The Real Problem with Solyndra

The Real Problem with Solyndra
by Laurence M. Vance, September 27, 2011

Executives from the bankrupt solar-energy company Solyndra recently invoked their Fifth Amendment privileges before the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations, declining to testify to avoid self-incrimination. "On advice of counsel, I respectfully decline to answer any questions," said CEO Brian Harrison and CFO Bill Stover at the Subcommittee hearing "Solyndra and The DOE Loan Guarantee Program."

Solyndra, based in Fremont, California, filed for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 6, 2011, shut down all production operations, and laid off its 1,100 employees. At issue is the company's default on a federally guaranteed loan of $535 million.

Solyndra was the first renewable-energy company to receive a loan guarantee under a provision to encourage "green energy" in Barack Obama's stimulus plan, the " American Recovery and Reinvestment Act of 2009." It was not the beginning of the government's effort to encourage "green energy," and neither was it the beginning of Solyndra's attempt to secure a government loan.

The Energy Policy Act of 2005, signed into law by George W. Bush on August 8 of that year, provided, among a host of things in its 551 pages, energy-related tax incentives and loan guarantees to companies investing in innovative "clean" technologies or commercial-scale renewable energy projects. Title XVII, "Incentives for Innovative Technologies," Sections 1701–1704, created the Department of Energy's Loan Guarantee Program. The Energy Policy Act directed

the Secretary of Energy to make guarantees for certain projects, including gasification and liquefaction projects, that: (1) avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases; and (2) employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.

Companies that received loan guarantees had to pay a credit-subsidy cost representing the cost of the loan to the taxpayer if the recipient of the guarantee defaulted. The Energy Policy Act of 2005 was amended by the American Recovery and Reinvestment Act of 2009 by the addition of Section 1705 and the appropriating of $6 billion (later reduced to $2.4 billion) in funding to pay for the credit-subsidy costs of the loan guarantees because many applicants had been unable to pay for them. That is the origin of the "Section 1705" loan guarantees received by Solyndra and others. The only thing most people remember about the Energy Policy Act is that it amended the Uniform Time Act of 1966 and changed the start and end dates of daylight-saving time.

Applications for Department of Energy loan guarantees are solicited by the Loan Guarantee Program. According to an internal memorandum of the Subcommittee on Oversight and Investigations regarding the Solyndra hearing, the application procedure is as follows:

... Once an application is filed, DOE reviews the initial application to determine whether the applicant meets the solicitation criteria. If so, those applicants submit a second, more comprehensive application. DOE then conducts due diligence ­ including legal, environmental, engineering, and market reviews ­ and sometimes engages outside consultants for these reviews. Once these reviews are complete, the Loan Programs Office then negotiates a term sheet with the applicant company. A credit paper is then drafted and submitted to a DOE "Credit Committee," which is comprised of DOE officials. If the Credit Committee approves the credit paper and term sheet, a DOE "Credit Review Board" then reviews and votes on the matter. The Credit Review Board is comprised of senior DOE officials, including the Deputy Secretary, the General Counsel, the Chief Financial Officer, and other senior advisors. If the Credit Review Board approves the term sheet, a conditional commitment is made to the company.

Following the conditional commitment, DOE and the loan guarantee applicant begin to negotiate the terms for the final loan guarantee agreement. DOE is also responsible for calculating the credit subsidy score of the guarantee. Under the Financial Credit Reform Act (FCRA) of 1990, the Office of Management and Budget (OMB) is responsible for determining and approving the subsidy estimates associated with loan guarantees awarded by federal agencies. DOE submits its credit subsidy estimate to OMB along with other information about the guarantee. OMB then reviews the underlying information, and asks questions or seeks additional information from DOE about the guarantee. OMB can either approve the credit subsidy calculated by DOE, or can recommend that the cost be increased or decreased based on the perceived risk of the guarantee. Once OMB approves, the loan guarantee is finalized and DOE begins making disbursements to the company. The tenor of the loan and the repayment schedule is set out in the final loan guarantee document.

Following the loan closing, the DOE Loan Programs Office tracks and monitors the loan guarantee project. The loan guarantee agreement spells out the type of information and data the company must provide about the status of the loan project (in some cases, construction updates), as well as engineering reports and other information. These kinds of reports and data must be submitted to the DOE before the Loan Programs Office will authorize the disbursement of funds to the company.

