How Can Congress Pass a REPIC Bill That Works?
Rick Gittleman has been exploring the idea of developing a Renewable Energy Private Investment Corporation (”REPIC”) as a quasi-governmental renewable energy infrastructure bank. Previous posts have assessed the need for a REPIC, programmatic areas that REPIC could offer and the administrative advantages of REPIC. Rick requested Mark Garfinkel, Vice-President and General Counsel of the Overseas Private Investment Corporation from 2001 to 2009 to author this post which explores options and issues for Congress to consider as a renewable energy investment bank bill is drafted. Mark has kindly agreed and his post is below.
It is widely anticipated that the 111th Congress will pass a new bill establishing a clean energy bank or private investment corporation in 2009. In creating REPIC, the question is not whether our legislators can reach a compromise bill that will be hard to vote against, but rather, whether they can pass a bill that creates a nimble commercial bank-like entity equipped to deploy capital within an ambitious time frame. The goal must be to establish a new U.S. government (USG) financial institution with a mission to provide finance and insurance support for clean and renewable energy projects as well as for energy efficiency and “innovative technology” projects in the United States. This post counsels on legislative drafting issues that are essential to ensure a functional and efficient REPIC.
Efforts underway to draft REPIC appear to merge language from previous bills in the 110th Congress, along with legislative language used in the Energy Policy Act of 2005, which authorized the ailing Department of Energy (DOE) Loan Guarantee Program. Proponents of a merger are likely to end up with a hybrid alternative financing mechanism, rather than an independent bank or financial institution. We strongly caution against this approach. Those of us who have served in the legal departments of U.S. governmental agencies, commissions and corporations know first hand the frustration and program delivery paralysis that can be caused by an overly restrictive and contradictory authorizing statute that leaves an agency with little flexibility.
Thankfully, a good working model for REPIC exists in the form of OPIC, a small self-sustaining financial institution established in 1969 that has broad bi-partisan support. The Office of Management and Budget has praised OPIC for its responsible delivery of credit authority. Congress should look closely at the OPIC model and at some of the other successful USG credit programs, such as those of the U.S. Department of Agriculture, for lessons learned. In addition, the trials and tribulations of establishing the Millennium Challenge Corporation should not be overlooked.
Which Projects Should Be Eligible For REPIC Funding?
As discussed, the first Senate draft of REPIC will likely combine aspects of two bills introduced in the previous Congress: S. 3233 (Senator Bingaman) and S. 2730 (former Senator Domenici and others). Both of these bills have strong and weak points; however, they are fundamentally at odds with each other in defining eligible projects.
Under S. 3233, projects eligible for funding utilize a “breakthrough technology,” “novel technology” and “clean energy technology.” S. 2730 has a confusing and unworkable definition of “eligible project” and fails to define often used terms such as “clean energy” and “energy efficiency technologies.” The DOE Loan Guarantee Program eligibility language, authorized by Title XVII of the Energy Policy Act of 2005 (EPAct), is likewise problematic. The Title XVII language specifies eligible categories of projects but limits guarantees to projects that employ “new or significantly improved technology,” that either avoid, reduce or sequester air pollutants or greenhouse gas (GHG) emissions.
It is important that a REPIC bill clarify eligible technologies in plain language to encompass what are essentially three broad categories of projects: 1) clean and renewable energy projects; 2) energy efficiency projects employing technologies that can provide the same level of energy in a more efficient manner and 3) innovative or novel technologies that can improve the use of existing commercial technologies and reduce, avoid or sequester pollutants and GHGs (e.g. gasification).
How Should REPIC Interact with the DOE Loan Guarantee Program?
A REPIC bill must phase-out or sunset the current DOE loan guarantee program authority and transfer the project pipeline and project management over to the new entity. REPIC should have broader powers and more flexibility than the DOE Loan Guarantee Program.
While the DOE Loan Guarantee Program was ambitious, it has failed to evaluate projects efficiently and has yet to issue funding. It is clear that the structure of Title XVII of EPAct did not give the program the tools needed for success. A particular concern with borrowing elements from S. 3223 is replicating aspects of the DOE Loan Guarantee Program that may lead to funding delays. S. 3223 would create a program under DOE oversight that would spend its early years developing goals, performance targets, and a rating system to establish funding priorities, but not issuing financial support. Lessons learned from the existing Loan Guarantee Program caution against such mandates.
In replacing the Loan Guarantee Program, it is critical not to incorporate the restrictive and confusing language that authorized the Loan Guarantee Program. However, drafters should borrow from those concepts that work.
How Should Congress Structure REPIC?
Looking to OPIC as the primary model, the entity does not need to be complicated. The intent of REPIC must be to create a financial institution with broad programmatic authority and the highest level of flexibility. Congress should staff the Corporation with people who understand underwriting, servicing loans and portfolio management. Ideally, REPIC should employ seasoned financiers, bankers, clean energy entrepreneurs, private equity managers, structured finance attorneys and insurance professionals with private sector experience, recruited using a pay parity model.
To move quickly, Congress must give REPIC broad debt, equity and insurance authorities, and direct it to work with the private sector and encourage private investment. Since REPIC will support projects based on fairly new and evolving technologies, it is prudent to add a chief technology officer and a technology advisory council. Congress should establish maximum contingent liability caps for program authorities and provide for the appropriation of subsidy costs to control overall portfolio risk.
REPIC should have discretion to charge commercial banking fees, which it can use for working capital and administrative costs without the need for OMB apportionment. REPIC should issue securities and loan guarantees backed by the full faith and credit of the United States, and set up a revolving fund outside of credit reform to cover insurance risk and equity investment.
What Policy Tools Does REPIC Need to Operate Efficiently and Effectively?
In creating REPIC, Congress must examine carefully and handle correctly a host of fundamental policy issues. For example, REPIC should be allocated sufficient credit subsidy and not be given an option to charge sponsors an upfront fee to cover the cost of the loan. The DOE Loan Guarantee Program shows that charging an upfront fee to cover modeled loan risk is not a commercial reality.
Another critical policy area is the environment. It is important for projects funded by REPIC to comply with stringent environmental standards. However, for REPIC to function like a commercial financial institution, it should be given its own streamlined environmental protection scheme that specifically exempts it from the National Environmental Policy Act (NEPA). Certain aspects of NEPA, such as the ability of project critics to seek judicial review of loan commitments and other final agency actions, will create untenable and commercially unreasonable uncertainty that the private sector will not embrace.
REPIC legislation should also resolve the question of whether the new entity should be allowed to provide support for research and development. It is reasonable to allow DOE and the National Renewable Energy Laboratory to continue with their success in this area, and have REPIC focus solely on commercialization. However, there is little harm in giving the new entity limited authority to provide funding for feasibility studies and technical support, with such funding repayable on certain conditions.
Even with best designed statute, we need to remain realistic. OPIC, which emerged as a highly successful vehicle for mobilizing U.S. investment overseas, took over three years to begin getting money out the door. Given the right tools, a REPIC could be established and begin operations within two years.
This posting was written by Mark Garfinkel, who was VP and GC of OPIC from 2001 to 2009, and a former Chief of Staff for the USITC. He is currently an international mediator and founder of Diligence International, LLC, a consulting firm in the Washington, DC metro area. He can be reached at mgarfin@mindspring.com.