed on

287

Nevada Geothermal Power, Inc., Consolidated Financial Statements, June 30, 2010, at 55, available at

http://www.nevadageothermal.com/i/pdf/Annual_Financials_2010.pdf (Explainingthe John Hancock loan

guaranteed by DOE: “On October 13, 2009 the Company [Nevada Geothermal] announced that it appointed John

Hancock Life Insurance Company (“John Hancock”) to be the exclusive debt provider for up to $95 Million 20-year

term loan. Further to the above, on October 7, 2009, the DOE announced its Financial Institutions Partnership

Program (“FIPP”), a program supported by the 2009 ARRA. The FIPP program is designed to facilitate long term

financing for renewable development projects using commercial technology and applies to up to 80 percent of the

loan amount. John Hancock, as Lender for the Blue Mountain 'Faulkner 1' geothermal project, made an application

to the DOE for a Loan Guarantee under the FIPP. The loan guarantee was conditionally approved on June 15, 2010,

and the loan closed on September 3, 2010….At the closing of the John Hancock/DOE loan after paying associated

fees and funding reserve accounts for drilling, interest and plant maintenance the Company paid the TCW loan

down to approximately $86.9 million. The Company plans to apply for a second ARRA grant based upon work, to

September 3, 2010, and a repayment of $81,076,669 was made on the TCW

loan.

288

Confirming this troubling misdirection of taxpayer funds, the Summary of Proposed

Terms and Conditions for the Conditional Loan Guarantee, signed by Secretary Chu, provides

that the “proceeds of the Guaranteed Obligation will be used for the following: (i) Partial

repayment of intercompany loan from HoldCo [Blue Mountain], in the amount of approximately

80 million;…”

(emphasis added)

289

This intercompany repayment would ultimately flow to TCW as described

above. The remaining amount of the loan went to the posting of cash collateral to NV Energy,

Inc., funding a debt service reserve account, funding a maintenance reserve account, funding a

drilling expenditure account (which included already incurred costs), and other fees. As these

numbers total to around $98 million, it appears that little, if any, of the loan went to fund new

drilling or new construction.

290

2. This Bailout Appears to Violate the American Recovery and Reinvestment

Act of 2009

Not only does it appear that DOE purposely directed taxpayer funds to a failing

enterprise, DOE’s action robbed taxpayers of genuine investment toward renewable energy.

This loan guarantee bailed out lenders (TCW) and provided no assurance that TCW would apply

the money that it recovered toward the economy or jobs as required by the American Recovery

and Reinvestment Act of 2009.

Title XVI, Section 1602 of the American Recovery and Reinvestment Act of 2009,

requires that “recipients shall also use grant funds in a manner that maximizes job creation and

economic benefit.”

291

increase power production, subsequent to the first grant that will be partially funded by the John Hancock/DOE

loan.”).

Paying off a creditor clearly does not maximize job creation and

economic benefits. Rather, it provides an opportunity for private industry to exit an investment,

deleverage and transfer the extraordinarily high default risk to taxpayers.

288

Id.

289

Loan Guarantee LGPO Loan Number: F1001, U.S. Dep’t of Energy, June 15, 2010 at. 4 (on file with author).

290

Nevada Geothermal Power, Inc., Conditional Loan Guarantee, U.S. Dep’t of Energy, Summary of Terms and

Conditions at 4 Summary of Terms and Conditions (Stating “USE OF PROCEEDS: The proceeds of the

Guaranteed Obligation will be used for following:

(i) Partial repayment of intercompany loan from HoldCo in the amount of approximately $80 million;

(ii) Funding security requirements under the power purchase agreement signed on August 18, 2006 with NV

Energy, f/k/a Nevada Power Company (“PPA”), either by posting cash collateral, cash collateralizing

one or more letters of credit, or otherwise in accordance with the PPA in amount of $3.8 million (the

“PPA Credit Support”);

(iii) Funding of the Debt Service Reserve Account in the amount of approximately $5.5 million, Major

Maintenance Reserve Account in the amount of $125,000, and Drilling Expenditure Account in the

amount of approximately $8,400,000 (less amounts applied to reimburse the Borrower for Project

Costs incurred prior to the Closing Date in connection with the Additional Wells (as defined below));

(iv) The payment of certain fees and transaction expenses associated with the Guaranteed Obligation which are

permitted to be paid with such proceeds under the Solicitation as set forth in Schedule 1; and

(v) Initial funding of the Operating Account with all remaining proceeds of the Guaranteed Obligation.”).

