The Department of Energy's ability to modify loan guarantee terms to ensure some private investors could be repaid before taxpayers is an important "last resort" that could help prevent a company from going into bankruptcy, a top official told House lawmakers yesterday -- objecting to a Republican bill that would eliminate DOE's option to "subordinate" taxpayer money behind private investment.

Republicans on the House Energy and Commerce Committee used yesterday's hearing to reiterate their criticism of the loan guarantee program, focusing on now-defunct solar panel manufacturer Solyndra, and they repeatedly questioned whether DOE even has the legal authority to structure loan agreements such that private investors would recoup funds before taxpayers in the event a company went bankrupt.

Two subcommittees convened a joint hearing on two draft pieces of legislation, Rep. Cliff Stearns' (R-Fla.) "No More Solyndras Act," which would phase out the loan guarantee program and ensure that subordination could not be used to restructure existing loan agreements, and Rep. Charles Bass' (R-N.H.) "Smart Energy Act," which would boost efforts to deploy industrial energy efficiency programs and aim to expand the use of combined heat and power. Stearns' bill received the most attention by far from members of the Subcommittee on Oversight and Investigations and Subcommittee on Energy and Power who attended yesterday's hearing.

In the case of Solyndra, which received a $535 million loan guarantee, DOE restructured the loan to subordinate $75 million of public money behind private investors.

David Frantz, acting executive director of DOE's Loan Programs Office, defended that decision, saying the goal was to prevent Solyndra from going bankrupt so as not to lose any of the taxpayers' investment. He said subordination was the only option because otherwise, private investors would not back the project.

"This is a tool of last resort in restructuring, but it is used specifically to attract new and fresh debt and/or equity into the transaction with the hope of saving the project," Frantz said during the hearing. "Those investors, new funding coming into an already distressed property, will almost demand to mitigate the risk they have in assuming that position."

Frantz also noted that the ability to subordinate during restructuring was supported by Herb Allison, a former Treasury Department official who led a probe into the Solyndra loan guarantee (Greenwire, March 13).

Grilled on the legality of subordination -- which Republicans say violates the 2005 Energy Policy Act, which created the loan guarantee program -- Frantz deferred to the opinion of DOE's lawyers, who said it did not violate the law when enacted as part of a loan restructuring.

Frantz acknowledged that the handling of Solyndra looked bad in retrospect, but he said DOE was improving its handling of the program and implementing reforms recommended in the Allison report. He also said the loan guarantee program was performing above expectations overall. And he said subordination was a preferable alternative to simply letting a struggling project collapse.

"If a project is in distress, we want the opportunity to save the project," he said.

While committee Republicans were generally supportive of Stearns' bill, a few said its prohibition on DOE's evaluating any loan guarantee applications filed after Dec. 31, 2011, went too far. Rep. Joe Barton (R-Texas) said lawmakers shouldn't be so quick to "throw the baby out with the bath water," arguing that the loan guarantee program could be improved without being scrapped altogether. Rep. John Shimkus (R-Ill.) made a similar argument.

DOE's authority for issuing new loans under the Section 1705 program, through which Solyndra received its funding, expired Sept. 30, 2011. But the agency still has funding available and authority to grant new loans under the Section 1703 program, which supports clean-energy projects.

The 1703 loan program was created by the Energy Policy Act and required applicants to front some of the costs of the loan. The 1705 loan program, which was created in 2009 and funded by the government stimulus, offered more generous loan terms than the original program and has been criticized for not requiring companies to put their own "skin in the game."

Rep. Ed Whitfield (R-Ky.), who chairs the Energy and Power Subcommittee, said no markup of the bills had been scheduled, and he did not expect one to take place before the August recess.