BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 796 HEARING: 6/20/12
AUTHOR: Blumenfield FISCAL: Yes
VERSION: 2/27/12 TAX LEVY: No
CONSULTANT: Phan
CALIFORNIA ALTERNATIVE ENERGY AND ADVANCED
TRANSPORTATION FINANCING ACT
Changes the loan guarantee limit in the CalCAP program and
creates a new process for financing clean energy in the
CAEATFA program.
Background and Existing Law
I. The California Capital Access Program for Small
Businesses (CalCAP): The program was established in 1994.
The program assists small businesses in obtaining loans
through participating financial institutions. For eligible
businesses, CalCAP matches loss reserve account premiums
paid by borrowers and lenders on loans. The participating
financial institutions are entirely liable for loan losses,
which can be reimbursed through each lender's CalCAP loan
loss reserve fund.
CalCAP insures bank loans made to small businesses to
assist them in growing their business. It also encourages
banks and other financial institutions to make loans to
small businesses that fall just outside of most banks'
conventional underwriting standards. Loans can be used to
finance the acquisition of land, construction or renovation
of buildings, the purchase of equipment, other capital
projects, and working capital. There are limitations on
real estate loans and loan refinancing. Qualified
financial institutions, such as a bank or credit union,
work with CalCAP to issue loans to small businesses.
The maximum loan amount is $2.5 million. The maximum
amount that CalCAP will pay is $100,000 per loan under the
loan loss reserve. The current program allows the
Treasurer's office to pay about 7%-12% of the loan loss.
Lenders set all the terms and conditions of the loans and
decide which loans to enroll into CalCAP. Lenders
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determine the premium levels to be paid by the borrower and
lender. Loans can be short- or long-term, have fixed or
variable rates, be secured or unsecured, and bear any type
of amortization schedule. The lenders negotiate directly
with the Treasurer's office under the CalCAP program.
CalCAP acts as a loan guarantee as follows: a company that
falls outside of traditional lending or underwriting
criteria either because the product is new or the company's
rating is not AAA, the bank would work directly with CalCAP
to insure that at least part of the loan (7%-12%) would be
repaid if the company were to default.
Because of CalCAP's success, the program is spending
approximately $3 million annually for the funding of loan
loss reserve contributions and program administration. In
2010, the Treasurer's Office received federal funding for
the CalCap program, totaling $84 million over three
installments of $28 million each.
II. California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA): CAEATFA is a
state authority at the State Treasurer's Office and was
created for the purpose of promoting the development and
utilization of alternative energy sources, and the
development and commercialization of advanced
transportation technologies. Existing law authorizes
CAEATFA to use lease revenue bonds and provide "financial
assistance" to finance projects that utilize alternative
energy sources and advanced transportation technologies.
"Financial assistance" includes loans, loan loss reserves,
interest rate reductions, proceeds of bonds, insurance,
guarantees, credit enhancements, and contributions of
money, property, and labor. Existing law also allows
CAEATFA to exempt qualified participants from paying the
sales and use tax on tangible personal property for green
energy and renewable energy.
To date, CAEATFA has approved financial assistance for
private entities in the following fields: electric vehicle
manufacturing, solar photovoltaic manufacturing, landfill
gas capture and production, biogas capture and production,
demonstration hydrogen fuel production, electric vehicle
battery manufacturing, biomass processing and fuel
production, and others. CAEATFA consists of five members:
the Director of Finance, the Chairman of the California
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Energy Commission (CEC), the President of the California
Public Utilities Commission (CPUC), the Controller, and the
Treasurer.
III. Utilities charge: Existing law requires that all
ratepayers within the service area of an investor owned
utility pay a public goods charge based on the amount of
electricity they use. The charge funds the Renewable
Resources Trust Fund, the Public Interest Electricity
Research Program, administered by the State Energy
Resources, Conservation, and Development Commission, and
complements the CPUC energy efficiency efforts. The public
goods charge program expired on January 1, 2012, and was
not renewed.
As a replacement for the renewable energy funding formerly
provided by the public goods charge, the CPUC decided in
June 2012, to establish the Electric Program Investment
Charge (EPIC). Like the public goods charge, EPIC
generates funds for investment in public interest energy
programs by levying a small surcharge on electricity. The
program is expected to amass $162 million annually, to be
used for renewable energy research, deployment, and market
facilitation. The CEC administers all funds and develops
an investment plan every 3 years.
IV. Loan guarantee and Solyndra: The United States
Department of Energy (DOE) Loan Guarantee Program is a loan
guarantee program, where a government entity assumes the
obligation to repay a lender if the borrower fails to repay
a loan. DOE solicits firms that invest in either
innovative clean technology or commercial scale renewable
energy generation projects, which then apply. Because
these technologies are unproven, the loan guarantee program
provides certainty for lenders to make loans to these firms
that they may not otherwise, as these technologies lack the
proven capacity to produce sufficient net income for the
firm to repay the loan. Therefore, the loan guarantees
allow firms in this area to bring more technologies to
market than would otherwise, but for the program. In
consultation with the Office of Management and Budget
(OMB), DOE assesses the investment risk assumed by its loan
guarantee.
Solyndra first applied to DOE for a loan guarantee in
December 2006, in response to a solicitation. On March 20,
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2009, DOE announced its conditional commitment to the loan
guarantee to Solyndra, and closed on September 2,
projecting 3,000 construction jobs and 1,000 ongoing jobs
in the factory.
In March 2010, Solyndra's auditor warned about its ability
to continue as a growing concern in an SEC filing. In June
2010, the company cancelled a $300 million initial public
offering. The Solyndra Board announced its bankruptcy on
August 30, 2011. Two days later, the Federal Bureau of
Investigation working with the DOE's inspector general
executed search warrants at the firm and at the home of its
executives, but authorities have not yet charged the firm
or its executives with wrongdoing. Solyndra filed for
bankruptcy on September 6th in the United States Bankruptcy
Court for the District of Delaware. As such, DOE must
repay the loan, made under another DOE program, and pursue
its claims for repayment in the bankruptcy proceeding.
Proposed Law
Assembly Bill 796 has two separate components.
Section 1: Expands the CalCAP program. AB 796 increases
the maximum allowable loan size in the CalCAP program from
$2.5 million to $5 million, and the maximum loan loss
reserve for a single borrower from $100,000 to $200,000.
The bill requires that the increased loan loss reserve
amount be entirely funded through new federal funds.
Section 2: Creates a new finance program under CAEATFA.
AB 796 requires CAEATFA to establish the "Clean Energy
Economy and Jobs Incentive Program" (Clean Energy Program)
to provide financial assistance to eligible
California-based entities for the development and expansion
of "clean energy" technology manufacturing and
commercialization. Consistent with current law, AB 796
restates that "financial assistance" includes loans, loan
loss reserves, interest rate reductions, insurance,
guarantees, credit enhancements, and contributions of
money, property, and labor. Eligible projects have to
demonstrate the technology's energy efficiency or cost
effectiveness compared to current products; capability to
commercialize within 3 years of submitting the application;
accelerated progress from the financial assistance; and
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current transition from development to commercialization.
This bill focuses on the loan loss guarantee program under
CAEATFA, which has a financial assistance limit for each
applicant of $5,000,000 and shall not be worth more than
25% of the project total. CAEATFA may provide financial
assistance of up to $10,000,000 if it receives legislative
approval. Financial assistance can only be provided in
partnership with a financial institution.
AB 796 provides that CAEATFA shall promulgate regulations
to administer the program only when it receives legislative
funding for the purpose of developing clean energy
technology. Funding shall come from the CPUC surcharge,
private, and federal funds. CAEATFA may use up to $300,000
of funds on initial administrative costs.
This bill requires the Legislative Analyst's Office (LAO)
to evaluate the program's effectiveness based on job
development, instate business growth, state and local
revenue and economic growth, and reduction in greenhouse
gas emissions, air pollution, water pollution, and energy
consumption. The LAO must report its findings to the
Legislature before January 1, 2015.
These provisions will sunset on January 1, 2018.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Our state is home to the most
cutting edge environmental policy in the nation. Along
with implementation of AB 32, California has enacted such
laws as the Renewable Portfolio Standard (RPS), the Low
Carbon Fuel Standard, and, most recently, SB 71 (Padilla,
2010), which provides a sales and use tax exemption for
clean technology manufacturing equipment. These policies
all speak to California's long-term environmental goals,
but most of these policies do not focus on the near-term
job creation and business growth that California's clean
economy needs now. To effectively get businesses to the
point that they can utilize these policies, CA needs to
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help companies get out of the starting gate due to
constraints on their ability to access capital to finance
manufacturing of their products here.
