Biorefinery Assistance Guaranteed Loans

DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 4279 and 4287

RIN 0570-AA73

Biorefinery Assistance Guaranteed Loans

AGENCY:

Rural Business-Cooperative Service and Rural Utilities Service, USDA.

ACTION:

Interim rule with request for comments.

SUMMARY:

This interim rule establishes a guaranteed loan program for the development and construction of commercial-scale biorefineries and for the retrofitting of existing facilities using eligible technology for the development of advanced biofuels.

DATES:

This interim rule is effective March 16, 2011. Comments must be received on or before April 15, 2011.

ADDRESSES:

You may submit comments to this rule by any of the following methods:

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Mail:

Submit written comments via the U.S. Postal Service to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742.

•

Hand Delivery/Courier:

Submit written comments via Federal Express Mail or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, DC 20024.

All written comments will be available for public inspection during regular work hours at the 300 7th Street, SW., 7th Floor address listed above.

FOR FURTHER INFORMATION CONTACT:

Kelley Oehler, Energy Branch, Biorefinery Assistance Program, U.S. Department of Agriculture, 1400 Independence Avenue, SW., Stop 3225, Washington, DC 20250-3201; telephone (202) 720-6819. E-mail:

kelley.oehler@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This interim rule has been reviewed under Executive Order (EO) 12866 and has been determined to be economically significant by the Office of Management and Budget. The EO defines a “significant regulatory action” as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this EO.

The Agency conducted a benefit-cost analysis to fulfill the requirements of Executive Order 12866. In this analysis, the Agency identified potential benefits and costs of the Biorefinery Assistance Guaranteed Loan Program to lenders, borrowers, and the Agency. The analysis contains both quantitative estimates and qualitative descriptions of the expected benefits and costs of the Biorefinery Assistance Guaranteed Loan Program. The environmental and energy impacts associated with the Biorefinery Assistance Guaranteed Loan Program were qualitatively assessed.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, Rural Development generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, or tribal governments, in the aggregate, or to the private sector of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of the UMRA generally requires Rural Development to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule.

This interim rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Environmental Impact Statement

This renewable energy program under Section 9003 of the Farm Security and Rural Investment Act of 2002 (FSRIA) (as amended by Section 9001 of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill)) has been operating on an interim basis through the issuance of a Notice of Funds Availability (NOFA). During this initial round of applications, the Agency conducted National Environmental Policy Act (NEPA) reviews on each individual application for funding. No significant environmental impacts were reported, and Findings of No Significant Impact (FONSI) were issued for each approved application. Taken collectively, the applications show no potential for significant adverse cumulative effects.

The Agency has prepared a programmatic environmental assessment (PEA), pursuant to 7 CFR part 1940, subpart G, analyzing the environmental effects to air, water, and biotic resources; land use; historic and cultural resources; and greenhouse gas emissions affected by the Biorefinery Assistance Guaranteed Loan Program proposed rule. The purpose of the PEA is to assess the overall environmental impacts of the programs related to the Congressional goal of advancing biofuels production for the purposes of energy independence and greenhouse gas emission reductions. The impact analyses are national in scope, but draw upon site-by-site analysis for each application to the program. Site-specific NEPA documents prepared for those facilities funded under Sections 9003 and 9004 of the FSRIA in FY 2008 and/or 2009 were utilized, as well, to forecast likely impacts under the interim rule. The draft PEA was made available to the public for comment on the USDA Rural Business-Cooperative Service's Web site on May 3, 2010. No comments were received on the draft PEA, and the Agency is preparing to publish a Finding of No Significant Impact (FONSI) for the program.

Executive Order 12988, Civil Justice Reform

This interim rule has been reviewed under Executive Order 12988, Civil Justice Reform. In accordance with this rule: (1) All State and local laws and regulations that are in conflict with this rule will be preempted; (2) no retroactive effect will be given this rule; and (3) administrative proceedings in accordance with the regulations of the Department of Agriculture's National Appeals Division (7 CFR part 11) must be exhausted before bringing suit in

court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time.

Executive Order 13132, Federalism

It has been determined, under Executive Order 13132, Federalism, that this interim rule does not have sufficient federalism implications to warrant the preparation of a Federalism Assessment. The provisions contained in the rule will not have a substantial direct effect on States or their political subdivisions or on the distribution of power and responsibilities among the various government levels.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or any other statute unless the agency certifies that the rule will not have an economically significant impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions.

In compliance with the RFA, Rural Development has determined that this action will not have an economically significant impact on a substantial number of small entities. The burden for applying for a Biorefinery Assistance Guaranteed Loan Program loan to any one borrower is estimated to be less than 0.1 percent of the estimated cost of the average construction or reconstruction project funded under this program. Further, this regulation only impacts those who choose to participate in the program.

Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use

The regulatory impact analysis conducted for this interim rule meets the requirements for Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use, Executive Order No. 13211, which states that an agency undertaking regulatory actions related to energy supply, distribution, or use is to prepare a Statement of Energy Effects. This analysis finds that this rule will not have any adverse impacts on energy supply, distribution, or use.

Executive Order 12372, Intergovernmental Review of Federal Programs

Rural Development guaranteed loans are subject to the Provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. Rural Development will conduct intergovernmental consultation in the manner delineated in RD Instruction 1940-J, “Intergovernmental Review of Rural Development Programs and Activities,” available in any Rural Development office and on the Internet at

http://www.rurdev.usda.gov/regs,

and in 7 CFR part 3015, subpart V.

Executive Order 13175

United States Department of Agriculture (USDA) will undertake, within 6 months after this rule becomes effective, a series of regulation Tribal consultation sessions to gain input by elected Tribal officials or their designees concerning the impact of this rule on Tribal governments, communities, and individuals. These sessions will establish a baseline of consultation for future actions, should any be necessary, regarding this rule. Reports from these sessions for consultation will be made part of the USDA annual reporting on Tribal Consultation and Collaboration. USDA will respond in a timely and meaningful manner to all Tribal government requests for consultation concerning this rule and will provide additional venues, such as webinars and teleconferences, to periodically host collaborative conversations with Tribal leaders and their representatives concerning ways to improve this rule in Indian country.

The policies contained in this rule would not have Tribal implications that preempt Tribal law.

Programs Affected

The Biorefinery Assistance Guaranteed Loan Program is listed in the Catalog of Federal Domestic Assistance Program under Number 10.865.

Paperwork Reduction Act

The information collection requirements contained in the Notice of Funding Availability for the Section 9003 Biorefinery Assistance Guaranteed Loan Program published on November 20, 2008, were approved by the Office of Management and Budget (OMB) under emergency clearance procedures and assigned OMB Control Number 0570-0055. In accordance with the Paperwork Reduction Act of 1995, the Agency is now seeking standard OMB approval of the reporting requirements contained in this interim rule. In the publication of the proposed rule on April 16, 2010, the Agency solicited comments on the estimated burden. The Agency received one comment in response to this solicitation. This information collection requirement will not become effective until approved by OMB. Upon approval of this information collection, the Agency will publish a rule in the

Federal Register

.

Title:

Biorefinery Assistance Guaranteed Loan Program.

OMB Number:

0570-NEW.

Type of Request:

New collection.

Abstract:

The collection of information is vital for Rural Development to make wise decisions regarding the eligibility of projects and borrowers in order to ensure compliance with the regulations and to ensure that the funds obtained from the Government are used appropriately (i.e., are used for the purposes for which the guaranteed loans were awarded). Persons seeking loan guarantees under this program will have to submit applications that include specified information including, but not limited to, the lender's analysis and credit evaluation, financial statements on the borrower, a feasibility study, a business plan, a technical assessment, an economic analysis, and a description of the borrower's bioenergy experience. The information included in applications for loan guarantee will be used to determine applicant and project eligibility and to ensure that funds are used for projects that are likely to be financially sound.

Once a project has been approved and the loan has been guaranteed, lenders must submit certain reports. Some of these reports are associated with the performance of the lender's loan portfolio and include both periodic reports on the status of that portfolio and, when applicable, monthly default reports. Other reports are associated with individual projects and include quarterly construction reports and, once a project has been completed, annual reports through the life of the guaranteed loan. In addition, lenders are required to conduct annual inspections of each completed project.

The estimated information collection burden hours has not changed from the proposed rule, remaining at 2,920 hours.

Estimate of Burden:

Public reporting burden for this collection of information is estimated to average 4.6 hours per response.

Respondents:

Individuals, entities, Indian tribes, units of State or local government, corporations, farm cooperatives, farmer cooperative organizations, associations of

agricultural producers, National Laboratories, institutions of higher education, rural electric cooperatives, public power entities, and consortia of any of these entities.

Estimated Number of Respondents:

23.

Estimated Number of Responses per Respondent:

27.4.

Estimated Number of Responses:

630.

Estimated Total Annual Burden on Respondents:

2,920.

E-Government Act Compliance

Rural Development is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

I. Background

Rural Development administers a multitude of Federal programs for the benefit of rural America, ranging from housing and community facilities to infrastructure and business development. Its mission is to increase economic opportunity and improve the quality of life in rural communities by providing the leadership, infrastructure, venture capital, and technical support that enables rural communities to prosper. To achieve its mission, Rural Development provides financial support (including direct loans, grants, and loan guarantees) and technical assistance to help enhance the quality of life and provide the foundation for economic development in rural areas.

Section 9003 of the Farm Security and Rural Investment Act of 2002 (FSRIA) (as amended by Section 9001 of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill)) provides for financial assistance in the form of grants and loan guarantees to assist in the development of new and emerging technologies for the development of advanced biofuels. At this time, Congress has not appropriated any discretionary funding, which would be necessary to fund program grants. Therefore, the interim rule only addresses loan guarantees. If and when funds for grants are appropriated and received by the Agency, it will be necessary for the Agency to promulgate a separate regulation for program grants.

The interim rule establishes the Biorefinery Assistance Guaranteed Loan Program to provide loan guarantees for the development, construction, or retrofitting of commercial biorefineries using eligible technology, where eligible technology is defined as:

(a) Any technology that is being adopted in a viable commercial-scale operation of a biorefinery that produces an advanced biofuel, and

(b) any technology not described in paragraph (a) above that has been demonstrated to have technical and economic potential for commercial application in a biorefinery that produces an advanced biofuel.

On April 16, 2010 [75 FR 20044], the Agency published a proposed rule for the Biorefinery Assistance Guaranteed Loan Program. Comments were requested on the proposed rule, which are summarized in Section III of this preamble. Most of the proposed rule's provisions have been carried forward into 7 CFR part 4279, subpart C, and 7 CFR part 4287, subpart D, although there have been several significant changes. Changes to the proposed rule are summarized in Section II of this preamble.

Interim rule.

USDA Rural Development is issuing this regulation as an interim rule, effective March 16, 2011. All provisions of this regulation are adopted on an interim final basis, are subject to a 60-day comment period, and will remain in effect until the Agency adopts the final rule.

II. Summary of Changes to the Proposed Rule

This section presents changes from the April 16, 2010, proposed rule. Most of the changes were the result of the Agency's consideration of public comments on the proposed rule. Some changes, however, are being made to clarify proposed provisions. Unless otherwise indicated, rule citations refer to those in the interim rule.

A. Highlighted Changes

The following highlight significant changes to the rule:

• Revised the maximum percent guarantee provisions, including adding provisions to allow for a 90 percent guarantee for loan amounts of $125 million or less under certain conditions.

• Added refinancing as an eligible project purpose under certain conditions.

• Removed location in a rural area as a requirement for project eligibility; however, it is included in a scoring criterion in order to receive points for that criterion.

• Removed the citizenship requirement for borrowers.

• Revised the minimum retention requirement to 7.5 percent of total loan amount.

B. Section Specific Changes

1. Definitions

A number of definitions were added, revised, or removed.

The Agency added one definition:

“Biobased product” was added in order to further clarify the biorefinery definition.

The Agency revised several definitions as follows:

•

Business plan.

The Agency clarified the wording of this definition.

•

Existing businesses.

The Agency clarified the wording of this definition.

•

Farm cooperative.

The Agency revised the definition to be generally consistent with the definition being used in the value-added producer grant program.

•

Feasibility study.

The Agency replaced “capabilities” with “feasibility” to clarify the definition.

•

Local owner.

The Agency revised the rule to remove the reference to the feedstock supply area and now defines local owner as “an individual who owns any portion of an eligible advanced biofuel biorefinery and whose primary residence is located within a certain distance from the biorefinery as specified by the Agency in a Notice published in the

Federal Register

.”

•

Material adverse change.

The Agency revised the definition by replacing “might” with “would likely” jeopardize loan performance.

•

Project.

The Agency corrected the term “biobased byproduct” to “biobased product.”

•

Technical and economic potential.

The Agency added to the definition the phrase “successfully completed” when referring to the 12-month operating cycle.

Lastly, the Agency revised several definitions associated with capital ratios to refer to the Federal Deposit Insurance Corporation regulations in general.

The Agency removed several definitions—Agency, byproduct, future recovery, immediate family, regulated or supervised lender, and surety.

• The term “Agency” was removed from the definitions because it is defined in § 4279.2 and does not need to be repeated in the interim rule.

• The term “future recovery” was removed because the term is not used in the interim rule.

• The term “immediate family” was removed because the term was only used for the citizenship requirement, which has been removed. Thus, the term is no longer used in the rule.

• The term “regulated or supervised lender” was removed because of the revision made to identify eligible lenders.

• The specific definition for the term “surety” was removed; the rule now refers to how the term is commonly used in the industry.

2. Lender Eligibility Requirements

The Agency modified § 4279.202(c)(1) to make the definition of eligible lender similar, but not identical, to the definition of traditional lender in the Business and Industry Guaranteed Loan Program. The Agency notes that, under the interim rule, savings and loan associations, mortgage lenders, and other lenders (those that are not regulated lenders) are not eligible to participate in this program.

The Agency modified the rule to require that the lender meet acceptable levels of capital at the time of application and at the time of issuance of loan note guarantee, thereby removing the requirement of maintaining acceptable capital levels at all times.

The Agency also clarified that, if the information to calculate these levels of capital is not identified in the Call Reports or Thrift Financial Reports, the lender will be required to calculate these levels and provide them to the Agency.

Lastly, the Agency added a provision addressing lenders that are under a cease and desist order from a Federal agency. In such instances, the Agency will evaluate the lender's eligibility on a case-by-case basis given the risk of loss posed by the cease and desist order.

3. Independent Credit Risk Analysis

The Agency revised “$100,000” to “$125,000,000.”

4. Conditions of Guarantee

The Agency revised the rule to indicate that both the guaranteed and unguaranteed portions of the entire loan must be secured by a first lien and that the Agency may consider a subordinate lien position on inventory and accounts receivable for working capital loans if certain conditions are met.

The Agency also clarified that the lender remains bound by all obligations under the loan note guarantee, Lender's Agreement, and Agency program regulations even if all or a portion of the loan note guarantee has been sold to a holder.

Lastly, the Agency incorporated provisions associated with rights and liabilities specific to this program, rather than relying on the corresponding provisions in the Business and Industry Guaranteed Loan program found at § 4279.72(b), to clarify that having a holder purchase part of the loan note guarantee does not increase the coverage provided to the lender under the loan note guarantee.

5. Sale or Assignment

The Agency revised the sale or assignment provisions to rely solely of the sale or assignment provisions of the Business and Industry Guaranteed Loan program found at § 4279.75.

6. Minimum Retention

The Agency revised the minimum retention provisions to rely on the minimum retention provisions of the Business and Industry Guaranteed Loan program found at § 4279.77, except that the lender is required to hold 7.5 percent (rather than 5 percent) of the total loan amount in its own portfolio.

7. Ineligible Purposes

As proposed, projects in excess of $1 million that would likely result in the transfer of jobs from one area to another and increase direct employment by more than 50 employees and projects in excess of $1 million that would increase direct employment by more than 50 employees, if the project would result in an increase in the production of goods for which there is not sufficient demand, or if the availability of services or facilities is insufficient to meet the needs of the business, would have been ineligible purposes, as they are in the Business and Industry Guaranteed Loan program. The Agency has removed these types of projects as ineligible; that is, such projects would be eligible for a guaranteed loan under this program. The Agency has determined that to continue excluding such projects is unnecessary for this program because the program's primary focus is on the development of renewable energy technologies and not on job creation.

8. Fees

The Agency removed the cross-reference to the Business and Industry Guaranteed Loan program and replaced it with provisions specific to this program. The only substantive change is the elimination of reference to the option to lower the guarantee fee to 1 percent, which was never intended to be part of this program.

The Agency has added provisions that allow it to adjust the guarantee fee and the annual renewal fee through the publication of a

Federal Register

notice.

The Agency has added a 3 percent guarantee fee for loans with a 90 percent guarantee.

9. Borrower Eligibility

The Agency removed the citizenship requirement. In addition, the Agency clarified that the borrower must have or obtain legal authority prior to loan closing.

10. Project Eligibility

Changes made to project eligibility include:

• Replacing the requirement that the project must be located in a rural area with the requirement that the project must be located in a State. Note that the project must be located in a rural area to receive points under the “potential for rural economic development” scoring criterion.

• Clarifying that the project must use an eligible feedstock for the production of advanced biofuels and biobased products (at proposal, only advanced biofuels was identified) to be consistent with the authorizing legislation.

• Revising the proposed requirement that “more than 70 percent of the revenue generated by the biorefinery must be from the sale of advanced biofuel” to now require that the majority of the production generated by the biorefinery must be advanced biofuels. If the biorefinery produces biobased products and, if applicable, byproduct(s) with an established BTU content, majority biofuel production will be based on BTU content of the advanced biofuel, the biobased product, and byproduct. Alternatively, if there is no established BTU value for the biobased product or the byproduct produced, then majority biofuel production would be based on output volume of the advanced biofuel, the biobased product, and, if applicable, the byproduct.

• Adding a provision that the advanced biofuel must be sold as a biofuel unless otherwise approved by the Agency and determined to be in the best financial interests of the government.

• Revising the rule to include any organic matter that is available on a renewable or recurring basis from non-Federal land or eligible tribal land, including municipal solid waste consisting of renewable biomass, biosolids, treated sewage sludge, and byproducts of the pulp and paper industry, as eligible feedstock.

• Clarifying that an advanced biofuel that is converted to another form of energy for sale will still be considered an advanced biofuel.

11. Guaranteed Loan Funding

The Agency has made several changes in this section, including:

• Clarifying that the borrower needs to provide the remaining 20 percent from other non-Federal sources to complete the project.

• Revising the loan guarantee amounts associated with the maximum percent guarantees;

• Allowing a maximum guarantee of 90 percent for loan requests of $125 million or less and identifying the conditions under which the Agency may issue a 90 percent guarantee.

• Adding a provision that loans made with the proceeds of any obligation the interest on which is excludable from income under the Internal Revenue Code are ineligible.

12. Subordination of Lien Position

The Agency moved this provision to the servicing section and corrected the cross-reference (from § 4279.123 to § 4287.123).

13. Interest Rates

In addition to removing the proposed provisions associated with blended rates and the 1 percent interest rate cap from the interim rule, the Agency has significantly revised this section to now rely on the interest provisions found in the Business and Industry Guaranteed Loan program at § 4279.125, with several exceptions:

• The rate on the unguaranteed portion of the loan cannot exceed the rate on the guaranteed portion of the loan by more than 500 basis points;

• Variable rate loans will not provide for negative amortization nor will they give the borrower the ability to choose its payment among various options; and

• Both the guaranteed and unguaranteed portions of the loan must be amortized over the same term.

In addition, the interest rates provisions found in the Business and Industry Guaranteed Loan program at § 4287.112 also apply to this program.

14. Terms of Loan

The maximum repayment period has been revised from “20 years or 85 percent of the useful life of the project, as determined by the Agency, whichever is less” to “20 years or the useful life of the project, as determined by the lender and confirmed by the Agency, whichever is less.”

The Agency also removed the cross-reference to § 4279.126(d) and inserted corresponding text specific to this program (see § 4279.232(d)).

15. Credit Evaluation

The Agency made several changes to the provisions for demonstrating the borrower's equity. One change allows equipment and qualified intellectual project (in addition to real property as was proposed) to be used to meet the equity requirement, but clarifying that this provision applies to only existing biorefineries and not to new biorefineries. In addition, the Agency clarified that equity cannot include other direct Federal funding.

The Agency clarified that the project equity must be demonstrated at the time the loan is closed.

With regard to collateral, the Agency added provisions that it may consider, for both existing and new biorefineries, the value of qualified intellectual property, arrived at in accordance with GAAP standards and subject to discounting. The value of intellectual property may not exceed 30 percent of the total value of all collateral.

16. Guarantee Applications

i.

Application submittal, deadlines, and process.

Reference to paper copies has been replaced with reference to the use of the annual Federal Register notice to identify the applicable method(s) of application submittal.

ii.

Lender's analysis and credit analysis.

The Agency added a provision requiring the lender to identify whether the loan note guarantee is requested prior to construction or after completion of the construction of the project; revised the requirement that the required personal credit report be from an “acceptable” credit reporting company to an “Agency-approved” credit reporting company; added a requirement that personal credit reports are required from key employees of the borrower; added a provision to allow the Agency to obtain personal credit reports when the borrower is a corporation listed on a major stock exchange; and deleted the provision that stated credit reports are not required for elected and appointed officials when the borrower is a public body or non-profit corporation.

iii.

Feasibility study.

Several changes were made to the contents of the feasibility study as summarized in the following table. Note that only elements that were changed are shown in the table.

Feasibility area

Change(s)

Economic

• Added feedstock risks.

• Revised documentation of woody biomass feedstock to apply only to woody biomass feedstock sourced from National Forest system lands or public lands.

• Added “or sold to” when referring to biobased by-products and producer associations and cooperatives.

Market

• Redefined risks to address competitive threats and advantages and specific market risks.

Technical

• Removed “any constraints or limitations in the financial projections and any other facility or design-related factors that might affect the success of the enterprise.”

• Under Risk Related to: added “Design-related factors that may affect project success.”

Financial

• Added reference to “uses of project capital.”

• Revised the provision of project balance sheets, income and expense statement, and cash flow statements from 3 years to over the useful life of the project.

Management

• Added biofuel production, acquisition of feedstock, and marketing and sale of off-take to the list of areas to be covered when describing the borrower and management's previous experience.

• Added risks related to management strengths and weaknesses.

Note:

No changes were made to: Executive Summary and Qualifications.

iv.

Economic analysis.

The elements of the economic analysis have been incorporated in the economic feasibility and financial feasibility sections of the feasibility study and proposed § 4279.261(i) has been removed from the rule as a separate provision.

V.

Scoring information.

The Agency added a paragraph requiring that the application must contain information in a format that is responsive to the scoring criteria.

17. Lender Certification

The lender is now required to certify that “the lender concludes that the project has technical merit” rather than certify that “the project is able to demonstrate technical merit.”

18. Scoring Criteria

The Agency revised the date it will score each completed application it receives from June 1 to May 1 in the fiscal year in which the application is received.

The Agency also made numerous changes to the criteria it will use to score applications. These changes are summarized in the following table. Note that only criteria that were changed are shown in the table.

Criterion

Change(s)

Borrower has established a market

• Added requirement for the advanced biofuel to meet an applicable renewable fuel standard in order to be awarded points.

• Reduced the percent commitment from 60 to 50 percent.

• Increased points from 5 to 10.

Location of biorefinery relative other similar biorefineries

• Revised to read “any other similar advanced biofuel facilities.”

Use of feedstock not previously used in the production of advanced biofuels

• No changes were made to this criterion.

Working with producer associations and cooperatives

• Corrected example.

• Instituted a two-tier system that begins awarding points at a 30 percent threshold.

• To be awarded points, must meet one of the three provisions, not all three as proposed.

• Replaced “advanced biobased byproducts” with “biobased products”.

Level of financial participation by the borrower

• Reduced points from 20 to 15.

Impacts on resource conservation, public health, and environment

• Increased maximum points from 5 to 10 and redistributed the points.

• Added examples to each of the three impact areas.

• Added provision to deduct 5 points if feedstock can be used for human or animal consumption.

Significant negative impacts on existing facilities

• Increased points from 5 to 10.

• Added provision that if the feedstock is wood pellets, no points would be awarded under this criterion.

Rural economic development potential

• Added provision that the project be located in a rural area to be awarded points under this criterion.

• Removed reference to the median household wage in the State such that only the County median household wage is used in awarding points.

• Increased points from 5 to 10.

Level of local ownership

• Decreased points from 15 to 5.

Project replication

• Increased points from 5 to 10.

Use of feedstock for human or animal consumption deduction

• Removed as a separate criterion and incorporated provision for deducting points under the “Impact on resource conservation, public health, and environment” criterion.

Use of technology, system, or process not in operation in the fiscal year

• Decreased points from 15 to 5.

Applications that promote partnerships and other activities that further the purpose of the program as stated in the authorizing legislation

• Added provision to award Administrator bonus points.

19. Ranking of Applications

The Agency modified when it will rank applications and when applications are due for each of the two rankings. The Agency also modified slightly the process that will be used to rank applications, which includes allowing an application to be competed in two consecutive competitions. This has the effect of allowing applications submitted during the second application period of a fiscal year to be carried over to the next fiscal year. Conforming changes were made in the section addressing ranked applications not funded.

20. Conditions Precedent to Issuance of Loan Note Guarantee

The Agency added to the introductory text that the lender can request the guarantee prior to construction, but must still certify to all conditions in this section. The Agency also added a new requirement that the lender certify that the borrower has provided the equity in the project identified in the conditional commitment.

21. Requirements After Project Construction

The Agency added a requirement to report on the actual amount of biobased product and, if applicable, byproducts produced.

22. Servicing

The Agency is allowing the financial statements to be submitted within 180 days rather than the 120 days required under § 4287.107(d).

The Agency made a conforming change in § 4287.307(d) that, for working capital loans, the Agency may consider a subordinate lien provided it is consistent with the conditional provisions specified in § 4279.202(i)(1).

The Agency determined that the interest rate adjustment provisions of § 4287.112(a)(2) should not apply to this program and has revised the rule to exclude those provisions.

As noted earlier, the Agency moved the provisions concerning subordination of lien position to this section (see § 4287.307(g)).

The Agency revised the transfer and assumption provisions to cross-reference this rule rather than the Business and Industry Guaranteed Loan rule.

The Agency revised the default by borrower provisions by removing the cross-reference to the corresponding Business and Industry Guaranteed Loan program provisions and inserting text specific to this program. This change was made to correct an incorrect cross-reference.

The Agency revised the liquidation provisions to correct an incorrect cross-reference in § 4287.157(d)(13) concerning appraisals.

23. Fiscal Year 2009 and Fiscal Year 2010 Loan Guarantees

Prior to this interim rule, applications were processed and guaranteed loans were serviced according to the provisions in the November 20, 2008 (73 FR 70544), March 12, 2010 (75 FR 11840), or the May 6, 2010 (75 FR

25076)

Federal Register

notice, as applicable. Because of the changes the Agency has made to the servicing of loans guaranteed under the Biorefinery Assistance Guaranteed Loan Program, there may be entities that would prefer to have a guaranteed loan serviced under the provisions of the interim rule rather than under the provisions in the three

Federal Register

notices pursuant to which their guaranteed loans were made. The Agency has determined that such entities should be afforded the opportunity to access the servicing provisions of the interim rule. Therefore, the Agency has added a new provision to this effect in the interim rule.

III. Summary of Comments and Responses

The proposed rule was published in the

Federal Register

on April 16, 2010 (75 FR 20044) with a 60-day comment period that ended June 15, 2010. Comments were received from 42 commenters yielding 352 individual comments on the proposed rule, which have been grouped into categories based on similarity. Commenters included biorefinery owner/operators, community development groups, industry and trade associations, investment banking institutions, Rural Development personnel, and individuals. As a result of some of the comments, the Agency made changes in the rule. The Agency sincerely appreciates the time and effort of all commenters. Responses to the comments on the proposed rule are discussed below.