291

American Recovey and Reinvestment Act of 2009 §1602, Pub. L. No. 111-5.

For this reason, it appears DOE, in its very first FIPP section1705-based loan guarantee,

violated the spirit and, quite possibly, the letter of the law.

3. Given the “Pari Passu” Deal Terms and the Required Consent of all

Lenders to Reorder Priority, the Terms of the DOE Loan Guarantee Appear to Violate

the Requirement of Superiority under Title XVII, Section 1702(g)(2)(B)

The Summary of Terms and Conditions in the Conditional Loan Guarantee signed by

Secretary Chu that relates to the Blue Mountain loan guarantee, at page 8, provides for a pari

passu and pro-rata right of payment for senior creditors.

292

This means that the unguaranteed

senior lender, John Hancock, stands equal to taxpayers in terms of recovering a share of their

loss in the event of default. The Summary of Terms also requires the consent of all Lenders in

the event that DOE seeks to “change to the priority of payment in the payment waterfall.”

293

4. Nevada Geothermal’s Continuing Problems

The

combination of the pari passu credit terms, which ranked John Hancock as an equal to taxpayers,

with DOE’s inability to reorder priority in case of a default, disables the ability of DOE to rely

on its superiority as required under Section 1702(g)(2)(B).

Since DOE finalized Nevada Geothermal’s loan guarantee in September 2010, the project

continues to have operational and financial problems. The project has an ongoing problem with

electrical fires. In January 2010 (before the loan guarantee), part of the Blue Mountain plant was

damaged after electrical cables were placed too close together and burned; a significant amount

of cable was destroyed and had to be replaced.

294

In October 2011, another fire occurred

because the seal on one of the pumps failed, causing part of the plant to go offline for major

repairs.

295

Operational problems at the Blue Mountain project resulted in revenue being less

than estimated the last four months of 2011.

296

Additionally, in November 2011, one of Nevada

Geothermal’s major creditors considered placing Nevada Geothermal in default because of a late

payment,

297

and Nevada Geothermal lost $3.9 million in the fourth quarter.

298

F. Granite Reliable

In September 2011, Granite Reliable Power, LLC, a wind generation company owned by

the Brookfield family of companies, received a partial guarantee for $168.9 million loan from

DOE.

299

292

Nevada Geothermal Power, Inc., Conditional Loan Guarantee, U.S. Dep’t of Energy, Summary of Terms and

Conditions at 8.

The funds will finance Granite Reliable Power Windpark, a wind generation project in

293

Id. at 25-6.

294

Email from Max Walenciak, Nevada Geothermal, to Brian Fairbank, Nevada Geothermal, Mar. 1, 2010 (on file

with author).

295

Email fromMax Walenciak, Nevada Geothermal, to Thomas Pollog, DOE, Nov. 22, 2011 (on file with author).

296

Operations Budget Reviews,Nevada Geothermal, Sept.-Dec. 2011 (on file with author).

297

Email from Andrew Studley, Nevada Geothermal, Nov. 1, 2011 (on file with author).

298

Nevada Geothermal Power Reports Dec Quarter Results, Nasdaq, Feb. 28, 2012, available at

http://community.nasdaq.com/News/2012-02/nevada-geothermal-power-reports-dec-quarter-

results.aspx?storyid=123602.

299

DOE Loan Programs Office, Loan Guarantee Program Projects, available at https://lpo.energy.gov/

?projects=granite-reliable.

Coos, New Hampshire.

300

Unlike other loan recipients, Granite Reliable was a very profitable

company without any demonstrated need to obtain a loan subsidy in order to secure private

financing.

301

Until 2011, Granite Reliable was owned and controlled by Noble Environmental Power,

Inc. Noble sold that 75% interest to BAIF Granite Holdings, Inc., just prior to the project’s loan

approval in September 2011.

A deeper look into the players and circumstances surrounding this decision suggest

that politics may have led DOE to approve the loan.

302

BAIF Granite Holdings (BAIF) was created by Brookfield

Renewable Power, a subsidiary of the $3.2 billion company Brookfield Asset Management

(BAM).

303

Brookfield Renewable Power financed the creation of BAIF from its Brookfield

Americas Infrastructure Fund, which reportedly has assets totaling $2.7 billion.

304

The remaining

minority interest is owned by Freshet Wind Energy, LLC, which partnered with BAIF on the

project.

305

1. Brookfield’s Company Background: Board Members, Holdings, and

Investors

Given the solid financial background from which Granite Reliable was formed, it is

unclear why DOE determined that the company needed a $168.9 million loan guarantee.

One reason DOE determined a loan guarantee may have been necessary may lie in the

inner workings of the BAM family of companies and the companies’ strong Democratic ties.

BAM owns BAIF, which owns Granite Reliable, as well as Brookfield Office Properties (BOP).

BOP’s Board of Directors is chaired by John Zuccotti, the man for whom New York City’s

Zuccotti Park is named, and includes Diana Taylor, New York City Mayor Michael Bloomberg’s

long-time girlfriend.

306

George Soros and Martin J. Whitman, both prominent Democratic

donors, are both heavily invested in Brookfield.

307

Moreover, Heather Podesta, sister-in-law of

Obama’s influential White House transition director John Podesta, and the Podesta Group served

as the lobbyists for BAIF.

308

300

Press Release, Department of Energy Finalizes Loan Guarantee of Nearly $170 Million to Granite Reliable

Power, U.S. Dep’t of Energy, available at http://energy.gov/articles/department-energy-finalizes-loan-guarantee-

nearly-170-million-granite-reliable-power.

301

See Opinion, A NH Solyndra? Wind Farm Gets Fed Loan, UNION LEADER, Sept. 28, 2011.

302

Press Release, Noble Environmental Power Signs Agreement for the Sale of its Interest in its New Hampshire

Wind Project, Noble Power, Dec. 7, 2010, available at http://www.noblepower.com/pressroom/documents/10-12-

7_NEP-SignsAgreementForSaleOfNHWindProject_Final.pdf; Ehren Gossens,Brookfield Picks RMT to Build New

Hampshire’s Largest Wind Farm, Bloomberg, Feb. 12, 2010, available at http://www.bloomberg.com/news/2011-

02-23/brookfield-renewable-picks-rmt-to-build-new-hampshire-s-largest-wind-farm.html.

303

Opinion, A NH Solyndra? Wind Farm Gets Fed Loan, UNION LEADER, Sept. 28, 2011.

304

Id.

305

Granite Reliable Power Wind Project, Brookfield Renewable Power, available at

http://brookfieldrenewable.com/content/united_states/granite_reliable_power_wind_project-30823.html (last visited

Mar. 15, 2012).

306

Board of Directors, Brookfield Office Properties, available at http://brookfieldofficeproperties.com/

content/corporate_governance/board_of_directors-16350.html?Page=2 (last visisted Mar. 15, 2012).

307

Steve MacDonald, NH Wind Farm Project Comes with Inside Deal Making?, Oct. 15, 2011, available at

http://www.allrightmagazine.com/environment/nh-wind-farm-project-comes-with-inside-deal-making-

11752/#more-11752.

308

Aaron Klein, Look Whose Sister-in-law Just Secured $135.8 Million Energy Loan, Oct. 12, 2011, available at

http://kleinonline.wnd.com/2011/10/12/look-who%E2%80%99s-sister-in-law-just-secured-135-8-million-energy-

loan-latest-%E2%80%98green%E2%80%99-company-with-deep-white-house-ties-to-get-massive-public-funds/.

2. Nancy Ann DeParle: Obama’s Deputy Chief of Staff for Policy and Noble

Interest Holder

As described in Section V, Part B of this report, Nancy DeParle suffered a conflict of

interest during her time in the Administration. As indicated on her financial disclosure forms,

prior to joining the White House, Nancy DeParle was one of five managing directors of a multi-

billion dollar private equity firm CCMP

309

While with CCMP, she sat on the board of directors

for Noble Environmental Power, LLC, one of CCMP’s investments.