AB 796 creates the Clean Energy Economy and Jobs Incentive
Program. AB 796 addresses small businesses' stumbling
block by offering access to state financial assistance for
investors in the clean tech industry that will open the
door to private financing of their production facilities.
According to the author, the program will incentivize the
clean energy and technology industry to locate and expand
their facilities in California by establishing a financial
assistance program designed to keep the industry and its
jobs in California. Other states and countries are
aggressively courting these companies in order to benefit
their economies. This bill will help incentivize companies
to remain in California by authorizing CAEATFA to offer
financial assistance through leveraging small amounts of
funds for large benefits to our economy and job creation.
In addition to the new program, AB 796 will stimulate
California's small business industry by increasing the
maximum loan amount in CalCAP to $5 million and loan loss
reserve contribution to $200,000. This increase is solely
funded by federal dollars and will benefit the small
businesses that qualify under federal regulations. This
increase is a big boost for small businesses at no cost to
the state and at absorbable costs to the CalCAP program.
While the unemployment rate has reached 30% in California's
hardest hit communities, job growth in the green energy
industry is on the rise. Keeping these companies in
California will augment our environmental policies,
increase jobs, increase our tax base, and boost our
economy.
2. CAEATFA's authority . Under CAEATFA's current statute,
it can already provide the financial assistance to clean
energy that AB 796 authorizes. AB 796 merely provides
CAEATFA with a more structured plan for financing clean
energy projects. However, by restating CAEATFA's current
authority in a more defined way, AB 796 narrows CAEATFA's
powers and flexibility. Under AB 796, all projects that
fall under the Clean Energy Program, which is defined to
include many of CAEATFA's current allowable projects, can
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only be financed by CAEATFA if it is in conjunction with a
financial institution, defined as a commercial institution.
Unlike existing law, this bill would prevent CAEATFA from
cooperating with a local government, for example, to
provide financial assistance to a clean energy firm.
Despite conversations with financial institutions, none
supports this bill. One venture capital firm, Mohr-Davidow
Ventures, supports this bill. Does this mean there is no
demand for the program except from the venture firm that
invested in these technologies as a start up? Thus, AB 796
(1) appears to respond only to demands from specific
companies, not banks, (2) creates a more narrowly focused
program under CAEATFA that it already has the authority to
do, and (3) places more constraints on CAEATFA's powers.
Proponents of this bill argue that CAEATFA's current
authority is too broad, and that although CAEATFA can
currently provide financial assistance to many different
projects, it is not using its powers because it has no
clear guidance on what it should do. Proponents of this
bill hope to imitate the effects of SB 71 by providing
CAEATFA with more focus and guidance so that it more
proactively assists the clean energy technology industry.
The Committee may wish to consider whether CAEATFA will
become a more effective program with more guidance and more
constraints or if this bill mitigates the existing
authority the Treasurer has to enter into flexible loan
guarantee programs.
3. A solution searching for a problem . According to the
Treasurer's office, the current CalCAP program is
successful and there has been little demand for an
increased loan loss reserve amount. The CalCAP program
backs loans as small as $500 or as large as $2.5 million;
it's not clear that more is necessarily better. This bill
does not address any major public policy concerns and
increases the State's exposure as a credit guarantee. The
Committee may wish to consider deleting the CalCAP
provision altogether.
4. Remember Fanny Mae & Freddie Mac ? Both Fanny and
Freddie are examples of what happens when credit risk isn't
properly assessed; the federal government now backfills
these loans at more than $200 billion per year. This bill
increases the loan guarantee program under CalCAP from $2.5
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million to $5 million and hopes to augment the program
under CAEATFA, an assurance the private sector has declined
to provide. When loans fall out of the traditional lending
structure, lenders will sometimes seek state assurances
through the CalCAP program to back part of the loan.
Through the program, the state guarantees the lender
between 7-12% of the loan amount. The State has neither
the risk assessment nor risk management faculty to fully
analyze these types of loans, and this bill provides a
blanket backstop without the long-term considerations for
what it means to provide this type of certainty to private
loan holders. Can the state handle the pressure of
guaranteeing loans? Would a loan guarantee program impact
our credit rating? How would the loan guarantee programs
be backed or securitized? This bill does not answer these
questions. The bill does provide that the funding sources
should be limited to federal funds in Section 1 (the CalCAP
program) and to available funds in Section 2 (CPUC,
federal, and private). The bill does not consider a major
default under which all loans have to be paid immediately.