Requested Comments— a. Preapplications

Comment:

Two commenters state that a preapplication process that serves as a screening process could be very helpful to all parties. One of the commenters states that considerable effort is required to develop an application package that may ultimately not score high enough to meet eligibility requirements. In addition, lenders have to commit to the application process with no reference as to how the Agency will view the project. One option would be to move the feasibility study (§ 4279.261) and the evaluation scoring (§ 4279.265) into a preapplication process. Screening and filtering out ineligible or otherwise low scoring projects would streamline the overall process and improve program efficiencies.

One commenter states that the application requirements, which appear to be rather lengthy and burdensome, contain elements that should be required by any prudent commercial loan committee reviewing the loan itself. The commenter believes a preapplication process for the program will only be of benefit to lenders and borrowers if it includes a sign-off by the Agency as to completeness of the application. The commenter believes it would be a waste of time to review a project for acceptability and then review it again for guarantee issuance; the review of a partial and then complete application would only serve to slow down a process that we are seeking to expedite.

One commenter believes that a preapplication process would only add another step in the program and would not further the intent and effectiveness of the program. Similarly, another commenter states that a preapplication should not be required as it increases the burden of required paperwork.

One commenter recommends that, rather than preapplications, specialists be available to assist in evaluating how a given project application would likely score against the program criteria.

One commenter encourages the Agency to consider a pre-application process similar to the two-phase process employed by the Department of Energy in its current solicitation (DE-FOA-0000140) for Title XVII loan guarantees, the lack of which the commenter identifies as an obstacle for applying for assistance. This process would be beneficial to the extent the “preapplication process” is similar to the two-phase process that the U.S. Department of Energy (DOE) is using in its current solicitation for Title XVII loan guarantees. Requiring less than a “full-blown” application in Phase I so that the Agency can determine eligibility and “invite” those applicants with a reasonable likelihood of success to apply in Phase II would relieve some burdens from applicants. Phase I could include a basic application, a letter commitment from the borrower to pursue Phase II if invited to apply and the applicant (lender) to lend a specified amount to the project if the Agency agrees to guarantee the loan (subject to other customary conditions precedent), along with an overview of the project reflective of the scoring criteria. This would reduce the level of diligence that lenders would have to conduct for Phase I and shift this diligence to Phase II when the success of an application is more likely. This may entice additional qualified lenders to participate and result in the Agency receiving more Phase I applications. A phased application process would also reduce the burden on the borrower, who, prior to issuance of the loan (or a greater likelihood as evidenced by an invitation to submit a Phase II application), may choose not to apply and instead allocate limited personnel resources to other tasks.

Response:

The Agency has decided not to implement a preapplication requirement. Because the information that would be required in the preapplication would be similar to that in a formal application, a preapplication would be duplicative and add further burden to the lender and Agency. The Agency can meet with the lender/potential borrower prior to application submission to discuss the scoring criteria and informally review the proposal and application material completed to date.

Comment:

One commenter suggests that a qualification form be written and posted on the Agency Web site that would be accessible to all. The commenter recommends that such a form would contain, at a minimum, scoring criteria; equity requirements and detailed examples of allowable equity; eligible borrowers; eligible technologies; eligible uses of loan proceeds; and approval timelines. The commenter also suggests that a blog page be implemented to make available questions and answers, new information, comments, and suggestions on an interactive basis.

Response:

The rule provides applicable eligibility criteria and so no changes were made to the rule based on this comment. The Agency is currently revising the USDA Web site and will consider the suggestions offered by the commenter. The Agency will also consider preparing an application guide.

Comment:

One commenter recommends implementing a pre-application process that does not require a lender-of-record. The first hurdle for participation in the section 9003 program is convincing a lender to commit resources to a project for due diligence, feasibility studies, term sheet development, and filing of an application. The program requirements are not conducive to lenders, particularly in light of the inherent risks associated with first-of-kind commercial advanced biofuel projects. Applications from several companies are being held back simply because a lender-of-record could not be found to begin the process. The structure that the Agency has created is counter to how private debt transactions are generally arranged. Typically, an investment bank represents the company/project and approaches lenders to underwrite the loans. Then, the lender will conduct extensive due diligence on the project and decide whether or not to lend and

on what terms. The proposed structure, however, requires the lender to be identified from the beginning, without any indication from the Agency as to whether or not there will be a guarantee from the Agency.

The commenter recommends phasing in applications in two parts as follows:

Part I (Pre-application)—The investment bank representing the project submits an application (similar to the current application) along with the project company. The Part I application contains the level of due diligence required by the Agency and gives the Agency comfort that an accredited, U.S. Securities and Exchange Commission (SEC)-regulated entity is representing the project and attesting to the project's attributes and risks. The Agency reviews that application and makes a determination, based on its review, whether a project should receive a “Letter of Intent” to proceed to Part II.

Part II—Once a Letter of Intent is issued, the project then seeks a lender for the guaranteed portion of the debt and a lender/investor for the unguaranteed portion of the debt. The latter is going to be the key participant and the one who will conduct a significant amount of due diligence to decide whether or not to take the risk on investing/lending for the unguaranteed portion of the debt. The result of that due diligence and a decision to invest should then be submitted to the Agency as a Part II “application,” which is really more of a collection of due diligence findings. The company and the original investment bank could even certify as to its accurateness and then the Agency can review that final deliverable prior to issuing a guarantee and closing the transaction.

The commenter recognizes that a potential Agency concern is that the appropriate level of due diligence would not be conducted unless a lender is on the hook for some portion of the unguaranteed portion of the loan. However, the fact that there is an unguaranteed note means that an investor or lender will do a tremendous amount of due diligence prior to agreeing to lend/invest in the unguaranteed portion, which is a condition precedent for the Agency to issue a final loan guarantee and close a deal. If the Agency's concern is that proper due diligence is being done, the Agency should be confident that it will be done prior to the closing of the transaction and the issuance of a loan guarantee, because there is an unguaranteed portion of the debt that has to be placed. But by requiring the “Lender of Record,” as defined to mean the holder of a portion of the unguaranteed debt, to conduct all of that due diligence up front is both unnecessary and unfeasible in this market. To protect the Agency from outstanding conditional commitments, without the ability to close on the guarantee, a 6-month time limit could be placed on submitting a Part II application.

Response:

With regard to a pre-application process, for the reasons noted in an earlier response, the Agency is not implementing a pre-application process.

As a matter of practice, the Agency is available to meet with potential borrowers and/or lenders prior to the submittal of an application for a specific project.

The Agency further requires that a formal application be submitted from an eligible lender. From the formal application forward, the eligible lender will be the primary point of contact for the project with the Agency.

Requested Comments—b. Feedstock

Comment:

One commenter recommends removing the restriction, “no corn feedstock,” from tandem USDA and DOE programs in the instance of biobased chemicals, products, and materials only. The commenter states that corn has long given the U.S. a competitive advantage in the biofuel industry and that it may be our country's only advantage in the clean energy sector. The Agency should not eliminate the advantage of a highly efficient industrial product, engineered specifically for use in industry and not for food consumption. The Agency should, instead, advocate for any advantage in reaching our country's goals to achieve both renewable fuel standards and U.S. government biobased product procurement program goals.

One commenter believes that feedstock currently used for the production of food, other on-site energy production, and in other industries should not be diverted to new energy production, and that the current proposal to exclude cellulosic feedstock and “corn kernel starch” is sound and reasonable, and fits within the Agency's guidelines, purpose, and intent.

Response:

The Agency notes that the exclusion of corn kernel starch is a statutory requirement and cannot be changed by this regulation. However, cellulosic feedstock is eligible under this program.

Comment:

One commenter believes that all biorefineries using any eligible feedstock should be eligible for the program because the purpose of this program is the creation of advanced biofuel biorefineries and limiting feedstock eligibility would not further the program's purposes.

One commenter recommends allowing byproducts from pulp and paper if they can be upgraded to higher value products compared to power generation, and scoring them equally to other feedstock. Another commenter also recommends that byproducts from the paper and pulp industry be eligible, if the byproducts meet the criteria of not being consumed in a higher value use.

Response:

The program allows for a variety of feedstock. The feedstock must be renewable biomass, other than corn kernel starch, as defined in the statute. The statute requires that the materials, pre-commercial thinnings, or invasive species from National Forest System land or public lands cannot be used for higher value products. This “higher value” criterion does not apply to byproducts of the paper and pulp industry.

Comment:

Six commenters note that the proposed rule limits the types of feedstock that can be used to produce biofuels under the program. The House Conference Report for the 2008 Farm Bill—House Report 110-627, p. 1048, lines 3-8—specifically provides that: “Examples of lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis include dedicated energy crops and trees, wood and wood residues, plants, grasses, agricultural residues, fibers, animal wastes and other waste materials, and municipal solid wastes.” The commenters believe that the Conference Managers undoubtedly intended that municipal solid waste can be used as a feedstock and state that the Agency has chosen to ignore this letter. Instead, the Agency notes in the proposed rule: “The Agency believes that the statute clearly defines eligible feedstock and no further clarification is needed in the proposed rule.”

The commenters believe that the public interest is not served by limiting the number and types of technologies that can be used to build biorefineries, or in limiting the types of feedstock that are available for use and can provide an economic benefit to rural America. The commenters urge the Agency to modify the proposed rule to specifically state that municipal solid waste can be used as a feedstock, in conformity with the express intent of the House Conference Report for the 2008 Farm Bill.

One commenter also recommends stating that municipal solid waste can be used as a feedstock and treating municipal solid waste materials as a

homogeneous feedstock eligible to be used in biofuels production, consistent with standard recycling practices.

One commenter recommends including biosolids, or treated sewage sludge and its byproducts, as an eligible feedstock, and that facilities producing advanced biofuels, solid and liquid, from biosolids be allowed to apply for program funds.

One commenter recommends including all biodegradable solid wastes to further expand the types of feedstock that can be utilized.

One commenter recommends expanding the traditional definition of biomass to take advantage of new technologies that convert additional organic matters into energy—such as biosolids. Such an expanded definition of “renewable biomass” would take account of population growth in our rural communities and the environmental impacts of the traditional methods of biosolids disposal on such rural communities. Additionally, the Agency would be encouraging the recycling and reuse of a substantial renewable organic feedstock—biosolids, further expanding our nation's sources of energy. Specifically, the commenter proposes that the definition of “renewable biomass” be expanded as follows to include: “(iii) Renewable waste materials and byproducts resulting from the treatment of sewage, including biosolids, fats, oils, and grease and other byproducts.”

Similarly, one commenter recommends expanding the definition of “Advanced biofuel” as follows to include: “(iii) Biofuel (solid or liquid) derived from waste material, including crop residue, other vegetative waste material, animal waste, food waste, yard waste, and treated sewage waste, residues and byproducts.” According to the commenter, specifically including biosolids in the definition of “renewable biomass” as an eligible feedstock, and qualifying the definition of “advanced biofuels” to include treated human sewage waste materials, will encourage the wide-spread adoption of sewage-to-energy technologies and further efforts by Congress and the Administration to develop all sources of renewable energy and create jobs in green technologies.

One commenter states there should be no restriction on feedstock used and that the definition of feedstock needs to be expanded to include municipal sludge as an acceptable feedstock. The commenter states that, with the current need and demand for biofuels, it is imperative that there should not be a restriction on the type of feedstock used. In addition to producing advanced biofuels in a sustainable, efficient manner, it is imperative that waste materials be used to produce other advanced products and be utilized in the greatest way to achieve energy production and reduce greenhouse gases (GHG).

Response:

The Agency partially agrees with the commenters. The Agency has revised the rule to clarify that municipal solid waste is an eligible feedstock, but only to the extent that it meets the statutory definition of renewable biomass. It is unlikely that homogeneous, unsegregated municipal solid waste would meet this definition. The Agency has also revised the rule to include as eligible feedstock any organic matter that is available on a renewable or recurring basis from non-Federal land or eligible tribal land, including biosolids, treated sewage sludge, and byproducts of the pulp and paper industry. The Agency notes that “black liquor,” a byproduct of the pulp and paper industry, is not an eligible feedstock, because it includes inorganic material and, therefore, does not meet the definition of renewable biomass.

Comment:

One commenter states that their technology is complementary to recycling and will not use paper that is commonly recycled. However, if paper is mixed with municipal solid waste instead of being collected separately, it cannot be recycled and should, thus, be considered a waste material for the production of biofuels. Therefore, the commenter urges the Agency to broadly define waste material, consistent with common recycling practices. Further, the commenter requests that the Agency not establish separate compliance obligations for various component parts of the waste stream, such as paper. The commenter, instead, recommends that the Agency provide additional guidance on the eligibility of paper, so that soiled paper, which is not recyclable, be included in the definition of waste material.

Response:

The Agency considers soiled paper mixed with other organic municipal solid waste to be eligible renewable biomass. In § 4279.228(c), the phrase “consisting of renewable biomass” was added after the term “municipal solid waste” in the description of eligible feedstocks.

Comment:

One commenter encourages the Agency to refrain from limiting feedstock eligibility for the program unless a particular feedstock is prohibited by Section 9003. The commenter agrees that “the statute clearly defines eligible feedstock and no further clarification is required.” The commenter states that both Section 9001(3) and 9001(12) of the 2008 Farm Bill contain lists of feedstock that are included, but that these lists should not be construed as limiting these definitions to those feedstock listed, but rather as examples of the term being defined.

The commenter asserts that any fuel derived from algae, whether blue-green, cyanobacteria, or seaweeds, meets the definition of “advanced biofuel” in all respects, perhaps limited only by Section 9001(12)(B). Algae are not corn starch, and it is explicitly included as an example of “renewable biomass.” The commenter would object to any efforts by the Agency or other stakeholders to exclude algae by administrative discretion. This would be contrary to clear Congressional support for the inclusion of algae as “renewable biomass” and, therefore, an eligible feedstock. The commenter believes the Agency views algae as an important feedstock to meeting the mandates imposed by the Renewable Fuel Standard (RFS) as evidenced by the loan guarantee issued to Sapphire Energy in 2009. The commenter applauds the Agency for taking the leading role in supporting the development of the algae industry as a vital sector of the broader agricultural industry poised to play an important role in securing America's energy independence and rural job growth. In sum, the commenter suggests that the Agency resist excluding feedstock as being “eligible” if such feedstock would qualify under section 9003.

Response:

The Agency agrees and considers the list provided by statute to be illustrative, but not exclusive. No change was made to the rule in response to this comment.

