Department of Energy Seeks to Reverse Position on First Lien Requirement of Section 1702

On August 6, 2009, the Department of Energy (the “DOE”) proposed amendments to its regulations implementing the Loan Guarantee Program initially authorized by Section 1703 of Title XVII of the Energy Policy Act of 2005 (“Title XVII”). Under Section 1703 of Title XVII, the Secretary of Energy is authorized to make loan guarantees for eligible projects that encourage the commercial use of new or significantly improved energy technologies and achieve certain environmental benefits.  The proposed amendments were published on the DOE’s website on August 6, 2009, and published in the Federal Register on August 7, 2009.

The proposed amendments reverse the DOE’s previous interpretation of two provisions of Section 1702 of Title XVII to require a superior first lien on any property acquired pursuant to a guarantee.  The DOE now asserts that it has critically reexamined the statute and concludes that the interpretation of the statute requiring receipt of a first lien on all project assets was not one that it was legally compelled to adopt, and was not correct. Instead, a first lien on all project assets is one element that DOE may require for a particular project, but is not compelled by the statute to require.  In reviewing the background to the proposed amendments, the DOE stated that its original reading of the statute was in tension with the financing structure of many commercial transactions in the energy sector, and in particular, the tenancy in common ownership structure proposed for many nuclear generating facilities, which were effectively disqualified from participation in Title XVII programs if they were jointly owned through a tenants in common structure or where there were appropriate co-lenders or co-guarantors requiring a pari passu structure.

The proposed rule deletes the requirement of a first priority lien on all project assets (and other pledged collateral) and leaves to the Secretary of DOE to determine an appropriate collateral package, as well as intercreditor arrangements.  The guaranteed obligation can not be subordinate to other financing.

While the proposed rule does not specifically address the effect of the proposed amendment on loan guarantee programs through Section 1705 (for three categories of projects that commence construction not later than September 30, 2011), the DOE has stated in its recent solicitations that projects for loan guarantee pursuant to Section 1705 must qualify with Section 1702, thus making it very likely that the proposed amendments to Section 1702 would affect loan guarantees issued pursuant to Section 1705 as well as Section 1703. 

Comments on the proposed rule must be postmarked no later than September 8, 2009.