310

She served as a board

member of Noble for about two years and quit in March of 2009.

311

Noble owned Granite

Reliable.

Coinciding with her tenure at the White House, DOE considered a loan guarantee for

Granite Reliable. The Granite Reliable project was well underway by late 2009.

312

Noble then

sold Granite Reliable in December 2010 to Brookfield Asset Management, just 6 months prior to

the conditional approval of the DOE loan guarantee and deep into the application process.

313

The

DOE loan guarantee was conditionally approved in June 2011 and finalized in September 2011.

The ultimate approval of the DOE loan guarantee that followed the sale of Granite

Reliable is tainted by DeParle’s position within the White House and her financial interest in

Noble. DeParle’s position in the Administration could have been used to influence the

successful sale by ensuring or increasing the likelihood of ultimate approval of the DOE loan

guarantee. The loan guarantee would increase the value of the Granite Reliable, improving the

sale price and, thereby, improving the investment of DeParle’s son.

G. Record Hill Wind: DOE Uses the First Solar Precedent to Speed

Through Another Questionably “Innovative” Technology

DOE relied on the First Solar precedent to approve Record Hill Wind’s $102

million loan guarantee project as “innovative,” despite the project using commercial

technology. DOE knew that the Record Hill project did not use significantly innovative

technology. The Standard & Poor’s credit rating for the project that DOE received

clearly indicates the commercial (and non-innovative) nature of the project:

Record Hill has entered into a Turbine Supply Agreement for the

shipment of 22 Siemens 93SWT[Siemens Wind Turbine] 2.3MW wind

309

CCMP Capital Advisors, LLP, available at http://www.ccmpcapital.com/ (last visited Mar. 15, 2012).

310

See Noble Environmental Power, LLC, U.S. Securities and Exchange Commission, Form S-1, May 8, 2008,

available at http://www.nasdaq.com/markets/ipos/filing.ashx?filingid=5635802.

311

Company Overview of CCMP Capital Advisors, LLC, Bloomber Businessweek, available at

http://investing.businessweek.com/research/stocks/private/person.asp?personId=1090061&privcapId=28674590&pr

eviousCapId=35644&previousTitle=DaVita%20Inc.

312

Federal Aviation Admin. Determination of No Hazard to Air Navigation, Nov. 18, 2009 (on file with author);

Engineering, Procurement and Construction Agreement between RMT, Inc. and Granite Reliable Power, LLC, Apr.

26, 2010 (on file with author).

313

Press Release, Noble Environmental Power Signs Agreement for the Sale of its Interest in its New Hampshire

Wind Project, Noble Environmental Power, Dec. 7, 2010, available at

http://www.noblepower.com/pressroom/documents/ 10-12-7_NEP

SignsAgreementForSaleOfNHWindProject_Final.pdf.

turbines to be installed at the site. The SWT-2.3-93 turbine has been in

operation in Europe since 2005, and the first turbines in the US were

installed and began operations in 2006. Currently, there are a total

1,374 SWT-2.3-93 turbines operating worldwide….

…Due to harsh winter conditions in Maine, the project plans to

install a cold weather package on all turbines, which will keep the turbines

running in cold temperatures. Siemens’ cold weather packages are

currently in use on turbines in Canada, Norway, and other cold areas,

and have performed to expectations. Along with a cold weather package,

the project expects to make use of Siemens proprietary Turbine Load

Control (TLC) technology…Given that the technology is software-

based, however, and is not considered a fundamental component in

the performance of the turbine, the TLC could be shuttered without

damaging the turbine if it does not work properly. In this case, the

turbines would continue to run similar to Siemens’ existing fleet.