Comment:

Two commenters urge the Agency to exercise caution when considering limitations on feedstock for use in biorefineries. The commenters encourage the Agency to support feedstock that increase the overall potential of the biomass industry through widespread applicability, creation of jobs, and a positive impact on national security, while excluding support for feedstock that compete with food or harm the environment. Outside of these specific areas, however, the commenters encourage the Agency to remain as feedstock neutral as possible in order to allow both the feedstock and biofuels industry to innovate freely. In the notice of proposed rulemaking (NPRM), the Agency notes: “At this stage in the development of the biofuels industry, it is impossible to know what technologies will become the most effective.” The same is true of feedstock.

Another commenter also encourages the Agency to remain as feedstock-neutral as possible in order to allow the

feedstock and biofuels industry to innovate freely. The commenter believes the Federal government has a dubious track record when it attempts to pick winners and losers in the energy space, and the advanced biofuels sector should be no exception. The commenter warns against excessive limitations on feedstock for use in biorefineries. Concerns over competition with food or harm to the environment are legitimate and should be addressed; however, the Agency should also take into account the overall potential of the biomass industry through widespread applicability, creation of jobs, and a positive impact on national security.

A third commenter states that the regulations need to provide sufficient flexibility so that the refinery can minimize the cost of its biofeedstock. To accomplish this, it is essential that the rules be feedstock-neutral. The commenter understands that there are as many as 3,200 potential biofeedstock and that the economic viability of a given feedstock is likely to vary significantly by region. The commenter believes it is inappropriate at this stage to single out one or more specific feedstock or those with specific characteristics that would disqualify their use in a biorefinery supported by the section 9003 program. That decision should be made in concert with the Agency when an application is being evaluated based on all relevant sustainability issues. The commenter also believes that it will be necessary to provide the ability to utilize alternative feedstock on an opportunistic basis in the event that they are economically advantageous to use.

Response:

The Agency agrees with the commenters and is not trying to exclude any eligible feedstock. The Agency notes, however, that it wants to encourage all advanced biofuels, except in very limited specific instances (e.g., feedstock that can be used for human or animal consumption) and that, beyond such instances, it does not want to limit specific feedstock from participation in the program.

Comment:

One commenter states that any exclusion to the definition of feedstock should be based solely upon GHG life-cycle emissions. For example, if a specific feedstock is estimated to produce fuel that causes no significant reduction in life-cycle GHGs compared to conventional fuels, or causes more emissions than conventional fuels, the Agency should consider excluding such feedstock from the list on that basis.

One commenter states that conversion technologies, on a life-cycle basis, are among the cleanest methods available for the production of advanced biofuels and green power.

Response:

The Agency disagrees with the recommendation to exclude any feedstock based solely on the basis of GHG life-cycle emissions of the resulting advanced biofuel. The feedstock must be renewable biomass, other than corn kernel starch, as defined in the statute. However, to help address such environmental considerations as GHG life-cycle emissions, the Agency has revised the scoring criteria such that an advanced biofuel must meet an applicable renewable fuel standard as identified by the U.S. Environmental Protection Agency (EPA) in order to receive points under the first scoring criterion.

The Agency is currently considering various models related to life-cycle analysis and has not identified an appropriate model at this time. Should a model be selected by the Agency, the rule will be amended accordingly.

Requested Comments—c. Rural Area Requirement

Comment:

Four commenters recommend not restricting a biorefinery to a rural area. Restricting the location of a biorefinery to a rural area is, in theory, a logical extension of an already established value-added agriculture industry. At first blush, it serves the purpose of the 2008 Farm Bill to boost the rural economy. However, as the economic crisis continues, more flexibility of site selection, not less, should be installed in these programs. The commenters believe that restricting these vital programs to rural areas is not only impractical and illogical, but fundamentally unfair to urban communities in desperate need of economic revitalization and job creation. The Agency, therefore, should enable biorefineries to develop wherever there is market potential regardless of whether that area is rural.

One commenter further states that the siting of biofuel facilities will be dependent on available feedstock, infrastructure, logistics, and other factors. Undoubtedly, many advanced biofuel facilities will be located in rural areas due to feedstock availability. However, to the extent that qualifying renewable biomass is located in other areas, the Agency should not discourage utilization of these resources by excluding non-rural facilities from eligibility for the payments program. Additionally, the scoring criteria in Section 9003(e)(1)(C) also demonstrate that “the potential for rural economic development” is merely one of ten factors that the Agency is directed to consider. While this scheme indicates that Congress intended that the Agency grant some level of preference to rural development, it does not support an interpretation that would preclude the issuance of loans to facilities in non-rural areas. The commenter states that, as with citizenship requirements, if Congress intended that rural development be a prerequisite, it would have explicitly stated so.

One commenter states that the rural location requirement will unfairly exclude biorefineries that make quality fuels, utilize domestic feedstock, and benefit American farmers and their communities. The commenter believes that any biorefinery constructed in the U.S. that provides jobs for U.S. workers and utilizes domestic agricultural feedstock produced by American farmers should be eligible for a loan guarantee under the program. The commenter believes that this was the intent of Congress, and is consistent with the national renewable energy and energy security goals. The commenter recommends removing the proposed rural location requirement in the final rule for biomass grant, loan, and loan guarantee programs.

One commenter states that, given that feedstock availability and reliability is paramount to success, any location that can support a successful project should be allowed, especially if the site was chosen in order to achieve feedstock availability and reliability. The same could be said for off-take agreements if the chosen feedstock can be brought to the proposed site easily, yet the off-take requirements necessitate a non-rural location. For example, for a project with Fisher-Tropsch output to make economic sense, the biorefinery would need to be co-located with an existing fossil fuel refinery, which may not be in a rural area. As another example, in order to have access to the largest possible geography for off-take, if a project must be located in a port facility that is in a non-rural area, this should be equally allowed.

The commenter also states that the program will only succeed in the event that proposed projects can minimize overall risk as much as possible. Project location can have a huge impact on this issue. Rather than citing “consistency with other programs” as a justification for a proposed rule, the criteria should be tailored to the needs of this specific program. In this case, any location that makes it easier to achieve project financing should be allowed without exception. There should be no restrictions on location for this program. It could make sense for a different program targeted at the scale-up of commercially proven technologies, but

in this context adds unnecessary additional burdens to achieving already challenging lender financing criteria.

One commenter opposes the rural area requirement, stating that biorefineries located in nonrural areas should be eligible. Nowhere in the authorizing legislation for this proposed rule did Congress even suggest that the section 9003 program be limited to rural areas. For the Agency to go outside the statute and make such a recommendation is puzzling at the very least, given the difficulty companies already face in opening biorefineries. The commenter states that the Agency should encourage biorefineries to develop wherever there is market potential, regardless of whether that area is rural, in order to meet the Agency's goal for an overall Federal renewable energy strategy designed to foster the development of a strong, expanding, and sustainable group of renewable energy industries in the U.S. to supply an increasing share of the country's energy needs.

One commenter, while recognizing the importance for the Agency to increase economic opportunity and improve the quality of life in rural communities, cautions against defining “rural area” with too much restriction, potentially disqualifying ideal sites for biorefineries that would, in fact, meet the program goals and increase economic opportunity in rural communities, but may be located in areas that do not fit the program definition. Offering eligibility to facilities in non-rural communities is critical to the success of the program goals and the advanced biofuels industry. Restricting the location of these facilities is not necessary to maintain the spirit of enhancing rural development and the geographic diversity of advanced biofuels production. More flexibility of site selection, not less, should be installed in these programs.

The commenter further states that having a consistent, cost-competitive regional supply of feedstock is key to the success of any project. Non-rural plants that use agricultural feedstock will most certainly rely on the surrounding rural communities to produce, harvest, store, and handle feedstock needs. With feedstock cost representing the largest operational cost of a biorefinery this, in turn, means that most of what the plant spends goes to the rural community in paying for that feedstock. This should demonstrate that the biorefinery does not need to be in a rural area to fulfill program goals. Excluding plants that are not in rural areas denies the supporting rural community significant opportunity.

One commenter states that winter barley from the rural community is key to the success of their project. According to the commenter, an independent economic analysis determined that their project will create an additional $100 million in revenue to rural farmers and create 450 farm jobs, clearly demonstrating that the biorefinery does not need to be in a rural area to fulfill program goals. In some circumstances, the decision of where to site a facility will be based on infrastructure often not available in rural areas (power, natural gas, transportation modes). Excluding facilities that are not within a strict definition of a rural area denies the supporting rural community significant opportunity.

One commenter states that their research indicates that biofuel refinery business plans will produce biofuels that cost substantially more than JetA and diesel. The commenter believes it is vital to minimize biofuel costs where airlines are supporting development of biofuel refineries by long-term cost plus purchase contracts. The commenter states that early research suggests that biofuel costs would be reduced by using as much existing infrastructure as possible throughout the entire supply chain (this includes delivery pipelines, refinery facilities, and agricultural infrastructure) and that requiring a biorefinery to be located in a rural area is likely to make it impossible to use some existing infrastructure, most particularly at refineries. The commenter recognizes that the purpose of the program is to support business development in rural areas, and proposes that biorefineries that are not located in rural areas, but obtain more than 75 percent of the dollar value of their raw materials from rural America, should qualify for the program.

One commenter states that, to maximize the rural economic benefits of the section 9003 program in furtherance of the Agency mission, a project's location in a “rural area” be removed as a threshold eligibility requirement and, instead, that a project's rural economic benefits be added as an evaluation criterion to proposed § 4279.265(d). Rural Development's mission to enhance the quality of life and economic foundation of rural communities would be furthered by a more comprehensive evaluation of a project's potential rural economic benefits. A project's rural economic impact is not only determined by the location of the biorefinery, but by the origin of the feedstock as well. Awarding points to projects based on their level of economic impact to a rural community is consistent with the Agency's mission and allows maximum opportunity for the commercialization of domestic advanced biofuels in the U.S. Dedicated energy crops, such as carnelian, are grown in rural areas. Thus, the commenter encourages Rural Development to consider a project's location in a rural area or its feedstock's rural origins as plus factors in the evaluation criteria. Many non-rural advanced biofuel refining projects can yield substantial economic benefits for rural America, in addition to increasing energy independence, decreasing greenhouse gas emissions, and diversifying agricultural markets. Thus, a more inclusive approach would maximize the impact of the section 9003 program.

One commenter believes that, while the definition of a rural area should be included, the definition proposed is too broad. The commenter requests deleting the wording “and the contiguous and adjacent urbanized area” through the remainder of the paragraph ending with the words “otherwise considered not in a rural area under this definition.” The use of “not more than 2 census blocks,” and “contiguous and adjacent urbanized area” appears intended to make the definition of rural as broad as possible, which is unwarranted and inappropriate. The Agency's scarce funding dollars should focus on truly rural areas particularly those further away from larger cities and more densely populated areas. The benefits of job creation should go to actual rural areas, not simply those areas that are adjacent to rural areas.

One commenter states that, while the proposed rule states that projects that are located in areas determined to be “rural in character” will be eligible, it does not explain how this nebulous determination will be made except to say in the same manner as in the business and industry (B&I) guaranteed loan program. The commenter believes that this terminology is far too broad and should not be allowed for determining rural areas. B&I guaranteed loans are much smaller than those envisioned in this program and the commenter believes the program should truly serve rural areas. Allowing rural areas to be defined in the manner stated is completely arbitrary and could open the program to abuse and unnecessary criticism.

One commenter states that the rural area requirement needs to be amended because many of these facilities have to be located where there are essential infrastructure, land available and

specialized jobs, which is usually in the larger communities. Facilities should be allowed to be located in communities larger than 50,000 if they are proposing to obtain a certain percentage (like greater than 25 percent) of their feedstock from rural areas. This will help farmers, rural businesses and rural cities find markets for their feedstock (solid waste, grease, crops, etc). By allowing them to be located in urban areas, it will increase the number of sites available to locate these facilities but at the same time increase feedstock markets for rural residents. Until these types of energy projects are well developed and mature, the commenter believes that all barriers that they may be encountering should be mitigated.

One commenter believes that, for new projects, implementing the rural area requirement will help the Agency fulfill its mission to improve economic conditions of rural America. However, with regard to retrofitting of existing biodiesel facilities, this requirement may not be practical as many existing facilities are no longer in production and are not all located in rural areas and an exception should be considered if the viability of the project is otherwise strong.

One commenter supports the requirement that the program only be used for biorefineries in rural areas. The commenter believes that the program should be targeted to rural economies.

Response:

In consideration of all of the associated comments reflected above on rural area, the Agency has, as a matter of policy, reconsidered the proposed rural area requirement. The beneficial impacts of the program will generally be in rural areas even if the biorefinery is located in an area that does not meet the proposed rural area definition, because biomass production is expected to occur largely in rural areas and, thus, rural economies will benefit from the increased use of biomass. The Agency is, therefore, removing the proposed rural area requirement from the rule as an eligibility criterion.

The Agency notes, however, two provisions of the interim rule. First, the project must still be located in a State in order to participate in this program. Therefore, the Agency has modified the location requirement so the project must be located in a State, as defined in § 4279.2. Second, the project must be located in a rural area in order to receive points under the potential for rural economic development criterion (see § 4279.265(d)(8)).

Comment:

One commenter recommends redefining the definition of the “location population” classification of eligible and ineligible areas for the purpose of including companies that are located in cities. The commenter states that they would be eliminated solely due to the Agency's classification of location population. Presently, the Agency defines a City to be greater than 50,000 persons. The City of Erie holds approximately 102,036 persons and the Borough of Wesleyville holds approximately 3,617 persons. Therefore, according to the Agency eligibility map, both the City of Erie and the Borough of Wesleyville are deemed ineligible areas.

The commenter requests expanding the boundaries that define the location population to define a city as a populace of over 500,000 to 1,000,000 persons versus 50,000 persons.

Due to the present classification by the Agency, the commenter is not qualified to apply for any Agency funding programs (grants or loans) because the commenter is located in an area that encompasses the City of Erie and its outlying areas, even though they have low population.