The Committee may wish to consider (1) whether these
questions require further research before advancing the
bill, and (2) whether these decisions are better left to
the Treasurer under existing law to assess the overall risk
to the state.
5. Funding uncertainties . This bill requires CAEATFA to
establish and promulgate the Clean Energy Program when it
secures funds for the program. The bill identifies three
possible sources of funding: the CPUC, federal, and private
funds. The CPUC's new renewable energy funding program,
EPIC, is predicted to raise $162 million each year, with a
portion of that designated to renewable energy deployment
and market facilitation. Supporters of this bill hope that
CAEATFA will be able to secure a large portion of these
funds to launch the Clean Energy Program. However, what if
the CEC declines CAEATFA's application for funds? How much
effort must CAEATFA invest to continue to reapply for these
funds, expending its limited resources and staff time in
the process? What if funds materialize but are
insufficient? Is CAEATFA still required to develop the
program and wait until more funds materialize? Would the
program still be timely and useful once more funds become
available? The program that AB 796 establishes relies on
uncertain funding sources, which leads to many questions
about implementation. The other possible funding sources,
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federal and private funds, are as or even more unreliable
sources of funding than the EPIC program. The Committee
may wish to ask the author clarify how and when the program
may operate dependent on the funding.
6. Show me some proof . SB 71 (Padilla, 2010) expanded the
CAEATFA program for clean energy purposes as well.
Although SB 71 has yet to be fully analyzed and proven to
meet its intended goals, SB 1128 (Padilla, 2012) is a
current bill that would further expand the SB 71 program.
The Committee may wish to wait for further data on SB 71
before expanding the program with AB 796 and other bills.
Under SB 71, CAEATFA approves tax benefits to applicants
based on its evaluation of the applicant's "net benefits",
although CAEATFA can and has approved applicants that did
not demonstrate a net benefit. Applicants supply
information to CAEATFA, which performs its own independent
net benefits analysis to show that the applicants will
provide new jobs to the economy. AB 796 has no such "net
benefits test" provision. The Committee may wish to
subject the AB 796 applicants to the same net benefits test
as SB 71 companies.
7. How much is enough ? The state subsidizes renewable
energy programs in a number of ways, from the Renewable
Portfolio Standard (RPS) requirements to a solar exclusion
from property taxes. The federal government provides both
a federal investment and production credit for these same
products. By guaranteeing the demand side of these
products, the state has fixed demand and created a
guaranteed market. Therefore, each subsequent program the
state creates simply lowers the supply costs because demand
has already been fixed by the state. The committee may
wish to consider whether it makes sense to simply lower the
supply costs for laws that are already in place.
8. Technical amendments .
As drafted, the bill is inconsistent and difficult to
administer. Committee staff suggest the following
technical amendments:
For Section 2 of the bill, instead of creating a
new Division 16.1, add Section 2 as Chapter 4 under
Division 16 of the Public Resources Code
In Section 2, change all references from "division"
to "chapter"
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On page 4, line 14, strikeout "Biomass" and insert:
"Eligible biomass feedstock"
9. History . AB 796 passed out of the Assembly and Senate
Committees. It passed out of the Senate Governance and
Finance Committee on a 9-0 vote. Because AB 796 was not
voted on the Senate Floor, it became a 2-year bill and has
been double referred to the Governance and Finance
Committee and the Energy Committee in this legislative
session. During its legislative cycle, it has been amended
6 times.
10. Related legislation . SB 1128 (Padilla, 2012) expands
CAEATFA's sales and use tax exemption authority. SB 1128
passed out of the Senate Governance and Finance Committee
on a 9-0 vote.
Other Actions
Assembly Natural Resources 6-3
Assembly Appropriations 17-0
Assembly Floor 62-14
Senate Governance and Finance 9-0
Senate Environmental Quality 6-1
Senate Appropriations 8-0
Support and Opposition (6/14/12)
Support : CALSTART; Mohr-Davidow Ventures; Simbol
Materials; Nanosolar; Environmental Defense Fund; Solaria.
Opposition : Unknown.