Solyndra and 142 other companies applied for a DOE loan application in response to an August 2006 solicitation. After the initial review, 16 applicants (including Solyndra) were invited to submit a full application. In May 2008 Solyndra submitted an application for a $535 million loan guarantee to build a full-scale production facility to manufacture thin firm solar modules for flat, commercial rooftops. The application was deemed complete in August, and, after formal "due diligence" of the Solyndra application, it was presented to a DOE credit committee in January 2009, received a conditional commitment in March, and closed in September. The Federal Financing Bank, a government corporation under general supervision of the secretary of the Treasury, gradually advanced Solyndra money beginning with $21,380,155.36 on September 22, 2009. Solyndra was in financial trouble almost from the beginning, and the deal had to be restructured in February 2011.

In September 2009 Vice President Joe Biden spoke by satellite at the groundbreaking ceremony in September of 2009 for the company's new manufacturing plant and emphasized the role of the stimulus plan: "The announcement today is part of the unprecedented investment this administration is making in renewable energy and exactly what the Recovery Act is all about," said Biden.

Obama toured the Solyndra facility in May 2010 and used the company as an example of his administration's efforts to promote "green energy." He said, "Every day that you build this expanded facility, as you fill orders for solar panels to ship around the world, you're demonstrating that the promise of clean energy isn't just an article of faith ­ not anymore."

Republicans have seized on the Solyndra debacle as further proof of their claims that much of the stimulus money was wasted and used for political gain.

Rep. Cliff Stearns (R-Fla.), chairman of the Subcommittee, is "concerned that there was a hurry to get this money out of the door and that companies and individuals that supported the president were among the beneficiaries."

The committee also focused on the restructuring deal. Said Chairman Stearns, "We are also determined to know why DOE allowed the taxpayers to be subordinated to the private investors during that restructuring in violation of the clear letter of the law. What we do not know is whether the Solyndra executives here today have something to hide. Was all the information they submitted to DOE accurate and complete?"

Republicans want the Obama administration to turn over all Solyndra-related communications between the Energy Department and the White House and between the Energy and Treasury departments.

Some Republicans maintain that the Bush administration nixed the Solyndra deal and that it was revived by the Obama administration. No, it was actually the Bush administration's idea, said Jonathan Silver, executive director of the Department of Energy Loans Programs Office. Silver testified at the Subcommittee hearing along with Jeffrey Zients, deputy director of the Office of Management and Budget. Said Silver, "By the time the Obama administration took office in late January 2009, the loan programs' staff had already established a goal of, and timeline for, issuing the company a conditional loan guarantee commitment in March 2009."

The story of Solyndra shows how bloated, wayward, and out of control the federal government is.

None of the media reports about the Solyndra incident focuses on the real issue. None of the Republicans -- in or out of Congress -- criticizing the Obama administration is focusing on the real issue. No one on the committee investigating Solyndra has the slightest clue what the real issue is.

The real problem with Solyndra is not which administration should be blamed, whether stimulus money was wasted, whether the company was mismanaged, whether Solyndra executives misled the government and the company's investors, whether the loan guarantee should have been denied, whether the Obama administration pressured the DOE to approve the deal, whether the restructuring of Solyndra's loan was done lawfully, whether Obama used the Solyndra loan guarantee to score political points, whether the DOE and the OMB should have exercised more oversight, or whether "green energy" is viable.

The central government has been delegated no authority by the Constitution, nor is it the proper role of government, to regulate, encourage, discourage, license, subsidize, oversee, control, or otherwise have anything to do with energy production, energy conservation, energy efficiency, energy independence, renewable energy, or "green energy." And neither is it the business of government to have an energy policy and "green" initiatives or to guarantee loans and act as a venture capitalist.

Republicans and Democrats may disagree over the extent and scope of government intervention in the energy sector, but both parties are firmly committed to the statist idea that the government should have a role in shaping how Americans produce and use energy.

Rather than focusing on how the Solyndra incident happened, the focus should instead be on why the United States has an Energy Policy Act, a Federal Financing Bank, an American Recovery and Reinvestment Act, and a Department of Energy.

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