The commenter states that their plant has the versatility to run on various feedstock from non-vegetable oils to animal fats to agricultural feedstock such as soy. It is also located on Lake Erie where it has access to shipping, two interconnected railroads (CSX and Norfolk Southern), I-90 and I-79. Thus, it can easily bring in feedstock and ship out finished biodiesel. The commenter states that, if they could be deemed located in an applicable area, then they could apply for Agency funding and build on relationships with local/domestic farm institutions.

Response:

As noted in the previous response, the Agency has reconsidered the proposed rural area requirement and has removed it from the rule as an eligibility criterion. Thus, the applicant's facility would be eligible for participation in this program. The Agency notes that the definition of “rural area” is broader than previously used by the Agency and includes provisions for allowing urbanized areas to qualify for being “rural in character.”

Requested Comments—d. Foreign Ownership

Comment:

Numerous commenters recommend eliminating the 51 percent U.S. citizen ownership requirement in biomass grant, loan, and loan guarantee programs. U.S. government grants, loans, and loan guarantees are a large piece of incentivizing private financing for large-scale commercial projects. This incentive is diminished by requiring at least 51 percent domestic ownership. It presents the green business world with a conundrum. The commenters note that they need government grants, loans, and loan guarantees to attract investors who understand green investment. The investors who understand green investment are often foreign, where the clean tech investment framework is readily understood. Yet, the U.S. loan guarantees put a 49 percent limitation on foreign investment. In the age of a global economy, this citizenship requirement is impractical and ineffective. It inhibits the purpose of the program to incentivize private equity investment in the sector and may lead to job outsourcing. An increase in private equity in this sector is the key to multiple goals of current U.S. domestic policy. Green job creation, reduced dependence on foreign oil and reaching climate change reduction goals all benefit the country and taxpayers irrespective of funding sources.

As a regulatory matter, a 51 percent determination of domestic investors is untenable. An investor's domicile often cannot be discerned as foreign or domestic. A successful, ready to scale biochemical company is usually funded by a number of sources, both foreign and domestic, often made up of venture funds with investment from around the world, funds of funds, and independent investors alike. To discern whether or not the individual owners or investors of a fund, that owns a fund, that is invested in a particular portfolio company has 51 percent U.S. ownership, is not only impractical, it is impossible.

Additionally, the citizenship requirement is hurting rural America. The policy is delaying the administration's ability to reach its economic goals for rural America and energy independence goals for the country. The commenters hope that the Agency will use all of the resources available to help the administration reach its energy independence goals by removing all citizenship requirements. Rural Americans that benefit from the jobs created by these biorefineries do not care about the ownership of the biorefineries. The jobs provide much needed economic stability for local economies. The commenters state that Congress did not include eligibility restrictions as part of the program and the Agency's decision is a significant departure from Congressional intent. Rural Development regulations were implemented when our rural economy looked significantly different from today's rural economy. The commenters believe that the creation of biorefineries should be promoted in rural America, regardless of ownership.

One commenter further states that Congress specifically outlined the

definition of “eligible entity” and chose not to include any citizenship requirements. Had Congress intended to do so, it would have done so explicitly.

Another commenter states that to impose such a restriction without being mandated to do so by statute is counterproductive and will delay the development of new technologies and thwart achievement of the section 9003 program's purpose. To the extent the Agency considers citizenship of the borrower, it should be limited to the requirements of section 9003 and consider it only as one of many factors in evaluating and scoring an application.

Two commenters recommend considering foreign ownership in the context of all of the benefits of any given project and make decisions on a case-by-case basis rather than establishing an inflexible limit on the percentage of foreign investment.

One commenter offers this provision: The proposed rulemaking requires that, if the borrower is an entity other than an individual, it must be at least 51 percent owned or controlled by individuals who are either citizens or legally admitted permanent residents residing in the U.S. When an entity owns an interest in the borrower, that entity's citizenship will be determined by the citizenship of the individuals who own an interest in the entity or any subentity based on their ownership interest. Similarly, if the borrower is a subsidiary, the parent entity or the entities that have an ownership interest in that borrower must also be at least 51 percent owned by individuals who are either citizens or nationals or legally admitted permanent residents residing in the U.S.

One commenter recommends that non-U.S. ownership be permitted and that, if points are awarded for local ownership, the Agency consider awarding points based on estimated job creation. On the whole, the commenter supports rational requirements for new technologies that will foster rural development as those industries have a chance to grow.

One commenter recommends that, as long as the ownership of the project has at least 25 percent U.S. citizenship, the project be equally eligible. Given the challenges to achieve funding sources to date, the program should be open to the widest possible sources of funding.

One commenter recommends allowing borrowers that are entities that are other than individuals to be owned or controlled by less than 51 percent of either citizens or legally admitted for permanent residence. The percentage could be 34 percent of U.S. ownership or legally admitted for permanent residence instead of 51 percent. It will allow for additional investment from non-U.S. investors that may have a higher comfort level in investing in these types of energy projects. These types of energy projects are more advanced in other countries, so foreign investors are more familiar with the technology and are willing to invest in these projects. Banks in Europe are also more familiar with financing these types of projects, so they may feel more comfortable to finance a project in the U.S. if one of their existing customers in Europe is investing and developing an energy project in the U.S.

One commenter believes that the foreign ownership requirement should be strengthened to eliminate the automatic presumption that companies traded on U.S. stock exchanges are 51 percent owned by persons who are either citizens or legally admitted permanent residents residing in the U.S.

One commenter states that the proposed rule makes eligibility parameters extremely broad as almost any U.S. citizen or corporation with majority U.S. ownership is eligible. The commenter agrees with the citizenship requirements as one way to partially limit the scope of those eligible for loan funding.

Response:

The Agency has determined that it is in the best interests of furthering the Administration's goal of increasing the production of advanced biofuels to broaden the Biorefinery Assistance Guaranteed Loan Program applicability to include making loans to eligible domestic or foreign-owned advanced biofuel refineries.

Requested Comments—e. Program Obstacles

The Agency received numerous comments on program obstacles and ways to improve the program. Please note that for those comments received under this section that are the same or similar to comments made on specific provisions within the rule, the Agency has grouped such comments with those comments made on the specific rule section rather than presenting them below in this section.

Total Loan Guarantee Amount

Comment:

Several commenters recommend publishing the total loan guarantee amount, not just the monetary fiscal appropriation. With all USDA loan guarantee programs, there is a multiplier risk calculation that is set by OMB for each annual appropriation, which allows the total of the loan guarantees awarded to be greater than the actual cash appropriation. The commenter state that transparency is needed from USDA and OMB in advance to know what the lending authority is at the beginning of the fiscal year. Without that information, applicants do not want to apply, and lending institutions do not want to take the time to support the application if there is not adequate funding for the programs.

Response:

The Agency will provide, by Notice, the available program level funding for a specific fiscal year. No change was made to the rule in response to this comment.

Evaluation and Approval Process

Comment:

One commenter believes that the evaluation and approval process may be an obstacle. The evaluation process must be transparent and clearly stated with established timelines for the approval process.

Several commenters state that the evaluation process must be transparent, clearly stated, with established timelines for the approval process. These commenters recommend holding a pre-application and post-application meeting at the state office, at a minimum, to discuss the procedure and the requirements with the applicant and the lending facility. Large projects take intense coordination, management, and incur the up-front expense of permitting, detailed engineering, and other development costs. The financing program must be implemented within the same schedule as the other tasks to properly complete the project on time and under budget.

Response:

With regard to establishing timelines for the approval process, the Agency disagrees that this is possible because timing varies dependent on the unique characteristics of applications submitted. With regard to transparency, the Agency is satisfied that the evaluation and approval process is transparent and, for those applications that are denied, the Agency advises the lenders accordingly and provides them appeal rights.

Lastly, with regard to the suggested meetings, as noted in an earlier response, the Agency can meet with the lender/potential borrower prior to application submission to discuss the scoring criteria and informally review the proposal and application material completed to date. Further, Agency personnel are always available to answer questions.

Guarantee During Construction

Comment:

Several commenters state that it is imperative that the section 9003 loan guarantee continue to cover the construction period. No other

funding mechanism currently exists that could fund during the construction period without the loan guarantee in place.

One commenter states that, to be a complete program, the loan guarantees must include the construction period.

One commenter states that one of the greatest needs in renewable energy financing is construction financing. The commenter recommends setting up the section 9003 program to provide its guarantee at the outset of the project's construction so that the guarantee covers the construction risk. It appears this may be the case based on the reference in § 4279.256(e), but this should be made expressly clear that such coverage is to be available routinely.

Response:

The rule allows the Agency to guarantee the project prior to construction or after completion of the construction. The Agency has revised the rule in §§ 4279.261 and 4279.281 to clarify this.

Forms

Comment:

Several commenters recommend that the Agency prepare and provide fillable servicing reporting forms for lending institutions to provide the lender with a manageable, easy to use format for fulfilling the section 9003 reporting requirements. One of the main concerns that lenders face is the possibility of losing the Agency guarantee through improper or misunderstood reporting requirements. The Agency should provide actual forms and a section 9003 program reporting guidance document to all lenders, as well as post the documents on the Agency Web site for full review. An Agency primary contact person should also be provided to the lender during the application process as well as throughout the loan servicing process.

Response:

The Agency will take this comment into consideration as it develops the forms for the implementation of the regulation. Applicants may always consult the Agency's National Office Energy Division with any questions they may have during the application process and loan servicing process.

Technical Reports

Comment:

Several commenters recommend modifying the technical report to include elements of a project management plan that can be used by the applicant, lender, EPC (engineering, procurement, and construction) contractor, and the Agency to properly evaluate, benchmark, and complete the project within the time frames and budgets as proposed. Every major EPC contractor has software programs and policies and procedures in place that would provide this kind of reporting and which has previously been used for government contracting projects. This would also assist in organizing the application to become a living document that could then be utilized to begin the construction process and used throughout the life of the project, thereby saving time and resources.

Response:

The Agency does not object to the incorporation of elements of a project management plan in the technical report. However, the Agency is neutral on the use or brand of project management software.

Total Project Guarantee

Comment:

One commenter recommends utilizing the program to guarantee the full cost of a project, not just the biofuels portion.

Response:

The authorizing legislation does not allow the Agency to guarantee the full cost of a project.

Comment:

Several commenters recommend utilizing the loan guarantee to purchase, build, and operate all the collateral necessary to develop the total project, not just the biofuels portion. Because of the nature of biomass-to-biofuel production, there can be, and usually is, a significant portion of waste fiber material that is best utilized by gasifying, burning, or converted in some form that is usually ultimately manufactured into renewable electricity or another power product. Alternatively, the waste material is utilized in the production of animal feed or fertilizer. These products are also vitally important in providing sustainable, long-term profitability and production for the project and can greatly enhance the production capabilities of the region. The loan guarantee should cover all of the expenses of the entire project. Other expenses that are not listed in this rule but should be included are the cost of buildings, engineering fees, utility interconnect studies and infrastructure, vehicles, natural gas and electricity infrastructure costs, road upgrades or construction, and bonding and insurance costs.

Response:

The Agency disagrees with the recommendation to cover all of the expenses of the entire project. The Agency anticipates an over-subscription of the program. Therefore, the Agency's intent is to focus the program's limited funding resources on core project costs, which are identified in the interim rule as eligible project costs (see § 4279.229(e)). As the program matures, the Agency may consider whether to expand the list of eligible project costs, which is provided for in the interim rule (see § 4279.229(e)(7)).

Bond Financing

Comment:

One commenter advocates the Bond Loan Model as the most efficient financing mechanism for renewable energy projects and states it can be executed in a more cost-effective and timely manner than conventional financing transactions utilizing the Conventional Loan Model, particularly in light of the lack of commercial banks' willingness to commit to loans of 15 to 20 years.

Three commenters recommend financing through the use of corporate bonds. One commenter states that they recently reviewed a proposed corporate bond structure that would allow companies to issue 15 to 25 year non-amortizing bonds that would have the Agency guarantee attached. This would significantly reduce the cost of borrowing and provide a creative alternative to conventional commercial bank financing. The commenter believes using the loan guarantee program in support of this type of structure would provide a very viable financing source for these projects and would help achieve the overall objectives of creating a biorefinery industry.

One commenter states that, because they are recognized as a more freely tradable instrument than loan participations, the interest cost to borrowers (bond issuers) is often lower with bonds than with traditional loans. By not recognizing the predominant method for financing large commercial projects, the section 9003 program will likely not attract the larger producers of advanced biofuels and, equally important, will likely not attract the investment banking firms that are needed to facilitate these complex financings. The commenter suggested language for allowing the use of corporate bonds.

Three commenters recommend allowing borrowers to issue notes or bonds directly to accredited investors by way of capital markets offerings for both the guaranteed and unguaranteed portions. Two of the commenters point out that the proposed rule allows only for the sale of indirect “participations” in the unguaranteed portions, with the original lender retaining title to the notes, and does not contemplate the sale of notes or bonds in the capital markets (except with respect to the sale of the guaranteed portion to accredited investors).

The commenters state that banks are unwilling to fund the unguaranteed portion of the loans. The commenters point out that, in the current market,

only institutional investors are able, through capital markets transactions, to assume the perceived level of risk on the unguaranteed portion of the loans. Efficient capital markets transactions, including the sale of bonds, will require the direct sale by the borrower of notes or bonds to investors. As is market practice, a trustee would act on behalf of the bond investors as a class with the original lender performing the role of Collateral, Inter-creditor and Administrative Agent on behalf of all lenders, investors and the Agency. In that role, the original lender will perform all of the servicing duties contemplated under the proposed rule.

One commenter encourages the Agency to consider utilization of bond financing mechanisms in order to expand opportunities for debt finance where traditional credit markets are tight as one way to reduce program obstacles. The commenter believes that the currently proposed requirements dramatically reduce the number of lenders that will be willing to work with the program due to the current bank market and high-risk associated with this new industry. The Agency can address this problem by expanding the definition of eligible lender to enable utilization of the bond market in addition to the bank market. The bond market is favorable at this time because it is largely untapped in comparison with the bank market, it is more flexible than traditional commercial lending, and it eliminates a substantial portion of the risk for the lender. This can be accomplished by permitting a corporate trustee and investment bank to, collectively, function as an “eligible lender” for purposes of taxable corporate bond transactions.

One commenter states that the regulation needs to clearly state if bonds are allowed, what type of bonds should be allowed, who can issue the bonds, who can purchase the bonds, and how they are to be serviced.

Response:

The Agency is authorized to guarantee loans, which in certain circumstances may include bonds as described below, under this program. The Agency considers that this requires a lender to make the loan from its resources and then service that loan itself. While the Agency will permit the lender to secure limited servicing responsibilities from third parties, the lender must remain responsible for the servicing.

The Agency considers this as distinct from the typical investment banking scenario, where an investment bank secures the financing from outside investors. After the funding is secured, the investment bank has no further involvement with the transaction. Servicing is handled by a trustee who reports to and is controlled by the investors. The Agency considers that this is an investment instead of a loan and that its current authority is insufficient to guarantee investments.

Recognizing the current difficulties in securing funding, the Agency has been approving certain bond transactions. The Agency considers that, under the limitations contained in this regulation, guaranteeing these bonds is in keeping with its authority. In order to be more transparent of its willingness to guarantee certain bond transactions, the Agency has modified this regulation accordingly.

Specifically, the lender is required to provide the loan proceeds and service the loan. The Agency will allow a trustee to provide limited servicing only if the trustee is fully under the control of the lender. Holders' rights are limited to receiving payments under the note or bond and if those payments are delinquent making demand for payment on the lender and the government as provided in the regulation. In certain cases where the lender and borrower desire to change the loan terms, the holder is also required to consent to any changes. Loans providing holders any other rights are ineligible for guarantee under this program.

Comment:

Several commenters recommend including the option to utilize bond financing. The section 9003 program has already established a precedent in funding a project through the use of bonds. The need for lender participation through the section 9003 program can be met through use of an appropriately structured bond program to achieve effective financing in today's capital markets.

The commenters recommend expanding the section 9003 program to (1) permit treatment of large commercial banks or investment banks with substantial corporate trust practices as “eligible lenders” when acting as a bond trustee and (2) find that the “minimum retention” requirements are met if the bank, in its capacity as bond trustee, holds 100 percent of the legal title to the underlying corporation debt obligation and to related mortgage and security interests, even if the beneficial interests are participated out and held by a controlled number of sophisticated, institutional investors.

For purposes of the section 9003 program, the commenters advocate the expansion of the lending criteria to include a structured bond financing approach, which will assure the Agency of safety and soundness in the lending activity it guaranties, including high quality loan servicing, as well as the involvement of knowledgeable, professional investors well-qualified to evaluate and manage risks.

Response:

The Agency can only consider bond financing where the lender purchases all bonds and sells and/or participates thereafter. In all scenarios, the lender is responsible and controls the servicing of the loan. In addition, the lender would be required to fully control any trustee related to the bond financing.

Regarding eligible lenders, the rule reflects requirements that are similar to the requirements for a traditional lender under the Business and Industry guaranteed loan program. The Agency has determined that its current authority would not permit using an investment bank bond model. Unlike the authority given to the Department of Energy that permits the guarantee of debt obligations in addition to loans for several of its programs, the authority for this program is limited to guaranteeing loans.

Comment:

One commenter states that several banks have noted the limitation on the participation of noncommercial bank lenders. Given the size of the loan required to construct a commercial cellulosic ethanol facility, noncommercial bank participants will likely be critical to any effort in completing financing of a project. The commenter states that they are aware of discussions to use the loan guarantee program to guarantee bonds sold to accredited investors. Given the apparent lack of appetite in the debt markets, expanding the program to cover the bond market will increase potential financing options for cellulosic projects.

One commenter states that they have contacted numerous banks and insurance companies and have been unable to locate a commercial lender to finance the debt portion of a project despite the section 9003 program. Although the financial market conditions of the past 18 months have contributed to some degree to this challenge, the lack of available lenders has less to do with the recent debt crisis and more to do with structural issues with the program. The section 9003 program today is modeled after the B&I guaranteed loan program and requires a commercial lender to apply for the guarantee. This model has worked fine for the B&I guaranteed loan program because the typical loan size is sufficiently small. There are hundreds, if not thousands, of small rural banks that can fund small guaranteed loans. The section 9003 program, targeted at much larger projects with debt components that start at $70 million and

go up from there, quickly outstrips the capabilities of rural and even regional banks. The remaining lenders are “too big to fail” sized banks that have little, if any, experience with USDA programs. The only way for Wells Fargo, and even Rabo Bank, to fund one of these loans requires a high level executive decision to create a whole new line of business. So far that has not happened and expectations are that not much progress will be made in this arena.

As a result, the commenter states that they have been working with the Agency, specifically Undersecretary Tonsager and his team, to determine how best to adapt the program to the use of the commercial bond market which is a far better solution for the following reasons:

1. Bond investors provide “patient” capital that provides term lengths that match the project life better than a commercial loan.

2. Bonds do not include “sweep” provisions whereby the commercial bank lender “sweeps” any excess cash generated to reduce the principal of the loan. When this happens, it reduces the returns to equity investors and thereby makes it much more difficult to attract equity capital.

3. The bond market is 10 times larger than the commercial debt market.

4. Higher levels of due diligence are performed than is true with small lenders because a professional investment bank performs the underwriting and the bond investors also does similar due diligence.

5. Loan servicing is performed by a trustee that has a higher level of professionalism and process technology to assure greater compliance and overall loan processing. In the worst case scenario of liquidation, these trustees are far more capable of making debt holders whole than is a small lender.

The commenter proposes the bond market alternative because of the challenges with loans of the size needed for section 9003 projects and the lack of availability of lenders willing to participate. The additional minimum criteria in the proposed rule will make it even more difficult to find lenders willing to participate. The commenter believes that the bond market approach not only meets the criteria of the program as provided by the statute, but provides benefits in terms of lower risk to the Agency and better screening of projects.

Response:

For the reasons previously stated, the Agency can only consider bond financing where the lender purchases all bonds and sells and/or participates thereafter. In all scenarios, the lender is responsible and controls the servicing of the loan. In addition, the lender would be required to fully control any trustee related to the bond financing. In addition to other provisions, the Agency has tried to make the program more attractive to commercial lenders by revising the rule to allow either 20 years or useful life of the project (removing the “85 percent” provision associated with useful life), whichever is less, to allow more flexible terms for loans.

Special Program

Comment:

Several commenters recommend implementing a special section 9003 advanced biofuels guaranteed loan-bond program for the Gulf Coast and Eastern seaboard region to stimulate the economy ravaged by the recent Gulf oil spill crisis. The Go-Zone Bond funding and other business stimulus programs were vitally instrumental to getting these regions additional financial support that stimulated business creation and the rebuilding of the region. For the advanced biofuels industry, the primary feedstock that is the most reliable to date “woody biomass” is found in this same region in greater volumes than anywhere else in the country.

Response:

The Agency understands the commenters' concerns. However, the Agency wants to encourage the geographic distribution of projects throughout the U.S. and its territories and not tailor the program to specific events. The Agency notes that there are other methods to address specific events described by the commenter (

e.g.,

Presidentially-declared disaster areas).

Demonstration Funding for Pilot and Demonstration Scale Projects

Comment:

Several commenters recommend implementing the demonstration funding portion of the section 9003 program to include pilot and demonstration scale projects providing grants under the section 9003 program to assist in providing additional financial support, because these types of projects typically do not cash flow on a commercial scale. This intermediate step is a vitally important one in developing these new technologies to the commercial stage, and needs funding to allow deserving, sustainable technologies to move to commercialization.

Response:

The statute only allows for demonstration scale projects to be funded with grant funding. At this time, no funding has been appropriated to implement a grant program.

Dairy Industry and Department of Defense Set-Asides

Comment:

Several commenters recommend setting aside special funds for USDA partnership efforts with the dairy industry and the Department of Defense (DoD). In recent months, the Agency has entered into a memorandum of understanding (MOU) with the dairy industry with the intent of developing anaerobic digester technology and providing a reduction of greenhouse gas emissions. This technology has not been fully implemented in dairies because of the high cost and low profit margins from currently used technologies. However, advanced integrated biofuels technologies have been developed that dramatically increase efficiencies and provide profitable returns for investor-owners. The Agency can assist in this effort by supporting larger projects that are greater than the $25 million cap in the Rural Energy for America Program. Utilizing a 90 percent loan guarantee for these projects, and low or no fees will also additionally incentivize the growth of these technologies in this market segment.

The Agency also recently entered into a partnership agreement with the Navy to assist in developing advanced biofuels for fleets and vehicles. Five energy targets have been adopted by the Navy to reduce conventional fuel use. This will require an intense effort and coordination by the advanced biofuels industry just to supply the Navy this type of fuel, notwithstanding the RFS requirement and other industry needs. It is vitally important to our national security that the Agency can provide assistance to both the industry and the Navy in this effort through assisting in the development, implementation and financing of these new biofuels projects that must be implemented to meet such a demand.

Response:

The Agency is not establishing the set asides referenced in the comment because the Agency has adopted a policy of wanting to have a program that is technologically, geographically, and feedstock neutral. Such a set aside would provide preferences for specific feedstock and technologies inconsistent with this policy. The Agency believes that feedstock, geographic, and technology neutrality are critical to meeting the purposes of the program, which is to encourage broad-based advanced biofuel production practices, technologies, and feedstocks so that the best renewable energy options are supported.

However, the Agency has added a provision to the rule to allow the Administrator to award bonus points to

applications for partnerships and other activities that assist in the development of new and emerging technologies for the development of advanced biofuels so as to increase the energy independence of the United States; promote resource conservation, public health, and the environment; diversify markets for agricultural and forestry products and agriculture waste material; and create jobs and enhance the economic development of the rural economy. The Agency will identify these partnerships and other activities in a

Federal Register

notice each fiscal year. Please note that the Agency is specifically seeking comment on this provision (see Section IV, Request for Comments).

New Technology and Commercialization

Comment:

One commenter states that there appears to be some confusion as to how to determine whether a new technology is ready for commercialization. This shows up in the requirement that pilot-scale or semi-work facilities will have already been built and operated as a means to build confidence in commercial scale rollout. For some technologies, this is an acceptable approach, but it is not for many others. As a result, the technology development leading up to the proposal, and whether that work provides sufficient confidence to move to commercial scale, should be determined as appropriate, to the technology being proposed. Also, if the financing team and the due diligence performed by them and the third party Technical Reviewer finds the evidence sufficient, that is a good proxy for acceptance. Instead, it can be a requirement of the Technology Assessment to express whether sufficient pre-work has been performed to warrant a commercial scale project. Or when a proposed project for commercial scale operations is of a size that could also be considered a pilot scale project, that such projects are equally qualified and eligible. Although there are many technologies that are well suited to testing with pilot scale facilities as a means to increase confidence in the technology (

e.g.

fermentation), oxygen gasification of biomass is not one of these. The commenter's commercial facility, with a proposed budget of $140 million, is in fact at a scale that would normally be considered “pilot scale.” The commenter states they considered developing a quarter-scale facility for this purpose. Unfortunately, the challenges of either generating or trucking sufficient oxygen to a quarter-scale facility drives the cost of such a facility to be comparable (approximately 70 percent) to the full commercial scale design. Also, a quarter-scale facility provides little valuable information in terms of scalability and therefore very little increased confidence for the commercial scale-up. The reason is that the fluid dynamics and chemistry within such a gasifier vary dramatically from one size to another. Operation of a smaller unit does not predict the actual operation of a larger unit. As a result, the design work and subsequent validation within the pilot facility would only prove that the pilot functions properly. The details of the full scale commercial unit will certainly be different and require its own separate validation. Given that the risks are similar and equally low for a quarter-scale versus commercial scale, it is unwise to waste that much money on a useless facility. More importantly, investors are not willing to waste that much investment on a pilot scale that provides little incremental value.

Response:

The Agency disagrees with the comment. The application must include documentation that proves the technology as proposed meets the definition of eligible technology. The Agency has consulted with technical experts and has determined that the process needs to be demonstrated to provide reasonable experimental data to support engineering scale-up with acceptable technical risk. That documentation includes that the advanced biofuel technology has at least a 12-month (four seasons) successful operating history at semi-work scale, which demonstrates the ability to operate at a commercial scale. Semi-work scale is defined as “a manufacturing plant operating on a limited commercial scale to provide final tests of a new product or process.” The Agency did not receive many comments concerning this issue and the commenter did not provide sufficient reasons for a change in policy at this time.

Interest Caps and Financing Structure

Comment:

To achieve the Agency's goal of leveraging Federal government biorefinery assistance loan guarantees and private capital sources to facilitate financing of biorefineries in the U.S., two commenters recommend considering factors not included in the NPRM that affect available financing of renewable energy—in this case biorefinery—projects. Specifically, while Federal loan guarantees provide greater certainty for private lenders, if interest caps on loan guarantees are too low, commercial lenders are just as likely to turn to other stable investments, such as Treasury Bills, rather than the desired renewable energy investments. While some commercial lenders are comfortable operating in the current program structure, the commenters believe that the industry as a whole would benefit from maximum competition and flexibility for lenders to negotiate business structures and terms that provide incentives to finance biorefineries.

Response:

The Agency has removed the proposed blended interest rate requirement from the rule. The Agency has revised the interest rate provisions to more closely match the requirements in §§ 4279.125 and 4287.112, while providing lenders with some flexibility in establishing loan type and terms on the unguaranteed portion. The Agency believes that this and other changes to the rule sufficiently address the commenter's concerns.

Grants

Comment:

One commenter recommends including grants in the program. According to the commenter, grants could be used as matches for other funding sources and would help reduce the high startup costs associated with the use of new technology, particularly in rural communities.

Another commenter also encourages the Agency to include grants for developing and deploying new and emerging technologies that, at a minimum, emanate from paradigms different from the one built into the proposed rules, and preferably that target transformative innovations in rural America.

Response:

The Agency points out that grants for this program are authorized by statute for the development and construction of demonstration-scale biorefineries to demonstrate the commercial viability of one or more processes for converting renewable biomass to advanced biofuels, and are only funded under discretionary funding, which must be appropriated by Congress. At this time, no discretionary funding has been received by the Agency for the program. Therefore, until funds for grants are appropriated, the Agency cannot address grants in the program. Additionally, the authorizing legislation for this program would not authorize program grants being used as a match for another Federal grant program.