314

Much like First Solar’s “innovative” projects, the Record Hill Wind project

attempted to categorize minor modifications to existing commercial technology as

“innovativeness.” DOE eventually agreed with Record Hill Wind’s questionable

reasoning. On December 14, 2010, Todd Shrader of DOE sent an email to several DOE

personnel with the subject line “Eligibility Intepretation (sic)” that read:

(emphasis added)

An eligibility issue arose during the technical evaluation of

Ocotillo Express (FIPP—F1033). This project is utilizing Siemens SWG-

2.3-101 wind turbine generators. It is claimed to be a commercial

technology based on the wide spread use (including in this country) of the

closely related Siemens SWG-2.3-93 turbines, which are essentially the

same just with smaller blade lengths (101 feet vs. 93 feet). Without

looking deeper into the design differences (which will occur at due

diligence), I concur with the applicant that this is a commercial

technology. However, for Record Hill, which is using SWG-2.3-93

turbines, it is claimed that this is a new and innovative technology,

partially based on no use over 5 years in the US for these turbines. I also

believe there were some differences in internal controls. However, the

101 and 93 units are essentially the same technology. Can the same

technology be innovative under the Renewables Solicitation and

Commercial under the FIPP’s solicitation?

315

Later in the day, Ruth Ku of DOE replied that the same question had occurred

before with a different project and that the “project was asked whether it could obtain

alternative financing in the private market…the project was able to get alternative

financing (e.g., with John Hancock) and I think the recommendation was for it to move

its application to FIPP…don’t know where Record Hill is in its process for it to be

(emphasis added)

314

Record Hill Wind, LLC., Standard & Poors Credit Report, July 1, 2011 (on file with author).

315

Email from Todd Shrader, U.S. Dep’t of Energy, Dec. 14, 2010 (on file with author).

feasible for it to apply under FIPP at this point.”

316

Ruth Ku forwarded her email to

Douglas Schultz, a Program Manager at DOE’s Loan Programs Office. Douglas Schultz

replied, “Record hill is well into due diligence with [D]avid [S]chmitzer. No reason to

transfer at all. In terms of precedent of innovative and not look no further than first

solar where there [sic] panels are both innovative and noninnovative given the

inverter used.”

317

Ruth Ku agreed with Douglas Schultz but worried that submitting two project

applications using the same technology as innovative and not innovative could cause a

“policy issue for OMB.” She wrote back to Douglas Schultz stating “[I]t cld [sic] be a

policy issue for OMB if record hill followed Ocotillo. Think it’s probably less of an

issue if record hill was first then Ocotillo.”

(emphasis added)

318

After scheming about how to get the two

applications through OMB without problems, DOE allowed the Record Hill Wind project

to continue as an “innovative” project.

319

H. Genesis Solar: An Expedited Approval Process Now Threatens Entire

Project

DOE would eventually finalize a $102 million

loan guarantee (guaranteed 100% by the federal government) in August 2011.

On August 20, 2011, DOE awarded NextEra Energy Resources LLC (NextEra) a partial

loan guarantee for $825 million to fund the Genesis Solar Energy Project (Genesis). A planned

250-megawatt plant to lie on 1,950 acres of federal land located outside Blythe, California,

Genesis plans to power more than 187,500 homes by 2014.

320

Standard & Poor’s gave NextEra

a BBB+ rating, highly dependent on a long term Power Purchasing Agreement (PPA) with

Pacific Gas &Electric (PG&E), and a Construction Completion Agreement with NECH, noting

that if either’s credit ratings were downgraded in the interim, it would hurt Genesis’s rating as

well.

321

S&P emphasizes that the loan guarantee would only support the project for up to a six

month delay. Additional delays would restrict Genesis’s ability to meet the PPA and jeopardize

the success of the project.

322

An accelerated state and federal site approval process allowed the project to gain DOE

approval, but the hasty work may now endanger the entire project. Genesis’s original site

resided on a section of Ford Dry Lake, which archeologists suspected contained ancient

cremation sites.

323

316

Email from Ruth Ku, U.S. Dep’t of Energy, Dec. 14, 2010 (on file with author).

To minimize delays, NextEra moved the project two miles north to a new

site, still on federal land. DOE’s application process requires extensive vetting of project sites

for a variety of environmental factors. However, to expedite site approval, NextEra opted for a

less thorough process developed by the state energy commission (The Commission) and the

Bureau of Land Management (BLM) that would “streamline the time necessary to produce the

317

Email from Douglas Schultz, U.S. Dep’t of Energy, Dec. 14, 2010 (on file with author).

