1. Federal Subsidies for Transmission Projects under the Recovery Act April 2009 By Deborah A. DeMasi

2. Overview Support for Transmission Facilities Loan guarantees by DOE for transmission projects commencing construction not later than September 30, 2011. Smart Grid Provisions: Act expands the availability of federal financial support for Smart Grid demonstration projects to provide support to electric utilities or other parties and provides up to 50% of the costs of advanced grid technology investments. Transmission Study: Secretary of Energy is to complete 2009 National Electric Transmission Cogeneration Study which is to include analysis of constraints on potential renewable energy sources and extent to which legal challenges are delaying construction of transmission facilities necessary to access renewable energy, and recommendations for achieving transmission capacity. BPA given additional borrowing authority to fund transmission facilities. Act provides loans to Western Area Power Administration by the Treasury for transmission facilities and related studies if lines and facilities have at least 1 terminus within WAPA’s area. Other entities may participate in ownership of projects so financed.

3. Pending Transmission Legislation Clean Renewable Energy and Economic Development Act (Section 539, March 2009) – Amends FPA to provide FERC with siting authority

4. DOE Guarantee Loan Program Overview The Recovery Act expands the DOE guarantee loan program established under Energy Policy Act of 2005 to include electric power transmission systems.  Originally established to provide loan guarantees for “innovative” renewable energy projects.  New provisions cover traditional renewable energy projects and biofuels, as well as transmission systems Electric power transmission systems under the guarantee loan program include upgrades and reconductoring projects. Generally, current guarantee program parameters are expected to apply to guarantees for transmission projects. Authority to enter into guarantees expires on September 30, 2011. Davis-Bacon wage requirements will apply to the project.

5. DOE Guarantee Loan Program Overview (Continued) Program presumes that the debt will be a project financing with the lenders and the DOE, as guarantor, having a lien on the assets being financed. Unclear if the program can support jointly owned projects. To date, only 1 guaranteed loan made, but new administration has indicated that it will modify procedures to expedite loan processing. New regulations may modify current regulations perceived as impediments to implementation of the program. Entities interested in clarifying program rules are expected to have an opportunity to provide comments to proposed regulations to the loan guarantee provisions of the Recovery Act. The window for applications under the new guarantee loan program is expected to be open in May or June.

6. DOE Guarantee Loan Program Timing:  If you are interested in applying, apply early.  Matt Rogers, former director of McKinsey Global Institute, has been retained as senior advisor to Energy Secretary Chu, and has been tasked with streamlining the process and expediting approval of loan guarantees.  DOE seems committed to expediting the loan guarantee application progress. DOE may include an accelerated approval process for projects with strong sponsors, significant equity and good credit ratings. As more applications are processed, it may make it increasingly difficult for DOE staff to assess and process applications, commitments and guarantees.

7. Factors Relating to Transmission Facilities Viability of the project without the guarantee. Availability of other Federal and State incentives. Importance of the project in meeting reliability needs. Effect of the project in meeting a State or region’s environment and energy goals.

8. Energy Policy Act of 2005 Regulations for DOE Guarantee Program Regulations would need to be amended to accommodate changes to EPAct enacted under the Recovery Act. The program presumes that the debt will be a project financing with the borrower pledging project assets to secure the debt. In the past, DOE has taken the position that all owners of projects that are owned through multiple undivided interests will have to support DOE guarantees supporting debt of one of the owners, thereby making the program unavailable for jointly owned projects. Participants in nuclear facilities are challenging DOE’s interpretation.  This issue could be clarified through comments to the NOPR expected to be issued in respect of the Recovery Act. Guaranteed portion of the loan cannot exceed 80% of total project cost, with equity or non-guaranteed debt expected to cover the remaining 20% of such costs. No minimum level of equity is required, but DOE expects that a “significant” level of equity is to be contributed by sponsor, with the level of contribution a factor considered by DOE in determining whether to accept a guarantee application.