Comment:

One commenter states that the language in the rules for the grants authorized under Section 9003 are limited to only development and construction of demonstration-scale biorefineries or construction of commercial scale facilities based on a

traditional “bricks and mortar” paradigm. [“Grants for the development and construction of demonstration-scale biorefineries to demonstrate the commercial availability of one or more processes for converting renewable biomass to advanced biofuels.”] This language precludes the Agency from tapping into truly transformative innovations.

The commenter further states that the Agency needs to include in its rules the ability to fund transformative technologies in the agriculture sector that support and accelerate the sustainable production of advanced biofuels.

The commenter states that ag-interested/savvy venture investors do not truly exist in the agriculture sector. Thus, incremental agricultural improvements have tended to be the norm; paradigms producing transformative innovations in this sector are few and far between. The DOE views its mission in strictly narrow terms as only pertaining to the fuel, even though by definition biofuel includes agriculture. Thus, it has been funding interesting science “fuel only” focused efforts that will likely take many, many years to deploy at commercial scale with competitively priced output. Our urgent national imperative is for a domestic renewable source of liquid fuels. Urgency requires transformational innovation in the agricultural sector. The Agency is the only entity with enough knowledge and experience in this sector, and with a mission to revitalize rural America, to foster the kind of innovation that can enable transformation in the agricultural-related advanced biofuel sector.

The commenter provided the following discussion to support their position regarding grants for innovative technology:

(1) The new paradigm is born of a different way of thinking about how to solve our urgent near-term need for a thriving domestic biofuels industry. The new paradigm recognizes that it is really the yeast that produces the biofuel and thus is at the center of the ethanol ecosystem, and that the current yeast only produces one product—ethanol. The facilities the existing yeast is deployed in, as a consequence are known as “ethanol plants.” The commenter utilized off-the-shelf biotechnology to modify the single-product yeast so it would multi-task. When multi-tasking yeast are deployed, producing ethanol and valuable co-products simultaneously, ethanol plants automatically become biorefineries by definition. Furthermore, since yeast do not care where their C6 sugar-food comes from, the biorefineries deploying multi-tasking yeast can use feedstock other than grain feedstock (e.g. stover, sorghum, grasses, etc.) to produce advanced biofuels. Off-the-shelf technology exists today to convert cellulose into C6 sugar-food for the yeast to ferment into ethanol. The problem heretofore has been doing so in an economically sustainable way from just the cellulose alone. However, the valuable co-products that multi-tasking yeast produce enable economically sustainable conversion of only the cellulose portion of cellulosic feedstock, allowing the hemi-cellulose and lignin to be used for heat and energy to run the operation in a carbon neutral manner.

(2) When the yeast element of the biofuel system changes, all the other elements of that system also change. The most important change from switching to multi-tasking yeast is a sustainable advanced biofuel business model. The revenue in this new model is from the sale of ethanol and valuable co-products that are derived solely from the C6 sugars converted from just the cellulose portion. The hemicellulose and lignin used in CHP facilities provide the heat and power to run the operation and generate more revenue through sale of excess electricity to the grid. Private capital will invest in a sustainably profitable business model—the key element that is missing from the biofuel funded efforts to date. Farmers will grow cellulosic crops when a profitable market exists.

The logical sequence of events, therefore, will proceed as follows:

a. The Agency should change the rule pertaining to grants in Section 9003, allowing the Agency to make “grant(s) for the development of processes for converting renewable biomass to [sustainable] advanced biofuels.”

b. The revised rule would allow the commenter, for example, to apply for a grant under Section 9003 to complete the optimization of its multi-tasking yeast in order to produce commercially viable levels of co-products in advanced biofuel biorefineries, furthering the fundamental intent of the rules “to assist in the development of new and emerging technologies for the development of advanced biofuels.” It would also enable the Agency to successfully advance its agenda to revitalize rural America by creating thousands of new green jobs, and do so at an accelerated pace.

c. The commenter would then deploy multi-tasking yeast first in existing ethanol plants, where just the cellulose from cellulosic feedstock (initially stover because it is already grown) is converted to C6 sugar for the yeast to ferment.

d. Ethanol produced in the biorefinery would be sold through existing channels at market prices as it is today, and the byproduct portion would be sold as a molasses-type material or dried and sold as a powder (market pricing for amino acids is quite stable), which has enabled computation of the $0.70/gallon of revenue.

e. With a proven sustainable business model (by converting an existing ethanol plant to an advanced biofuel biorefinery), private capital will invest in building many new biorefineries (even without guaranteed loans) to expand the industry, and farmers will grow the cellulosic crops to meet the new market for them.

The systemic changes also include:

(1) No need for funding for new pilot plants to demonstrate viability of unproven, complex and costly technologies.

(2) Existing designs for ethanol plants (substituting pulp mills at the front end for existing corn grinders) can be used for new advanced biofuel biorefineries, expediting deployment of these facilities at a lower cost, and accelerating production of advanced biofuel that can meet the RFS2 production levels and timeline.

(3) Accelerated advanced biofuel production (within 24 months post funding) means accelerated construction and operating jobs in rural communities, which will enable the Agency to dramatically demonstrate to rural America and to Congress that it is the Agency that can make the transformative difference to rural America and to our domestic biofuels industry that the President, Congress and the American people voted for.

In conclusion, the commenter advocates rules that allow an Agency-funded transformational innovation to be developed wherever the resources within the United States most readily exist in order to expedite development and deployment, but the resulting technology must be deployed in rural America. If the statutory language requirement in the 2008 Farm Bill will not allow for inclusion of funding for development of agricultural-biofuels related transformative innovations like the one discussed above, then provision for such should be made clear under § 4279.202(b).

Response:

The language in the statute (see section 9003(c)(1) of the FSRIA) states: “grants to assist in paying the costs of the development and construction of demonstration-scale biorefineries to demonstrate the commercial viability of 1 or more

processes for converting renewable biomass to advanced biofuels.” This language precludes the Agency from implementing what the commenter is requesting. Further, to the extent commenter is requesting the Agency to do otherwise, the Agency cannot. It is up to Congress to modify the statutory language in order for the Agency to consider the commenter's suggestions.

Simple Applications

Comment:

One commenter recommends developing a simple application for small biorefineries that produce less than 1,500 gallons of biofuels per day.

Response:

Because the program deals with new and emerging technologies, the Agency needs the same detailed information on the technology and process regardless of the size of the biorefinery. Therefore, a simplified application is not appropriate for the program.

Small, Mobile Biorefinery Units

Comment:

One commenter recommends giving preference to small and particularly mobile biorefinery units that may be better able to serve small rural communities on a multi-county regional basis. The commenter states this will help provide economic security to those communities through job creation and dependable sources of local energy and provide greater feedstock security by having the sources located in many different locations throughout a multi-county area instead of being concentrated near one centralized biorefinery.

Response:

Please note the previous response where the Agency stated its position to remain technologically, geographically, and feedstock neutral. While there is no preference given for small biorefinery units, they are not excluded from the program. A mobile system is eligible.

Unsecured Debt

Comment:

One commenter believes that the primary obstacle to this program is the unsecured debt requirement. According to the commenter, lenders are not willing to take risk in the alternative fuels industry given the current state of financial markets. The Agency must be willing to relax this rule. Options include allowing subordinate risk, such as a state or other credible entity, or offering a 100 percent guarantee under conditions when a high ratio of equity investment is secured, where technology risk is limited, and where there is a demonstrated ability to accelerate return on investment. Loan guarantees, like loans, should not be a “one size fits all.” Banks adjust loan terms based on conditions specific to the investment the loan supports. The Agency should consider adjustments when the potential investment offers compelling reasons to do so.

Response:

The Agency is addressing these concerns by allowing the subordination its lien on accounts receivable and inventory for working capital loans under certain conditions and guaranteeing up to 90 percent of the loan for guaranteed loans of $125 million or less, also under certain conditions. As noted in an earlier response, the rule outlines the criteria the project must meet to obtain a 90 percent guarantee.

Requested Comments—f. Processing Technology Owned by Borrower

Comment:

One commenter believes that the majority of biorefineries will be built by entities that are not owners of the processing technology that will be used in the biorefineries. Thus, the commenter believes that the processing technology should not be counted as collateral or equity in the project. In the instance where the process technology owner is the borrower, the market value of the technology should not be counted in the project cost. This will lower the equity requirement of the borrower because the project cost will be lower. Thus, the commenter recommends setting the market value of the technology at zero, and not entering it into the calculation of the equity requirement, if its market value cannot be determined because it is a novel technology and unproven in the production of advanced biofuels.

Response:

With regard to process technology, the Agency agrees with the commenter that it should not be counted as collateral or equity in the project.

The Agency agrees that the market value of the technology should not be counted in the project cost, because it is the Agency's intent to focus the program's limited funding resources on implementing the technology rather than developing technology. However, the Agency notes that technology may be considered as part of the collateral based on the value identified on the borrower's audited financial statement prepared in accordance with Generally Accepted Accounting Principles (GAAP) and subject to appropriate discounting as provided for in the rule.

Comment:

One commenter suggests using the standard discount rate of 20 percent that is used in the B&I loan guarantee calculation.

Response:

The Agency disagrees with the commenter. Prudent lending practices dictate that the Agency use a discount factor, which may vary depending on condition and type of collateral offered. Because of the variability associated with the technologies participating in this program, discounting needs to be performed on a case-by-case basis and a standard, fixed discounting rate would be inappropriate. Where there is an existing market for intellectual property, discounting will be performed in accordance with the lender's standard discounting practice. Where there is not a market for intellectual property, the value of the intellectual property will be no greater than 25 percent, as determined by the Agency.

Comment:

One commenter suggests calculating highly skilled labor as a business expense on the income statement and not including it in the equity calculation.

Response:

The Agency agrees that highly skilled labor will not be included in equity calculation. However, labor is an eligible business expense, which could be financed with working capital.

Comment:

One commenter stated that a broad interpretation of “eligible project costs” will facilitate lending and achievement of the purposes of the program. Because upfront transaction costs on these projects are significant, borrowers should receive credit for their contributions of real and personal property, including, without limitation, laboratory equipment, intellectual property, and reasonable fees paid to critical service providers. These fees can be substantial, up-front costs that are often a barrier to completing a significant application as is required for this program. If there is the opportunity to wrap these into the loan or apply them towards the borrower's equity contributions, additional companies with promising technology may choose to avail of the program as a financing mechanism.

Response:

It is the Agency's intent to focus the program's limited funding resources on primary project costs and, therefore, the Agency disagrees with the suggestion for wrapping these fees into the loan because the Agency does not consider these fees to be primary project costs. For existing biorefineries only, qualified intellectual property, equipment, and real property may be considered in meeting the equity requirement, as described in § 4279.234(c)(1). The Agency notes that a loan guaranteed under the program may only finance 80 percent of the eligible project costs. The borrower needs to provide the remaining 20 percent from other non-Federal sources to complete the project.

Comment:

Two commenters state that processing technology owned by the borrower should be included as an eligible project cost. Allowing for a means to recoup the processing technology development costs will speed the creation of biorefineries. It will maximize commercial flexibility of technology owners and project developers to negotiate deals that create incentives for innovation (on the part of the technology owner) and commercialization (on the part of the developer). If it is not an eligible cost, the developer will have to compensate the technology owner outside of the project finance structure, which reduces the capital that could be applied to biorefinery deployment/retrofitting. This may significantly reduce the commercialization of advanced biofuels refining technologies necessary to meet the RFS as well as diversifying the country's transportation fuel portfolio.

Another commenter, however, states that, while physical laboratory and equipment costs should be considered eligible project costs if they are listed as assets of the borrower, there is no legitimate value to intellectual property until the industry has emerged into commercial-scale production, and, at that point, commercial values will be changing to meet new supplies and demands. If there is the opportunity to apply a portion of what the borrower perceives as the value of its intellectual property towards the required equity contributions, additional companies with promising technologies may be eligible for assistance under the section 9003 program. Because the documentation required by the Agency is no different than what a prudent lender should require, eligible project costs should not include any item that is not considered a project cost in the borrower/lender transaction being guaranteed.

One commenter explains that, as a startup company with first-of-kind technology, they have and will incur significant cost securing intellectual property, financing arrangements, R&D expenditures, and developing new forms of renewable biomass. The commenter believes these costs should be allowed as eligible project costs and should be applied to the cash equity requirements.

Response:

The Agency will not consider processing technology as an eligible project cost, because, as noted in a previous response, it is the Agency's intent to focus the program's limited funding resources on core project costs. However, the Agency acknowledges that the processing technology has collateral value and can consider the value of such technologies, with certain restrictions, in addressing the program's collateral and equity requirements.

Comment:

One commenter states that eligible costs should include all costs that make up a sound project including production of byproducts, co-products, and electricity co-generation. If a facility generates excess heat or other forms of energy that can be harnessed to co-generate power, it should be encouraged to do so because this activity is in keeping with the energy goals of the Agency and the program. Also, as long as there are investment tax credits available for power co-generation, these “funds” can have a profound positive impact on the financability of the project. Hence, these should all be included in eligible costs so that the best possible financing package may be brought to bear. If professional service fees include the legal fees and other fees are required to complete the financing, including the fees to the bank or investment bank, these should be allowed if they are to be incurred after the guarantee application has been submitted. These are bona fide costs of the project and should therefore be included.

Response:

The Agency agrees with the commenter to the extent that the costs associated with byproducts, co-products, and electricity generation are eligible project costs as provided in § 4279.229(e). The items listed in paragraphs (e)(1) through (e)(7) of § 4279.229 are eligible project costs as long as they are integral and necessary parts of the total project. With regard to professional fees, the Agency anticipates an over-subscription of the program, so the Agency's intent is to focus the program's limited funding resources on core project costs, which are identified in the interim rule as eligible project costs (see § 4279.229(e)).

Requested Comments—g. Percent Revenue From Sale of Advanced Biofuel

Comment:

Two commenters believe that the mandate that 70 percent of the revenue generated by a biorefinery must be from the sale of advanced biofuel will create a disincentive and turn companies away from the program goals. An integrated biorefinery, as described by the DOE, is similar to a petrochemical refinery where crude oil is processed into a variety of fuels and chemicals. To achieve this integrated biorefinery model, biofuel companies will have to go into production of biochemicals themselves (incurring enormous capital expenditure costs), or enter into a joint venture with existing biochemical companies that have ready-to-scale technology.

Under the section 9003 program, a chemical production facility included as part of a biorefinery can have no more than 30 percent of the revenue generated at the biorefinery, yet the revenue generation of chemicals compared to fuels is traditionally disproportionately higher. This revenue restriction inhibits the creation of joint ventures by putting a cap on the future revenue of the potential biorefinery partner, limits the growth potential due to market demand or other external factors that affect the partners, and limits the ability of biofuel companies to enter into a revenue generating joint venture in efforts to become economically viable and self-sufficient in the long-term.

The most powerful aspect of the biorefinery as a business model is the ability to produce multiple products, so that the plant can weather prices drops, fluctuations in demand and volatile feedstock prices by arbitraging between the various products produced and privileging those that are the most profitable at any given time. If this cap exists and biofuels are not economically viable or require large subsidies to be viable, then limiting the amount of higher value-added products that can be produced will condemn the biorefinery to failure.

In addition, as a practical matter, the Agency will be required to regulate the 70 percent revenue generation requirement on an ongoing basis. From the bioproduct and biochemical perspective, this is a revenue limitation of 30 percent. Limiting revenue generation of one component of a business within a free enterprise is questionable policy. The Agency does not have a rational basis for this limitation grounded in sound economics, nor does it serve the broader policy purposes of the program. Biofuels and bioproduct companies should not be limited in revenue for any reason. The U.S. economy and its taxpayers will only reap the benefits of biorefineries if they are profitable ventures. They should be free to innovate new business models in order to achieve sustainable success.

One commenter agrees that the intent of the program is to create biorefineries that produce advanced biofuels, but believes that the 70 percent requirement is too high. The commenter believes that as long as 35 percent or more of the revenue is from the sale of advanced biofuels, then the project should be eligible for the program.

One commenter states that the advanced biofuels industry is an

emerging market and, as such, many configurations for profitability and risk mitigation include the sale of byproducts and renewable electricity as major components of the profit and product streams. There should be no set standards for the production of the advanced biofuels, and to require that 70 percent of the revenues are from the sale of advanced biofuels adds a further artificial barrier on sound, sustainable projects. The requirement should be lowered to 50 percent and be a combination of all forms of energy, including renewable electricity.

One commenter states that it is important that new fuel production methods pass through the financing “Valley of Death” so that they can be replicated in the market without government financial assistance. Hence, whether a first of a kind project under section 9003 sells much, if any, advanced biofuel should be irrelevant as long as the proposed business plan is financeable and there is sufficient evidence that there is a market (or emerging market) for the proposed fuel. Thus, more new technologies will be financed and more new advanced biofuels will ultimately come to market. Because even the small number of section 9003 eventual winners will have a negligible total impact on U.S. fuel consumption, it is more important to set the stage for future growth rather than saddle these early stage projects with excessive hurdles to overcome to create a successful business plan for a first commercial project. As long as the borrower can explain cogently how future plants will produce and deliver advanced biofuels and bioproducts that mitigate imported fuel or energy intensive products, these should be equally rewarded in this program.

One commenter agrees that the program should be focused on projects that primarily produce advanced biofuels, and encouraged the Agency to make a determination of the nature of the project on a site-specific basis and not promulgate a bright-line threshold. BTL (benzene, toluene, and xylenes) facilities can be configured to produce various combinations of fuels, co-products, and electricity. Thus, it may be that an optimized plant on an efficiency basis would be configured for something marginally less than 70 percent revenue from advanced biofuel. While a plant could be configured to meet a 70 percent requirement, the commenter asks that the Agency provide flexibility to allow for the most efficient plant configurations, which would be consistent with the proposal to consider life-cycle GHG emissions and other performance criteria.

Two commenters state that, while the Agency has proposed to require a certain percentage of biofuels be produced at the facility receiving an Agency loan guarantee, other product streams from the same feedstock can enhance the economic viability of biofuel projects. Market forces will affect revenues based on ever-shifting price points. Thus, a requirement for a percentage of revenue would make financial and operational planning very difficult for a biorefinery that receives a loan guarantee. An energy content or biomass usage metric is more effective, allowing developers to plan their facility/project at the outset to ensure that a certain percentage of the energy or biomass is used for biofuels. The commenters recommend basing any required percentage related to biofuel production on energy content or biomass usage, not revenue. The commenters also urge the Agency to promulgate flexible guidelines to implement this approach at this stage of development and uncertainty in the biofuels market.

Response:

The Agency agrees with commenters' suggestion to remove the 70 percent revenue threshold. The rule has been modified to require that a majority of the biorefinery production is an advanced biofuel. When the biobased product and any byproduct produced have an established BTU content from a recognized Federal source, majority biofuel production will be based on BTU content of the advanced biofuel, the biobased product, and any byproduct. When the biobased product or any byproduct produced does not have an established BTU content, then majority biofuel production will be based on output volume, using parameters announced by the Agency in periodic Notices in the Federal Register, of the advanced biofuel, the biobased product, and any byproduct.

The Agency has determined that measuring the output is a better metric than the energy content of the biomass input in determining project eligibility, because the energy value of biomass input is not necessarily equivalent to the energy product outputs. The primary purpose of the program is for the development of advanced biofuels. For these reasons, the Agency is focusing on production of advanced biofuels rather than consumption of feedstock.

Comment:

One commenter recommends changing the facility's percentage of “revenue” that must come from advanced biofuels to a percentage of “volume” in order to enable a company to maximize the economic viability of its operations. The commenter believes basing the percentage requirement on revenue, and not volume, significantly inhibits a company from pursuing its maximum economic potential as the prices of many byproducts are greater than fuels. The commenter believes that changing this requirement to 70 percent of volume will still enable the Agency to pursue its goal of promoting advanced biofuels without unduly restricting companies from pursuing the most economically advantageous means of supporting their facilities.

Private financing entities will judge whether “facilities are worth financing” solely based on the economic potential of that facility to earn sufficient profits to be able to pay back the loan to the financing entity as well as pay returns to its equity holders. Therefore, any regulations should be structured such that they will facilitate the manufacturing plant achieving maximum profits and enhancing its economic viability. The Agency itself recognizes the value of multiple revenue streams that exist in a biorefinery operation. For example, the Agency states that “byproducts are an important revenue source for many biorefineries.”

To provide an example: The commenter's process inherently produces byproducts at a certain level. Monetizing these byproducts significantly enhances the financial viability of a biorefinery facility. As an example, one of the byproducts is an organic acid that sells for more than $2,000/ton, significantly more than the value of ethanol. Under a revenue-based eligibility requirement, the commenter states they would be significantly restricted from monetizing this byproduct, which is currently made exclusively from fossil fuels. Since this acid sells for more than 3 times the value of ethanol, the commenter states they would only be able to sell very small amounts in a revenue-based scenario, losing not only the revenue and societal benefit of replacing a fossil fuel derived material, but also incurring a cost to dispose of the material. In a volume-based scenario, the commenter states they would still focus on producing advanced biofuels as the primary purpose of the facility, but also would be able to enhance the economics of the facility by realizing the value inherent in its processes' byproducts.

Response:

As noted in the response to the previous comment, the Agency is replacing revenue as the standard of measurement and instead will determine the majority biofuel production based on BTU content of the advanced biofuel, biobased product, and any byproduct. However, if the biobased

product or any byproduct does not have an established BTU value, the Agency will determine majority biofuel production based on output volume of the advanced biofuel, the biobased product, and any byproduct.

Comment:

One commenter states that the 70 percent requirement is not contained in Section 9003 and may cause significant problems, both in terms of deterring companies from using the section 9003 program and then increasing the chance of default if a loan guarantee is issued. The commenter recognizes that the primary purpose of Title IX is “Energy”; however, Title IX also recognizes that, like petroleum, co-products provide essential revenue streams. Liquid transportation fuel has been the “holy grail” of the algae industry since its inception, but many companies are shifting their business plans away from a fuel-dominant approach in the short term and dedicating more efforts to developing higher-value co-products such as chemicals, agricultural soil remediation and fertilization, and plastics. This has been driven primarily by high production costs for lipids and having to compete with low-cost crude oil. One of the primary reasons for the high production costs of algal-based fuels is the lack of commercial-scale (and even demonstration-scale) projects that provide opportunities to optimize and de-risk technologies and reduce costs with scale. The algae industry views the section 9003 program as a much-needed financing tool to develop projects and bring down costs and risks. As the Agency notes, “byproducts are an important revenue source for many biorefineries.” They will be even more important for the long-term success of the algae industry and the ability of the industry and its technologies to mature to the point where algal-based liquid transportation fuels are price competitive with petroleum gasoline, diesel or jet fuel.

For this reason, the commenter strongly encourages the Agency to interpret the purposes of Section 9003 broadly and in a way that will most likely accelerate the ultimate development and production of advanced biofuels. Imposing a 70 percent revenue requirement defeats this purpose.

First, it is unclear what the ramifications would be to the applicant if, in practice, this 70 percent threshold was violated. Would this constitute a default under the credit facility or security agreement? If so, this injects an artificial limit into the operation of projects that may, at points, obligate the applicant to run the project in a commercially unreasonable or imprudent way by producing products that fail to provide sufficient revenue to meet debt service.

Second, and related to the first, it is much more difficult to control price for a product (unless long-term off-take contracts are in place) than volume produced. Price fluctuations may inadvertently cause a breach of any loan agreement or security document.

Third, there is a significant pricing differential for feed, nutraceuticals, bioplastics, and biochemicals compared to fuel. This pricing differential could distort financial models and disqualify early algae projects that will rely on co-product sales to make the fuels portion of the project “pencil out.” Borrowers should not be penalized for capitalizing on multiple value streams. If any limit on product mix is imposed, this should be volumetric rather than revenue-based.

Fourth, Section 9003 imposes no such specific threshold for purposes of a biorefinery's eligibility for the section 9003 program. Section 9003 provides that “eligible technology” for purposes of qualifying for a loan guarantee is “technology that is being adopted in a viable commercial-scale operation of a biorefinery that produces an advanced biofuel” as well as “technology * * * that has been demonstrated to have technical and economic potential for commercial application in a biorefinery that produces an advanced biofuel.” Nothing in this sentence requires anything more than a biorefinery to produce some quantity of advanced biofuel, and it certainly doesn't base a requirement on a percentage of revenue. Further, a “biorefinery” is defined as a “facility (including equipment and processes) that “(A) converts renewable biomass into biofuels and biobased products; and (B) may produce electricity”. On the face of the statute, Congress did not require a project's eligibility to be based on production and sale of a specific product mix or revenue mix, and biobased products and electricity are specifically anticipated to be key attributes of any biorefinery. The Agency's exercise of administrative discretion on this issue goes too far and jeopardizes the success of a much-needed program.

This limit on the revenue mix from products produced by the project is counterproductive to the purpose of the section 9003 program. Imposing an arbitrary limit on the product and revenue mix unsupported by Section 9003 will negatively affect borrower's ability to make prudent business choices and maximize revenues based on market demand for certain products at any given time during the loan term. This is not in the lender's best interest, it is not in the borrower's best interest, and it is not in the taxpayer's best interest when the borrower defaults.

The commenter recommends considering the merits of (most desirable to least desirable): (i) Completely eliminating this requirement for project eligibility in favor of a certification by the borrower that the primary purpose of the project over the term of the loan is the production of advanced biofuels; (ii) imposing a volumetric requirement rather than a revenue requirement with the volumetric requirement being a “majority” rather than 70 percent; (iii) reducing the 70 percent revenue threshold to a “majority”; (iv) providing a waiver process to avoid default; and (v) permitting the carry-forward and carry-backward of surpluses and deficits so that the 70 percent revenue requirement is imposed over multiple years.

In any event, the commenter encourages the Agency to clarify its intent here and the ramifications for failing to meet such a requirement, and recommends either discarding the 70 percent revenue-from-fuels requirement or completely restructuring this requirement.

Response:

For program integrity the Agency cannot rely just on certifications. As has been noted in the responses to the two previous comments, the Agency is replacing revenue as the standard of measurement and instead will determine the majority biofuel production based on BTU content of the advanced biofuel, biobased product, and any byproduct. However, if the biobased product or any byproduct does not have an established BTU value, majority biofuel production will be determined based on output volume of the advanced biofuel, biobased product, and any byproduct. The Agency has also removed the 70 percent threshold and replaced it with a majority threshold. Based on the changes, the Agency has determined that a waiver process and the carry of revenue surpluses and deficits are not required. The Agency reserves the right to take any legal action to address default when the borrower is not operating as originally proposed.

Comment:

One commenter believes that biobased chemicals and biobased products must be included in grant, loan, and loan guarantee programs under the section 9003 program to enable stand-alone commercial scale facilities. Currently, most, if not all, large funding advantages in the DOE and USDA biomass program are

available to biofuels production projects only (with one exception). Expanding funding programs to include production of biobased chemicals and products will enable shovel ready projects that are the cornerstones of new biobased industries to immediately take hold. The 2008 Farm Bill states clear objectives for our nation yet these programs exclude loans, loan guarantees and grants for biochemical and biobased material production that would immediately enable these goals. The commenter believes the U.S. cannot afford to miss an economic and environmental opportunity for ready to scale green technology that falls well within the parameters of 2008 Farm Bill concerns.

Response:

The Agency disagrees with commenter. The purpose of the program, as provided in the statute, is to assist in the development of new and emerging technologies for the development of advanced biofuels. Pursuant to the statute, all biorefineries financed under the program must produce advanced biofuels.

Requested Comments—h. Value of Feedstock Supplied by Producer Association and Coops

60 Percent Threshold

Comment:

One commenter strongly opposes the proposed 60 percent threshold. The advanced biofuel feedstock markets, particularly for algae and cellulosic ethanol, are immature and have not developed to date using the agricultural cooperative model. Given transportation costs and other logistical issues, algal feedstock will likely be grown by the same companies that harvest the lipids/triaclglycerides and convert the same to advanced biofuels or other biobased products at the same or an adjacent site.

While the commenter encourages and supports the premise that “algae is agriculture,” the commenter urges the Agency to avoid making

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