318

Email from Ruth Ku, U.S. Dep’t of Energy, Dec. 14, 2010 (on file with author).

319

DOE did not finalize a loan guarantee for the Ocotillo Express project.

320

Louis Sahagun, Problems Cast Shadows of Doubt on Solar Project, L.A. TIMES, Feb. 11, 2012, available at

http://articles.latimes.com/2012/feb/11/local/la-me-solar-foxes-20120211.

321

Genesis Solar LLC , Standard & Poor’s, July 21, 2011 `BBB+’ Rating (on file with author).

322

Id.

323

Id.

joint cultural resources analyses…foregoing potentially lengthy investigations to evaluate the

historical significance of the cultural resources found.”

324

The Commission did warn Genesis of the potential consequences associated with the site

approval process in August 2011, stating, “This approach however has the real potential to result

in…delays in construction start-up, increase in requisite construction monitoring, and cost.”

325

After DOE granted final approval to the project and construction began, grading

equipment unearthed grinding stones lying on a bed of charcoal, indicating possible evidence of

human settlements. This discovery caused work to halt on 400 acres of the Genesis site while

the company and regulatory agencies discuss various options. The hasty approval process that

prevented the earlier discovery has compromised the construction schedule and put Genesis in

serious jeopardy of not satisfying its obligations under the PPA. NextEra has admitted that these

delays may have serious consequences for the project; according to a NextEra Senior Vice

President, “the project could become uneconomical.”

As part of the process, NextEra dug 500 test pits 3feet deep and found no artifacts, allowing

them to proceed with construction.

326

In addition to these problems, the new site also encroached on the habitat of the

endangered Kit Foxes, native to the California desert. NextEra used “passive hazing”

techniques approved by state and federal biologists to remove the foxes prior to site grading of

the area. Essentially, NextEra sprayed coyote urine around dens and removed food sources.

Two dead foxes were found on site in October 2011, which died from Distemper, a disease

similar to Rabies spread by bodily fluids, never previously recorded in Kit Foxes. Ultimately,

seven foxes died from NextEra’s removal process.

I. General Electric’s Broad Access to Loan Guarantees: Caithness Shepherds

Flat, 1366 Technologies and Kansas City Southern Railway Company

General Electric (GE) sponsored a project called Caithness Shepherds Flat

(Caithness), and also supplied the project with 338 wind-turbines. High level Administration

officials expressed concern that the project was receiving an excessive amount of public subsidy,

and that private parties did not have sufficient “skin in the game.” In a Memorandum for the

President (“Summers’ Memo”) dated October 25, 2010, Carol Browner, Ron Klan and Larry

Summers revealed concerns regarding excessive over-subsidization of the Caithness project,

where grants, tax credits and loan guarantees provided 65% of the funding for the project.

Because of the excessive subsidy, the memorandum reveals expectations of a 30% return to the

324

Letter from Mike Monasmith, Project Manager, California Energy Commission, to Scott Busa, Director, NextEra

Energy Resources, LLC, Dec. 3, 2009, available at http://www.energy.ca.gov/sitingcases/genesis_solar/

documents/2009-12-03_New_Alternate_Approach_TN-54332.pdf.

325

Id.

326

Louis Sahagun, Problems Cast Shadows of Doubt on Solar Project, L.A. TIMES, Feb. 11, 2012, available at

http://articles.latimes.com/2012/feb/11/local/la-me-solar-foxes-20120211.

private investors generated on the backs of taxpayers.

Four months after DOE approved the Caithness loan, President Obama named Jeff

Immelt, the CEO of GE, as the Chairman (Job Czar) of the President’s Council on Jobs and

Competitiveness (Jobs Council). As the Chairman of the Job Council, Immelt had direct access

to President Obama.

327

About the Council, President’s Council on Jobs and Competitiveness, available at

http://www.whitehouse.gov/administration/advisory-boards/jobs-council/about (Stating it shall, “Report directly to

Since Immelt’s appointment as Job Czar, two additional GE related

government-backed transactions have occurred. First, the poorly rated 1366 Technologies,