9. Energy Policy Act of 2005 Regulations for DOE Guarantee Program Applicants can seek a guarantee from DOE of 100% of the debt raised to support a project, but Federal Financing Bank must be the lender for DOE to guarantee 100% of the debt. Applicants can elect to finance using a non-guaranteed debt tranche. If the DOE guarantees more than 90% of the debt, the non-guaranteed debt tranche cannot be “stripped” for syndication in the secondary market, but one can “strip” the non-guaranteed portion if the DOE guarantees 90% or less. Although the regulations provide that the term of loan cannot exceed 30 years or 90% of projected useful life of the project, a term of 5-15 years is expected to be the more typical range. The sponsor must obtain a credit rating for project debt (without considering the DOE guarantee) for projects in which costs exceed $25 million.

10. Energy Policy Act of 2005 Regulations for DOE Guarantee Program (cont’d) U.S. Government must have a first priority security interest in the pledged collateral; provided, however, that DOE will enter into intercreditor arrangements which may be pari passu with the holders of the non- guaranteed portion of the debt, but DOE must control disposition of assets. Section 149(b) of the IRC provides that a federal loan guarantee cannot finance tax-exempt debt. Municipal entities would finance using taxable bonds. “Eligible lenders” is broadly defined under the regulations to include trustees or agents acting on behalf of bondholders or other lenders. DOE or the lender has rights to audit books and records applicable to the project.

11. Fees Administration fee. Credit Subsidy Cost: Treasury must collect fees equal to DOE’s estimate of the present value of payments that the government would make upon an event of default. Essentially involves default risk analysis on the project. Estimate for current guarantee program is an average cost of 5-10%, but cost may decrease for “proven” technology. Fees and costs are potentially substantial and have been considered a deterrent to effectiveness of existing loan guarantee program. Secretary Chu has stated that he intends to address this issue, possibly by permitting such fees and costs to be amortized.

12. Application Procedures To date, there have been delays in processing and approving loan guarantees under the loan guaranty program. To expedite execution of loan guarantees, Secretary Chu has stated that DOE is to review applications on a rolling basis which will likely reduce the extent to which DOE can review competing projects, which may benefit early applicants. Pre-Application Procedure: Sponsors are to provide general information about the project, the sponsors and the financing plan. Application Procedure: DOE invites some of the sponsors submitting a pre-application to submit an application; 16 of the 143 entities that submitted pre-applications were invited to apply in DOE’s first solicitation. Additional information about the project is required in the application, together with a fee, although the DOE may waive such fee until an award is made and amortize such fee.

13. Commitment and Guarantee Upon an award, the DOE issues a term sheet containing material terms and conditions of the guarantee agreement. A conditional commitment is executed upon agreement between the DOE and the applicant on the terms of the guarantee. Upon satisfaction of conditions set forth in the conditional commitment, the definitive guarantee agreement is to be executed.

14. Issues for Consideration Ability of the particular company to finance the transmission project in the current or near-term market without a guaranty. If debt is available to fund the project, compare all-in cost and term of such debt to cost of guaranteed debt, including term, fees and interest rates. Ability to finance with a loan guarantee at a higher Debt-to-Equity Ratio. Ability to raise capital for other company projects and whether, if transmission project debt was guaranteed, it would not be considered company debt, counting against other debt raised in the market. Ability to finance debt under the guarantee loan program (with priority lien to US and lenders) under current debt documents. If capital is available to fund the transmission project, but may be constrained for other projects, consider availability of federal guarantees for any other company projects, such as renewable power projects. Energy Secretary Chu has stated that applications will be considered on a rolling basis, suggesting that projects which are first to apply may as a practical matter get priority consideration as personnel constraints may make it increasingly difficult to process future applications. If a company thinks the program could be advantageous for one or more transmission projects, consider filing a pre-application. Federal guaranteed loans may provide an alternative source of money in a capital- constrained market. The following are key issues to consider: