[Federal Register: October 5, 2004 (Volume 69, Number 192)] [Proposed Rules] [Page 59649-59695] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr05oc04-22] [[Page 59649]] ----------------------------------------------------------------------- Part II Department of Agriculture ----------------------------------------------------------------------- Rural Business-Cooperative Service ----------------------------------------------------------------------- 7 CFR Part 4280 Renewable Energy Systems and Energy Efficiency Improvements Grant, Guaranteed Loan, and Direct Loan Program; Proposed Rule [[Page 59650]] ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Rural Business-Cooperative Service 7 CFR Part 4280 RIN 0570-AA50 Renewable Energy Systems and Energy Efficiency Improvements Grant, Guaranteed Loan, and Direct Loan Program AGENCY: Rural Business-Cooperative Service, USDA. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: Rural Business-Cooperative Service proposes to implement a program for making grants, loan guarantees, and direct loans to farmers and ranchers (agricultural producers) or rural small businesses to purchase renewable energy systems and make energy efficiency improvements. The Farm Security and Rural Investment Act of 2002 (2002 Act) established the Renewable Energy Systems and Energy Efficiency Improvements Program. This program will help farmers, ranchers, and rural small businesses to reduce energy costs and consumption. DATES: Written comments on this proposed rule must be received on or before November 4, 2004 to be assured of consideration. The comment period for the information collection under the Paperwork Reduction Act of 1995 continues through November 4, 2004. ADDRESSES: You may submit comments to this rule by any of the following methods: Agency Web Site: http://rdinit.usda.gov/regs/. Follow instructions for submitting comments on the Web Site. E-Mail: comments@usda.gov. Include the RIN No. 0570-0050 in the subject line of the message. 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 another 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 working hours at 300 7th Street, SW., 7th Floor, address listed above. FOR FURTHER INFORMATION CONTACT: Georg A. Shultz, Special Advisor for Renewable Energy Policy and Programs, Office of the Deputy Administrator Business Programs, U.S. Department of Agriculture, Mail Stop 3220, 1400 Independence Ave., SW., Washington, DC 20250-3220, Telephone: (202) 720-2976. SUPPLEMENTARY INFORMATION: The information presented in this preamble is organized as follows: I. Background A. Statutory Authority B. Background Information C. Request for Comments II. General Criteria and Terms for Approval of Grants and Guaranteed Loans A. Applicant and Applicant/Borrower Eligibility B. Project Eligibility C. Eligible Project Costs D. Project Funding E. Appeals F. Insurance G. Construction Planning and Performing Development H. Laws that Contain Other Requirements III. Application and Documentation Requirements for Grants and Guaranteed Loans A. Application B. Forms, Certifications, and Agreements C. Studies and Reports IV. Evaluation of Grant and Guaranteed Loan Applications A. Criteria for Applications for Renewable Energy Systems B. Criteria for Applications for Energy Efficiency Improvements C. Selection of Evaluation Criteria and their Point Values V. Processing and Servicing Grants and Guaranteed Loans A. Processing and Servicing Grants B. Processing and Servicing Guaranteed Loans C. Processing and Servicing Combined Funding VI. Economic Analysis A. Benefit-Cost Analysis B. Small Businesses VII. Administrative Requirements A. Paperwork Reduction Act B. Intergovernmental Review C. Regulatory Flexibility Act D. Civil Justice Reform E. National Environmental Policy Act F. Unfunded Mandates Reform Act G. Executive Order 13132, Federalism H. Executive Order 12866, Regulatory Planning and Review I. Background A. Statutory Authority The Farm Security and Rural Investment Act of 2002 (2002 Act) established the Renewable Energy Systems and Energy Efficiency Improvements Program under Title IX, Section 9006. The 2002 Act mandates that the Secretary of Agriculture create a program to make loans, loan guarantees, and grants to ``a farmer, rancher, or rural small business'' to purchase renewable energy systems and make energy efficiency improvements. The purpose of the program is to help agricultural producers and rural small businesses to reduce energy costs and consumption. The 2002 Act mandates the maximum percentage that the Agency will provide in funding for these projects. Grant funding is limited to 25 percent of the eligible project cost and will be made only to those who demonstrate financial need. Guaranteed loans and direct loans are each limited to 50 percent of the eligible project costs. Lastly, the Agency may fund up to 50 percent of the eligible cost for any combination of grants, guaranteed loans, and direct loans per project under this program. In determining the amount of a grant, guaranteed loan, or direct loan for renewable energy systems and energy efficiency improvements, the 2002 Act requires the Agency to take into consideration, as applicable, the following factors: 1. The type of renewable energy system or energy efficiency improvement to be purchased; 2. The estimated quantity of energy to be generated by the renewable energy system or energy efficiency improvement; 3. The expected environmental benefits of the renewable energy system or energy efficiency improvement; 4. The extent to which the renewable energy system or energy efficiency improvement will be replicable; 5. The demonstrated amount of energy savings expected to be derived from this activity or project; 6. The estimated length of time it would take for the energy savings generated by the project to equal the cost of the activity or project; and 7. Other appropriate factors. B. Background Information Due to time constraints for implementing this program, the Agency decided to institute only the grant program for FY 2003. Therefore, a NOFA inviting applications to purchase renewable energy systems and make energy efficiency improvements under the grant program was published in the Federal Register on April 8, 2003 (68 FR 17009). Of the 147 applications for grant funds received, 114 were approved and funded under this program for FY 2003. For FY 2004, the Agency published a second NOFA (May 5, 2004; 69 FR 25234) for a grant program for [[Page 59651]] renewable energy systems and energy efficiency improvements. For FY 2005, the Agency is in the process of developing a rule for a complete grant, guaranteed loan, and direct loan program. This notice is the first formal step of this process. In developing the proposed rule, the Agency relied on several main components. First, the rule needs to be consistent with the requirements specified in the 2002 Act. Thus, some of the proposed requirements are statutorily-based. Second, Rural Development is proposing to implement the grant and guaranteed loan program based on the requirements outlined in the NOFA published on April 8, 2003, including stakeholder comments. Third, in proposing the guaranteed loan program, the Agency is proposing requirements based on the experience of other loan programs (e.g., the Business and Industry Loan program) and the need to ensure that loan programs are based on sound financial principles. Based on experience, the Agency is proposing to require applicants and borrowers as well as their proposed projects to meet certain eligibility requirements to ensure that the funds available under this program are disbursed to those who meet the target market in the 2002 Act. To assess the eligibility and viability of proposed projects, applicants will be required to provide certain information. Because of limitations of available funds, the Agency is proposing criteria to score and rank eligible projects to determine those projects that are funded first. To make funds available to more agricultural producers and rural small businesses, the Agency is proposing limits to maximum funding levels. In addition, minimum funding levels are being proposed to help ensure that most projects that have beneficial aspects of energy production and energy savings in rural areas can be considered for assistance. Finally, the Agency is proposing processing and servicing requirements, which are necessary for any grant and guaranteed loan program. With regards to the direct loan program, the Agency has chosen not to promulgate a regulation for the direct loan program under section 9006 at this time because we believe the government needs to have options for dealing with change and innovation within the renewable energy industry. By allowing the Agency to tailor the direct program to specific needs that are not properly addressed by either the grant or guarantee gives the government some flexibility in dealing with the ever changing and evolving nature of the renewable energy industry. As funding is provided for this purpose, the Agency will develop the appropriate rules, terms, conditions and criteria for the direct loan program that will address the specific direct loan needs for renewable energy at that time. Finally, the implementation of a direct loan program can require significant staffing and resources, which the Agency does not currently have. By implementing a direct loan program tailored to specific needs at a later time, the Agency will be in a better position to allocate the necessary staff and resources to implement a direct loan program. For these reasons, the Agency is not proposing a specific direct loan program at this time, but is instead identifying the process for developing a direct loan program and the information that would be included in the direct loan program. C. Request for Comments The Agency is requesting comments on the overall program being proposed. The Agency is especially interested in comments on the following areas: 1. The rule sets a minimum funding amount of $2,500. How would this minimum value affect the projects most likely to otherwise use this program? 2. The rule does not allow non-traditional lenders to participate in the program. Is this appropriate for renewable energy projects or would some non-traditional lenders be likely to lend funds for this type of activity if the rule did not prohibit their participation? 3. Are there ways to improve, streamline, or simplify the application process for the program? The Agency is particularly interested in the views of program applicants and other interested stakeholders. The Agency will consider comments based on its need to assess the eligibility and viability of proposed projects. Applicants and the Agency must meet all applicable laws, regulations and executive orders. The applicants must provide the Agency and other agencies with appropriate information so that all compliance issues can be addressed and competing applications can be evaluated in a fair and objective process. The Agency will balance the above criteria, where possible, with the need to establish information requirements commensurate with the scale and complexity of the proposed renewable energy system or energy efficiency improvement. Comments are to be submitted as indicated in the DATES and ADDRESSES sections above. The Agency will consider all comments, although some may be addressed at a future date. The Agency believes that a 30-day comment period, rather than a 60- day comment period, is sufficient for soliciting public comments on this proposed rulemaking. First, the stakeholders are already very familiar with the grant and guaranteed loan program being proposed. The Agency issued two Notices of Funds Availability (NOFAs) for grant programs under section 9006, one in fiscal year (FY) 2003 and one in FY 2004, and requested public comments on both NOFAs. In addition, the Agency's current Business and Industry (B&I) guaranteed loan program forms the basis of the proposed guaranteed loan program. Second, in developing the proposed program, the Agency considered all of the comments received on the NOFAs and used its experience with the NOFAs in developing the proposed rule. Third, the Agency hosted a national public stakeholders forum for constituents on December 3, 2002, which was simulcast nationwide over the Internet. At this forum, attendees expressed their views on the implementation of section 9006. There was significant participation with both oral and written comments, which were also considered in the development of the proposed rule. Finally, the grant program is identical to the latest NOFA and there are only a few differences being proposed between the section 9006 guaranteed loan program and the existing B&I guaranteed loan program. For these reasons, the Agency believes that 30 days is sufficient for the stakeholders to understand the proposed program and to provide comment on it. If additional time is required, stakeholders can always request an extension of the public comment period. II. General Criteria and Terms for Approval of Grants and Guaranteed Loans There exist thousands of agricultural producers and rural small businesses engaged in meeting the needs of the nation's growing population. The potential contribution of this group toward meeting the national goal of conserving and reducing energy usage nationwide is great. In implementing this program, the Agency encourages agricultural producers and rural small businesses to utilize commercially available technologies. Terminology Throughout this preamble, we use the term ``applicant,'' ``borrower,'' and ``grantee'' in describing the proposed grant and loan program. The term ``applicant'' refers to the entity seeking [[Page 59652]] a grant or loan. For the grant program, this entity is the agricultural producer or rural small business. For the direct loan program, this entity is the agricultural producer. For the guaranteed loan program, however, this entity is the lender. We use the term ``borrower'' when referring to the agricultural producer or rural small business that is seeking the guaranteed loan or to whom a loan has been made. We use the term ``grantee,'' to refer to the agricultural producer or rural small business that has received a grant. In summary, when the phrase ``applicant or borrower'' is used in the preamble, it refers to the agricultural producer or rural small business seeking the grant, guaranteed loan, or direct loan. When just the term ``applicant'' is used, it refers to the entity (agricultural producer, rural small business, or lender) submitting the application, as described in the above paragraph. A. Applicant and Applicant/Borrower Eligibility To be eligible to receive a grant or guaranteed loan, an applicant or borrower must meet each of the five criteria, as applicable, identified below. These criteria were selected because they are identified in Section 9006 of the 2002 Act. 1. To receive a grant or guaranteed loan, the applicant or borrower must be an agricultural producer (farmer or rancher) or a rural small business; 2. If the applicant or borrower is an individual, the applicant or borrower must be a citizen of the United States (U.S.) or reside in the U.S. after being legally admitted for permanent residence; 3. Entities must be at least 51 percent owned, directly or indirectly, by individuals who are either citizens of the U.S. or reside in the U.S. after being legally admitted for permanent residence; 4. If the applicant or borrower is applying as a rural small business, both the applicant's or borrower's business headquarters and the proposed project must be in a rural area; and 5. For grants only, the applicant must have demonstrated financial need. Any applicant, borrower, or owner that has an outstanding Federal judgment, is delinquent in paying Federal income taxes, or is delinquent on a Federal debt is ineligible to receive a grant or guaranteed loan under this program. This condition is consistent with standard Agency practice for funding programs. B. Project Eligibility The proposed rule contains criteria to determine if an applicant's proposed project is eligible to receive funds or guarantees under the Renewable Energy Systems and Energy Efficiency Improvements Program. To be eligible, the proposed project is required to meet the following criteria, as applicable: 1. The project must be for the purchase of a renewable energy system or to make energy efficiency improvements; 2. The project must be for a replicable, pre-commercial or a replicable, commercially available technology; 3. The project must be technically feasible; 4. The project must be located in a rural area; 5. The applicant or borrower must be the owner of the system and control the operation and maintenance of the proposed project. However, a qualified third-party operator will be allowed to manage the operation and/or maintenance of the proposed project; and 6. All projects must be based on satisfactory sources of revenues in an amount sufficient to provide for the operation and maintenance of the system or project. Projects that are still in the research and development stage are not eligible for funds under this program, because the 2002 Act requires projects to be ``replicable'' and the Agency does not believe projects that are in the research and development stage meet this statutory requirement. In addition, a project for which construction has been initiated will not be considered by the Agency because the necessary environmental assessment cannot be conducted in accordance with the National Environmental Protection Act. The technical feasibility of each proposed project will be based on all of the information provided by the applicant and on other sources of information, such as recognized industry experts in the applicable technology field, as necessary. If the project is determined to be not technically feasible, the applicant will be notified in writing of this determination and the reasons therefore. The rule allows the applicant or borrower to appeal such determinations. C. Eligible Project Costs Funds may be used only for certain specified project costs, provided these costs are an integral and necessary part of the total project. Funds received under 7 CFR part 4280, subpart B, cannot be used for any other project costs. The eligible project costs are: 1. Post-application purchase and installation of equipment, except agricultural tillage equipment and vehicles. Vehicles are considered to be any powered mobile equipment, including but not limited to cars and tractors; 2. Post-application construction or project improvements, except residential; 3. Energy audits or assessments; 4. Permit fees; 5. Professional service fees, except for application preparation; 6. Feasibility studies; 7. Business plans; 8. Retrofitting; 9. Construction of a new facility only when the facility is used for the same purpose; is approximately the same size; and, based on the energy audit, will provide more energy savings than improving an existing facility. Only costs identified in the energy audit for energy efficiency projects are allowed; 10. Working capital (guaranteed loans only); and 11. Land acquisition (guaranteed loans only). The Agency selected these items as eligible project costs because they are integral to the acquisition or construction of eligible projects and these items are necessary for the successful implementation and quality assurance of the project; and allowing these costs provides for support of actual purchase of a renewable energy system and energy efficiency improvements. The Agency is allowing working capital and land acquisition as an eligible project costs for guaranteed loans because the Agency wants to ensure that the relatively limited percentage of grant funds (25 percent for grants versus 50 percent for guaranteed loans) are used for the renewable energy system or energy efficiency improvement project itself. D. Project Funding 1. Funding Amounts. The minimum level of funding available for a grant, guaranteed loan, or a combined grant and guaranteed loan is $2,500. The Agency believes that including this minimum level of funding will allow more agricultural producers and rural small businesses to qualify and take advantage of this program. The Agency's goal in implementing this program is to distribute all of the available funds quickly and equitably to qualified applicants and borrowers. To encourage wide participation and distribution of funds, the Agency has established levels of available funding for both funding programs. The following paragraphs discuss maximum [[Page 59653]] funding levels and specific details related to funding for grants and guaranteed loans, and percentages of eligible project costs available under each funding program. i. Grant Funding. The maximum funding level for grants for renewable energy systems is $500,000. The maximum funding level for grants for energy efficiency improvements is $250,000. The maximum amount of grant assistance to one individual or entity is limited to $750,000. As required by the 2002 Act, the amount of grant funds made available to an applicant for an eligible project must not exceed 25 percent of eligible project costs. The remaining funds needed to complete the project must come from other sources. The applicant may use third-party, in-kind contributions as part of the remaining funds. Third-party, in-kind contributions, however, cannot exceed 10 percent of the matching funds provided by other sources. ii. Loan funding. For guaranteed loans, the maximum funding level is $10 million. If a more than $10 million in loan guarantees is sought, then the loan should be sought under the Agency's B&I program. The amount of guaranteed loan funds made available to an applicant or borrower for an eligible project will not exceed 50 percent of eligible project costs. For guaranteed loans, the total amount of Agency loans to one borrower will be limited to no more than $10 million. The percentage of the guarantee, which will be negotiated between the lender and the borrower, cannot exceed 85 percent for loans of $600,000 or less; 80 percent for loans greater than $600,000 but up to $5 million; and 70 percent for loans greater than $5 million but up to $10 million. c. Combined Grant and Guaranteed Loan Funding. As required by the 2002 Act, a combined grant and guaranteed loan under this program cannot exceed 50 percent of eligible project costs and the applicant or borrower is responsible for having other funding sources for the remaining funds. Eligible project costs will be based on costs identified for each type of funding being requested under a combination funding request. 2. Interest rates on loans. i. Guaranteed loans. The interest rate for a guaranteed loan will be negotiated between the lender and the borrower and may be fixed, variable, or a combination of fixed and variable as long as it is a legal rate. If a variable interest rate is used, it must be tied to a base rate agreed to by the lender and the borrower and may be varied no more than once per quarter. The interest rate for a guaranteed loan is to be based on indices, such as money market indices, that are published in a recognized banking industry source. As in the Agency's B&I program, the interest rate can not be more than that rate customarily charged borrowers in similar circumstances in the ordinary course of business and is subject to Agency review and approval. ii. Combination Funding. The interest rate for the loan portion of a combined funding request will be determined based on the procedures specified for guaranteed loans. 3. Terms of Loan. This rule sets maximum loan term limits for guaranteed loans and also applies when they are part of a combination funding request. These term limits vary according to the type of item and will be utilized only when the loan cannot reasonably be repaid over a shorter term. The maximum loan terms being proposed are established loan terms used under the Agency's B&I program and are familiar to commercial lenders. The maximum loan term limits in this rule are as follows: i. For real estate, 30 years. ii. For machinery and equipment, 15 years, or the useful life, whichever is less. iii. For repayment for combined loans on real estate and equipment, 20 years. iv. For working capital, 7 years. The first installment of principal and interest will, if possible, be scheduled for payment after the project is operational and has begun to generate income. 4. Guaranteed Loan Fees. This rule sets the maximum guarantee fee at 1 percent and the maximum annual renewal fee at 0.5 percent. The Agency considered establishing a higher guarantee fee (2 percent), which would help leverage funds. However, the Agency believes that the lower fee is more appropriate because it provides a financial incentive, relative to other programs, to agricultural producers and rural small businesses to participate in this program. The maximum annual renewal fee is based on Small Business Administration (SBA) programs and is adopted for this program to provide additional funds to supplement the available funds appropriate to the program, thereby allowing the program to reach more potential applicants. The Agency will publish each year in the Federal Register the fee levels in effect for that year. E. Appeals Consistent with standard Agency policy, appeals will be handled in accordance with 7 CFR part 11. Any party adversely affected by an Agency decision under this subpart may request a determination of appealability from the Director, National Appeals Division, USDA, within 30 days of the adverse decision. F. Insurance This rule will require the applicant or borrower to carry certain types of insurance. The insurance requirements are consistent with other Rural Development programs and are applicable to this program. All insurance must be maintained for the life of the grant or loan, unless such requirement is waived or modified by the Agency. G. Construction Planning and Performing Development Consistent with Agency policies, construction planning and performing development requirements of 7 CFR part 1924, subpart A, will be used for grants. Under the Guaranteed Loan program, lenders will be required to ensure that all project facilities are designed utilizing accepted architectural and engineering practices, conform to applicable Federal, state, and local codes and requirements, and meet the requirements of this regulation. H. Laws That Contain Other Requirements There are several laws that applicants and borrowers must comply with under this program. These are: Executive Order 11246, ``Equal Employment Opportunity;'' Americans with Disabilities Act of 1990; Title VI of the Civil Rights Act of 1964 (grants only); Section 504 of the Rehabilitation Act of 1973 (grants only); Equal Credit Opportunity Act (Title V of Pub. L. 90-321, as amended) (guaranteed loans only); 7 CFR part 1940, subpart G, which requires an environmental impact analysis; and Executive Order 12898, ``Environmental Justice,'' under which the Agency will conduct a Civil Rights Impact Analysis in regard to environmental justice. III. Application and Documentation Requirements for Grants and Guaranteed Loans The Agency is requiring the minimum amount of information that it needs to evaluate an applicant's or borrower's [[Page 59654]] eligibility, evaluate the proposed project's eligibility, evaluate the applications and establish selection priorities among competing projects, ensure compliance with applicable regulations, and effectively monitor the applicant's or borrower's activities after the loan is made or the grant is awarded. The following paragraphs describe the Agency's proposed application and documentation requirements when applying for a grant or guaranteed loan. In applying for grant or guaranteed loan funds under this program, the applicant will be required to submit an application; submit a series of forms, certifications, and agreements; perform a feasibility study for renewable energy systems projects of more than $100,000; and prepare technical requirements reports. A. Application Separate applications must be submitted for renewable energy system and for energy efficiency improvement projects from applicants applying for both. Only one application per each type of project may be submitted. Applicants applying for a combined grant and guaranteed loan will submit a separate application for each grant and guaranteed loan, with at least one set of documentation. The separate applications must be submitted simultaneously. Applications will consist of: A table of contents; A one page summary of the project; A description of applicant/borrower eligibility and project eligibility; A description of agricultural producer's/rural small business' business, farm, or ranch operation and ownership; Management information; Financial information including an explanation of financial need (grants only), balance sheets and income statements or equivalent, information to allow assessment of annual receipts (rural small businesses only), historical financial statements, pro forma balances sheets, and gross market value of agricultural products (agricultural producers only); and A Dun and Bradstreet (D&B) Data Universal Numbering System (DUNS) number (grants only). For renewable energy systems, the applicant must also indicate whether the technology to be employed is commercially or pre- commercially available and is replicable, the information to support this position, and a description of the availability of materials, labor, and equipment for the facility. Also required is information on the demand for the product and/or service; who will buy the product and/or service, identification of the supply (past, present, and future) of the product and/or service; identification of competitors; and a description how the business will be able to sell enough of its product/service to be profitable given the trends in demand and supply. The Agency will then evaluate applications to determine if the applicant or borrower is eligible and if the project is eligible to receive funds and to score each application to assist in determining those projects that are funded first. B. Forms, Certifications, and Agreements Applicants must submit a series of forms, certifications, and agreements with each application. These forms, certifications, and agreements are necessary for the Agency to evaluate applications and to administer this program. Some of these are applicable to both funding programs. Applicants applying for a combined grant and guaranteed loan will be required to submit all applicable forms for both types of funding. Most of the forms being used for this program have been used in other, similar programs. Rather than develop new forms, which would be very time consuming, the Agency is amending these existing forms. For example, Form 4279-4, ``Lender's Agreement,'' would be amended to note that Section III, Item A.2, is only applicable to the Business and Industry program. 1. Grants. For grants, an applicant will be required to submit the following: i. Form SF-424, ``Application for Federal Assistance.'' ii. Form SF-424C, ``Budget Information--Construction Programs.'' iii. Form SF-424D, ``Assurances--Construction Programs.'' iv. AD-1049, ``Certification Regarding Drug-Free Workplace Requirements (Grants).'' v. AD-1048, ``Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion -Lower Tiered Covered Transactions.'' vi. A copy of a bank statement or a copy of the commitment letter from the funding source. vii. Exhibit A-1 of RD Instruction 1940-Q, ``Certification for Contracts, Grants and Loans,'' if the grant exceeds $100,000 (or Exhibit A-2 of RD Instruction 1940-Q, ``Statement for Loan Guarantees,'' if the guaranteed loan exceeds $150,000). viii. Form SF-LLL, ``Disclosure of Lobbying Activities.'' ix. AD-1047, ``Certification Regarding Debarment, Suspension, and Other Responsibility Matters--Primary Covered Transactions.'' x. Form RD 400-1, ``Equal Opportunity Agreement.'' xi. Form RD 400-4, ``Assurance Agreement.'' xii. Where applicable, a copy of a letter of intent to purchase power, a power purchase agreement, a copy of a letter of intent for an interconnection agreement, or an interconnection agreement will be required from your utility company or other purchaser for renewable energy systems. xiii. Where applicable, intergovernmental consultation comments in accordance with Executive Order 12372. xiv. Certification indicating whether or not there is a known relationship or association with an Agency employee. xv. An environmental impact analysis prepared in accordance with 7 CFR part 1940, subpart G, using Form RD 1940-20, ``Request for Environmental Information.'' 2. Guaranteed loans. For guaranteed loans, an applicant will be required to submit the items described above in paragraphs B.1.vii through xv as well as the following items: i. Form 4279-1, ``Application for Loan Guarantee.'' ii. A personal credit report for the borrower, a proprietor (owner), and anyone owning 20 percent or more interest in the borrower's business from a credit reporting company acceptable to the Agency. iii. Completed appraisals should be submitted when the application is filed. If the appraisal has not been completed when the application is filed, the applicant must submit an estimated appraisal. In all cases, a completed appraisal must be submitted prior to the loan being closed. iv. Lender's complete comprehensive written analysis. v. Commercial credit reports on the borrower and any parent, affiliate, and subsidiary firms. vi. Current personal and corporate financial statements of any guarantors. vii. A proposed Loan Agreement or a sample Loan Agreement with an attached list of the proposed Loan Agreement provisions. viii. A certification by the lender that it has completed a comprehensive written analysis of the proposal, the borrower is eligible, the loan is for authorized purposes, and there is reasonable assurance of repayment ability based on the borrower's history, projections and equity, and the collateral to be obtained. [[Page 59655]] C. Studies and Reports 1. Feasibility Study for Renewable Energy Systems. Because of factors of cost and complexity for renewable energy system projects of more than $100,000, a project-specific feasibility study prepared by a qualified independent consultant will be required. The feasibility study will have to include an analysis of the market, financial, economic, technical, and management feasibility of the proposed project. The feasibility study will also have to include an opinion and a recommendation by the independent consultant. Applicants for renewable energy system projects of $100,000 or less and for all energy efficiency improvement projects will not be required to conduct a feasibility study. 2. Technical Requirements Reports. This rule contains technical requirements for renewable energy systems and energy efficiency improvement projects. The rule identifies the following project technology categories: Biomass, bioenergy. Biomass, digesters. Geothermal, electric. Geothermal, direct use. Hydrogen. Solar, small. Solar, large. Wind, small. Wind, large. Energy efficiency improvements. The purpose of these technical requirements reports is to ensure that the renewable energy system or energy efficiency improvement operates or performs as expected over its design life in a reliable and cost effective manner. To this end, the applicant must provide information on project design, procurement, startup, operation, and maintenance. The technical requirements vary for each different system and project. In general, smaller projects will require less information than larger projects, projects using mature technologies will require less information than pre-commercial technologies or technologies with limited commercial operational history; projects using pre-engineered systems or kits will require less information than projects that require system design engineering; and systems or improvements using design-build project delivery methods where the supplier assumes all project delivery risks will require less information than those projects utilizing design-bid-construction methods where the risks of project delivery fall on the applicant or borrower. Small projects using pre-engineered kits or appliances utilizing a mature technology with significant commercial operational history will require the least information. The type of information to be provided includes the qualifications of the project team, agreements and permits, resource assessment, preliminary design and engineering, project development schedules, economic/feasibility modeling, equipment procurement, equipment installation, operations and maintenance, and project decommissioning. Energy efficiency improvement projects of more than $100,000 would be required to conduct an energy audit. The specific inputs for each of the ten technologies are identified in the proposed rule. The Agency allows for the use of an abbreviated set of requirements for small projects using a pre-engineered kits or complete integrated appliances utilizing a mature technology. Projects costing more than $100,000 will be required to employ the services of a professional engineer (PE). The applicant or borrower may be required to use the services of a PE for projects of $100,000 or less, depending on the level of engineering required for the specific project or if necessary to ensure public safety. To facilitate the review of proposed projects, all technical information provided will be required to follow a specific format, which is set forth in Sec. 4280.111(d). However, supporting information may be submitted in other formats as determined by the applicant. Although not required in the proposed rule, the Agency recommends that the narrative portion of the technical requirements portion of the application for small solar and small wind projects be less than 10 pages. For all proposed projects, the applicant will be required to submit the original technical requirements report plus one copy to the State Rural Development Office. IV. Evaluation of Grant and Guaranteed Loan Applications The Agency will evaluate each application and make a determination as to whether the applicant or borrower is eligible, whether the proposed project is eligible, and whether the proposed grant or guaranteed loan or combined funding request complies with all applicable statutes and regulations. The Agency will also evaluate the technical feasibility of each grant, while the lender will make this evaluation for guaranteed loans. The evaluation will be based on the information provided by the applicant and on other sources of information, such as recognized industry experts in the applicable technology field, as necessary. If the Agency determines that either the applicant or borrower or the project is ineligible, the Agency will notify the applicant in writing of the decision, reasons therefore, and any appeal rights, and no further evaluation will take place. If the Agency determines that the application is incomplete, the Agency will return it to the applicant to provide the applicant the opportunity to resubmit the application. The Agency will identify those parts of the application that are incomplete. Upon receipt of a complete application, the Agency will complete its evaluation of the application and forward a copy of the technical requirements to outside qualified industry experts for review. The Agency will score each application in order to prioritize each proposed project. The evaluation criteria that the Agency will use to score renewable energy systems and energy efficiency improvement projects are discussed in Sections IV.A and IV.B, respectively. The rationale for the selection criteria and their point values is presented in Sections IV.C.1 and IV.C.2, respectively. A. Criteria for Applications for Renewable Energy Systems 1. Quantity of Energy Produced. Points are earned for the amount of energy replaced or the amount of energy generated, not both. i. Energy replacement. If the proposed renewable energy system is intended primarily for self use by the agricultural producer or rural small business and will provide energy replacement of greater than 75 percent, 20 points will be awarded; greater than 50 percent, but equal to or less than 75 percent, 15 points will be awarded; or greater than 25 percent, but equal to or less than 50 percent, 10 points will be awarded. The energy replacement should be determined by dividing the estimated quantity of energy to be generated by at least the past 12 months' energy profile of the agricultural producer or rural small business or anticipated energy use. ii. Energy generation. If the proposed renewable energy system is intended primarily for production of energy for sale, 20 points will be awarded. 2. Environmental Benefits. If the purpose of the proposed renewable energy system is to upgrade an existing facility or construct a new facility required to meet applicable health or sanitary standards, 10 points will be awarded. The applicant must supply appropriate documentation. [[Page 59656]] 3. Commercial Availability. If the renewable energy system is currently commercially available and replicable, an additional 10 points will be awarded. 4. Cost Effectiveness. If the proposed renewable energy system will return the cost of the investment in 5 years or less, 25 points will be awarded; up to 10 years, 20 points will be awarded; up to 15 years, 15 points will be awarded; or up to 20 years, 10 points will be awarded. The estimated return on investment will be determined by dividing the total project cost by the estimated projected net annual income and/or energy savings of the renewable energy system. 5. Matching Funds (for Grants only). If the agricultural producer or rural small business has provided eligible matching funds of over 90 percent, 15 points will be awarded; 85-90 percent, 10 points will be awarded; or at least 80 and up to but not including 85 percent, 5 points will be awarded. 6. Management. If the renewable energy system will be monitored and managed by a qualified third-party operator, an additional 10 points will be awarded. 7. Small Agricultural Producer. If the applicant (for grants) or borrower (for guaranteed loans) is an agricultural producer producing agricultural products with a gross market value of less than $1 million in the preceding year, an additional 10 points will be awarded. 8. Loan Rate (Guaranteed loans only). If the rate of the loan is below the Prime Rate (as published in The Wall Street Journal) plus 1.75 percent, 5 points will be awarded. If the rate of the loan is below the Prime Rate (as published in The Wall Street Journal) plus 1 percent, an additional 5 points will be awarded. B. Criteria for Applications for Energy Efficiency Improvements 1. Energy savings. If the estimated energy expected to be saved, as determined by an energy assessment or audit, will be 35 percent or greater, 20 points will be awarded; 30 and up to but not including 35 percent, 15 points will be awarded; 25 and up to but not including 30 percent, 10 points will be awarded; or 20 and up to but not including 25 percent, 5 points will be awarded. 2. Cost Effectiveness. If the proposed energy efficiency improvements will return the cost of the investment in 2 years or less, 25 points will be awarded; greater than 2 and up to and including 5 years, 20 points will be awarded; greater than 5 and up to and including 9 years, 15 points will be awarded; or greater than 9 and up to and including 11 years, 10 points will be awarded. 3. Matching Funds (for Grants only). If the agricultural producer or rural small business has provided eligible matching funds of over 90 percent, 15 points will be awarded; 85-90 percent, 10 points will be awarded; or 80 and up to but not including 85 percent, 5 points will be awarded. 4. Small Agricultural Producer. If the applicant (for grants) or borrower (for guaranteed loans) is an agricultural producer producing agricultural products with a gross market value of less than $1 million in the preceding year, an additional 10 points will be awarded. 5. Loan Rate (Guaranteed loans only). If the rate of the loan is below the Prime Rate (as published in The Wall Street Journal) plus 1.75 percent, 5 points will be awarded. If the rate of the loan is below the Prime Rate (as published in The Wall Street Journal) plus 1 percent an additional 5 points will be awarded. C. Selection of Evaluation Criteria and Their Point Values 1. Selection of Evaluation Criteria. The 2002 Act requires the Agency to consider the following factors in determining the amount of a grant or loan to be awarded or approved under this program: i. The type of renewable energy systems to be purchased; ii. The estimated quantity of energy to be generated by the renewable energy system; iii. The expected environmental benefits of the renewable energy system; iv. The extent to which the renewable energy system is replicable. v. The amount of energy savings expected to be derived from the activity, as determined by an energy audit comparable to an energy audit conducted under section 9004; vi. The estimated length of time it would take for the energy savings generated by the activity to equal the cost of the activity; and vii. Other factors as appropriate. The Agency has incorporated Items C.1.ii through vi into the evaluation criteria for renewable energy systems and Items C.1.v and vi into the evaluation criteria for energy efficiency improvements (Items C.1.i through iv are not applicable to energy efficiency improvements). The Agency did not use Item C.1.i, the type of renewable energy system, as an evaluation criteria because the rule specifies the types of renewable energy systems that are approvable and no reason was found to ``favor'' one technology over another. The Agency identified up to four additional factors that were considered appropriate. These factors, the programs to which they are applicable, and the reasons for their selection, are: Matching funds, which is applicable to both renewable energy systems and energy efficiency improvements. One of the Agency's goals for this program is to fund as many projects as possible. To enable more projects to be funded, the Agency elected to include as a criterion the amount of funds being requested. Those projects requesting less assistance will be awarded more points than those projects requesting more assistance. As there are no matching funds associated with guaranteed loans, this criterion is applicable only to grants. Management, which is applicable to renewable energy systems only. One of the Agency's goals for this program is to fund projects that have a high likelihood of success. One key component to a successful project is the quality of the management team. Therefore, the Agency believes it appropriate to include management as an evaluation criterion for renewable energy projects. This criterion is applicable for grants and guaranteed loans. Small agricultural producers, which is applicable to renewable energy systems and energy efficiency improvements. The 2002 Act specifies the target market as rural small businesses and agricultural producers, but does not limit the size associated with agricultural producers. Another of the Agency's goals for this program is to help ensure additional income to small agricultural producers, thereby assisting in their economic sustainability. In order to help meet this goal, the Agency has elected to include as an evaluation criterion the size of the agricultural producer. This criterion is applicable to grants and guaranteed loans. Loan rate, which is only appropriate for guaranteed loans, because there are no loan rates associated with grants. The Agency is adopting loan rate as a criterion because it is consistent with Agency procedures under the B&I program and are applicable to this program. 2. Evaluation Criteria Point Values. The Agency has assigned point values or point value ranges to each of the criterion identified above. Generally, the Agency considers all of the evaluation criteria to be of similar value for scoring applications and, therefore, most have similar point values. It is possible, and likely, that many applications will receive no points for some of the criteria because the application does not meet the conditions for being awarded points. [[Page 59657]] For example, a guaranteed loan with an interest at the Prime Rate plus 2 percent would receive no points for the Loan Rate criterion. The criterion that the Agency believes should have the highest potential weight is cost effectiveness, because this criterion evaluates the overall return on investment for each project. Point values for this criterion range from 10 to 25. After this criterion, the Agency believes the criterion for the amount of energy generated or saved is the second most important criterion because it reflects the basic goals of the program's projects--to create new renewable energy systems and to improve energy efficiency. Point values for this criterion range from 10 to 20 for energy replacement and 20 points for energy generation for renewable energy systems, and from 5 to 20 points for energy savings for energy improvement projects. The remaining criteria all have point values of about 10 points, although some have the potential to be slightly higher (e.g., 15 points under matching funds for those seeking the lowest percentage assistance) or lower (e.g., 5 points under loan rate for higher interest rates). V. Processing and Servicing Grants and Guaranteed Loans A. Processing and Servicing Grants The Agency will prepare a Letter of Conditions, which establishes conditions that must be understood and agreed to by the applicant before the Agency will obligate any funds. The applicant must sign the Letter of Intent to Meet Conditions, if they accept the conditions of the grant. The grantee must sign a Grant Agreement (Form RD 4280-2) and abide by all requirements contained in the Grant Agreement as well as other requirements specified. Grants will be serviced in accordance with 7 CFR part 1951, subpart E and the Grant Agreement. The Agency is using 7 CFR part 1951, subpart E, for this program because it is the Agency's regulations for servicing Agency grant programs. B. Processing and Servicing Guaranteed Loans Under the proposed program, guaranteed loans will be processed and serviced in essentially the same manner as guaranteed loans are processed and serviced under the Agency's B&I program. The Agency determined that the requirements in the B&I program for processing and servicing guaranteed loans under the renewable energy systems and energy efficiency improvements program are applicable and therefore have essentially adopted the B&I requirements. Two exceptions to note are: Under the proposed program, the Agency is not utilizing the ``Certified Lender'' aspect of the B&I program because the Agency believes that there are few, if any, lenders who would pre-qualify as ``certified'' lenders for making guaranteed loans for renewable energy systems and energy efficiency improvements. Under the proposed program, the Agency is only allowing a single note system and is not incorporating the multi-note system from the B&I program. The Agency is doing this because the size of the loans associated with the renewable energy systems and energy efficiency improvements program are likely to be small enough that there is minimal benefit to allowing multi-notes and the program becomes simpler to implement without multi-notes. The following paragraphs discuss the processing and servicing requirements of the guaranteed loan program. 1. Eligible Lenders. Lenders eligible to make guaranteed loans under this program are the ``traditional'' lenders, as identified under the B&I guaranteed loan program. Such lenders include, but are not limited to: Federal or State chartered banks, Farm Credit Banks, other Farm Credit System institutions with direct lending authority, Banks for Cooperatives, or Savings and Loan Associations. These lenders have a broad range of experience and expertise to make, secure, service, and collect loans. In addition, these lenders allow the Agency to implement this program quickly because of the similarities between this program and the B&I program. 2. Lender's Functions and Responsibilities. As under the B&I program, lenders are responsible for properly implementing the guaranteed loan program, making sound loans, and conducting all servicing in a reasonable and prudent manner, in accordance with Agency regulations and approvals, as required. Lender's responsibilities in fulfilling this requirement include, but are not limited to: i. Processing applications; ii. Developing and maintaining loan files. Both the lender and borrower must permit representatives of the Agency to inspect and make copies of any records of the lender or borrower pertaining to the loan; iii. Obtaining valid evidence of debt and collateral. Complete, self, contained appraisals are required for loans of $600,000 or more. Complete summary appraisals are required for loans less than $600,000. Unconditional personal and corporate guarantees for those owning or having a beneficial interest greater than 20 percent of the borrower will be required where legally permissible; iv. Supervising and monitoring project construction and ensuring all projects are designed according to accepted practices; v. Distributing loan funds; vi. Conducting credit evaluations. For each proposed project, lenders will be required to conduct a credit analysis in order to determine credit quality of the borrower. Elements of credit quality to be addressed include adequacy of equity, cash flow, collateral, history, management, and the current status of the industry for which credit is to be extended. In determining the adequacy of equity, the lender must ensure that, for loans over $600,000, evidence of cash equity injection in the project of not less than 25 percent of eligible project costs is demonstrated and that, for loans of $600,000 or less, evidence of cash equity injection in the project of not less than 15 percent of eligible project costs is demonstrated; vii. Ensuring that borrowers furnish all required environmental information and reporting any environmental issues to the Agency; and viii. Closing loans. When loan closing plans are established, the lender must notify the Agency in writing. At the same time, or immediately after loan closing, the lender must provide to the Agency the lender's certifications (as required by Sec. 4280.146), an executed Form 4279-4, ``Lender's Agreement,'' an executed Form RD 1980- 19, ``Guaranteed Loan Closing Report,'' and appropriate guarantee fee, copies of legal loan documents, and disbursement plan if working capital is a purpose of the project. Note that, if a valid Lender's Agreement already exists, the lender will not be required to execute a new Lender's Agreement with each loan guarantee. 3. Loan Note Guarantee. A loan guarantee will be evidenced by Form 4279-5, ``Loan Note Guarantee,'' which is prepared and issued by the Agency. The entire loan must be evidenced by one note, and the Agency will issue only one Loan Note Guarantee. The lender may assign all or part of the guaranteed portion of the loan to one or more holders. The Agency will not issue the Loan Note Guarantee until the lender certifies certain conditions have been met (e.g., all required insurance is in effect, the loan has been properly closed). If the [[Page 59658]] Agency determines that it cannot execute the Loan Note Guarantee, the Agency will inform the lender of the reasons and give the lender a reasonable period within which to satisfy the objections. If the lender satisfies the objections within the time allowed, the guarantee will be issued. Any changes in borrower ownership or organization prior to the issuance of the Loan Note Guarantee must meet the eligibility requirements of the program and be approved by the Agency loan approval official. Upon approval of a loan guarantee, the Agency will issue a Conditional Commitment, which contains the conditions under which a Loan Note Guarantee will be issued. If certain conditions cannot be met, the lender and/or borrower may propose alternate conditions and the Agency may negotiate with the lender and/or borrower regarding any proposed changes to the Conditional Commitment. 4. Additional actions. This rule also provides procedures for actions that may be made in connection to a guaranteed loan. Actions covered include: i. Sale or assignment. A lender may sell all or part of the guaranteed portion of the loan on the secondary market or retain the entire loan, provided the loan is not in default. Sale or assignment cannot be made to the borrower or members of the borrower's immediate families, officers, directors, stockholders, other owners, or a parent, subsidiary or affiliate. ii. Participation. The lender may obtain participation in the loan under its normal operating procedures. However, the lender must retain title to the note and retain its interest in the collateral. iii. Minimum retention. The lender must hold in its own portfolio a minimum of 5 percent of the total loan amount. The amount required to be maintained must be of the unguaranteed portion of the loan and cannot be participated to another. The lender may sell the remaining amount of the unguaranteed portion of the loan only through participation. Sale of this part of the unguaranteed portion, while allowable, will not be guaranteed. iv. Repurchase from holder. A holder may submit a written demand for repurchase of the unpaid guaranteed portion of the loan to the lender or to the Agency under certain conditions. The lender has the option to repurchase. The lender must notify, in writing, the holder and the Agency of its decision. If the lender declines, the Agency will purchase from the holder the unpaid principal balance of the guaranteed portion according to the conditions set forth in the regulations and instruments. Purchase by the Agency does not change, alter, or modify any of the lender's obligations to the Agency arising from the loan or guarantee nor does it waive any of the Agency's rights against the lender. The Agency has the right to set-off against the lender all rights inuring to the Agency as the holder of the instrument against the Agency's obligation to the lender under the guarantee. Alternatively to the holder requesting repurchase, if the lender determines that repurchase of the guaranteed portion of the loan is necessary to adequately service the loan, the holder must sell the guaranteed portion of the loan to the lender for an amount equal to the unpaid principal and interest on such portion less the lender's servicing fee according to the requirements of the regulations and instruments. v. Transfer of lenders. The Agency may approve the substitution of a new eligible lender provided there are no changes in the borrower's ownership or control, loan purposes, or scope of project, and loan conditions in the Conditional Commitment and the Loan Agreement remain the same. The Agency will analyze the new lender's servicing capability, eligibility, and experience prior approving the substitution. 5. Servicing guaranteed loans. The lender is responsible for servicing the entire loan and for taking all servicing actions that a reasonable, prudent lender would perform in servicing its own portfolio of loans that are not guaranteed. The lender must remain mortgagee and secured party of record. The entire loan must be secured by the same security with equal lien priority for the guaranteed and unguaranteed portions of the loan. i. Servicing. Servicing responsibilities include, but are not limited to, the collection of payments, obtaining compliance with the covenants and provisions in the Loan Agreement obtaining and analyzing financial statements, checking on payment of taxes and insurance premiums, and maintaining liens on collateral. Lenders will be responsible for: A. Submitting semiannual reports on the outstanding principal and interest balance on each guaranteed loan using Form RD 1980-41, ``Guaranteed Loan Status Report.'' B. Notifying the Agency, in writing, of the loan's classification or rating under its regulatory standards. C. Attending meetings with the Agency to ascertain how the guaranteed loan is being serviced and that the conditions and covenants of the Loan Agreement are being enforced; and D. Submitting annual financial statements and a written summary of the lender's analysis and conclusions, including trends, strengths, weaknesses, extraordinary transactions, and other indications of the financial condition of the borrower. The lender will not be allowed to make additional loans to the borrower without first obtaining the prior written approval of the Agency, even though such loans will not be guaranteed. ii. Changes to the loan. This rule allows changes in the interest rate, the release of collateral, subordination of lien position, alterations of the loan instrument, and loan transfer and assumption. A. Under certain circumstances, interest rates may be temporarily or permanently reduced or increased, and fixed rates can be changed to variable rates. B. All releases of collateral with a value exceeding $100,000 must be supported by a current appraisal. The remaining collateral must be sufficient to provide for repayment of the Agency's guaranteed loan. Sale or release of collateral must be based on an arm's-length transaction as specified in the regulations and instruments. C. The Agency will only consider a parity or junior lien position. After the subordination, collateral must be adequate to secure the loan. D. Agency approval is required before the lender can alter or approve changes to any loan instrument. E. All transfers and assumptions must be approved by the Agency, in writing, and must be to borrowers eligible under this program and any new loan terms must be within the terms authorized by Sec. 4280.125. Other transfer and assumption conditions include: loan terms can only be changed with Agency approval and concurrence of any holder and the transferor (including guarantors); loans to provide additional funds in connection with a transfer and assumption will be considered as a new loan application under Sec. 4280.128; the lender must make a complete credit analysis, which is subject to Agency review and approval; and document and ensure that the transaction can be and is properly and legally transferred, and the conveyance instruments will be and are filed, registered, or recorded as appropriate. iii. Other servicing requirements. This rule also contains requirements for: A. Substitution of Lender. Agency written approval is required. The Agency will not pay any loss or share [[Page 59659]] in any costs with a new lender unless a relationship is established through a substitution of lender that has been approved by the Agency. The proposed substitute lender must be an eligible lender under this program, must be able to service the loan in accordance with the original loan documents, and must agree in writing to acquire and must acquire title to the unguaranteed portion of the loan held by the original lender and to assume all original loan requirements, including liabilities and servicing responsibilities. B. Default by Borrower. This rule outlines options a borrower can use to resolve a default. These include, but are not limited to, deferment of principal, reamortization and rescheduling, and liquidation. C. Protective Advances. If a borrower cannot meet its obligations, the lender will be required to make protective advances for the purpose of preserving and protecting the collateral as required in the regulations and instruments. Protective advances, however, cannot be made in lieu of additional loans. D. Liquidation. Liquidation of the loan may be considered by the lender under certain circumstances and must be concurred with by the Agency. Conditions and requirements associated with many aspects of liquidation are specified in the regulations and instruments, including, but not limited to, those for the decision to liquidate, liquidation plans, accounting and reports, abandonment of collateral, and settlements. The procedures and requirements are the same as those associated with the B&I guaranteed loan program. E. Bankruptcy. The lender will be required to protect the guaranteed loan and all collateral securing the loan in bankruptcy proceedings. This rule specifies procedures to be followed in reorganization proceedings and in liquidation proceeding covering such items, as applicable, as estimated loss, interest loss, and final loss payments; payment application, overpayments; and protective advances. F. Requirements After Project Construction. Once the project has been constructed, the lender must provide the Agency periodic reports from the borrower. For renewable energy systems, this report will be required beginning the first full calendar year following the year in which project construction was completed and continuing for 3 full years. Information in this report will include the actual amount of energy produced in BTUs, kilowatts, or similar energy equivalents; if applicable, documentation that identified health and/or sanitation problem has been solved; the annual income and/or energy savings of the renewable energy system; a summary of the cost of operating and maintaining the facility; a description of any maintenance or operational problems associated with the facility; and recommendations for development of future similar projects. For energy efficiency improvement projects, this report will be required beginning the first full calendar year following the year in which project construction was completed and continuing for 2 full years. This report will specify the actual amount of energy saved due to the energy efficiency improvements. G. Replacement of Documents. The Agency may issue a replacement Loan Note Guarantee or Assignment Guarantee Agreement, which has been lost, stolen, destroyed, mutilated, or defaced, to the lender or holder upon receipt of an acceptable certificate of loss and an indemnity bond. This rule identifies responsibilities for replacing documents and the information required for their replacement. C. Processing and Servicing Combined Funding Where the Agency approves a combined funding request, the grant portion will be processed and serviced according to the procedures described in paragraph A for grants. The guaranteed loan portion will be processed and serviced according to the procedures described in paragraph B for guaranteed loans. VI. Economic Analysis To support the development of this rule, a benefit-cost analysis was performed. In addition, an assessment of the potential impacts on small businesses was made. The following paragraphs summarize the benefit-cost analysis that was performed and the results. This summary is then followed by a brief discussion of the benefit-cost analysis as it applies to small businesses. Because this rule is not an economically significant rule under Executive Order 12866, the economic analysis conducted by USDA in support of this rule does not necessarily conform to OMB Circular A-4, Regulatory Analysis. A. Benefit-Cost Analysis 1. Scope of the Analysis. This analysis looks at the social benefits and costs from the implementation of the proposed rule. The social benefits examined are: i. The value of the energy produced or saved, including green tag values. ``Green tag'' refers to the positive environmental attributes of renewable energy compared to ``dirtier'' generation power sources. The green tag value refers to the additional amount an electricity service provider will pay to ``green'' their energy supply or to the additional amount a retail customer is willing to pay to purchase ``green'' power. ii. The amount of carbon emissions reduced as the result of electricity generation being displaced or reduced. The social costs examined are the costs of participating in the proposed program and the amount of USDA funds used in the program. Other effects examined included: i. The number of agricultural producers and rural small businesses that are served by the program. ii. The number of jobs created. iii. The amount of electricity generated or saved (energy cost savings). iv. The amount of energy displaced (e.g., the number of barrels of oil no longer needed). 2. Scenarios Analyzed. The analysis examines a baseline case and several policy alternatives. In addition, the analysis varied several of the parameters to assess the sensitivity of the results. The basic inputs into the analysis are: i. The total amount of program funding in FYs 2003 through 2007; ii. The amount of program funding obligated for grants, guaranteed loans, and direct loans; iii. The amount of program funding for renewable energy projects and for energy efficiency improvements; iv. The subsidy rate; v. The discount rate; and vi. The useful life of projects. 3. Results--Baseline Case Table 1 summarizes the social benefits and costs of the proposed rule. [[Page 59660]] Table 1.--Summary of Social Benefits and Costs by FY for Baseline Case [Million dollars] ---------------------------------------------------------------------------------------------------------------- FY Item -------------------------------------------------- 2003 2004 2005 2006 2007 ---------------------------------------------------------------------------------------------------------------- Social Costs: Participation............................................ 2.4 2.4 2.4 2.4 2.4 USDA Funds............................................... 19.8 15.7 20.0 20.0 20.0 Social Benefits: Green Tag Value.......................................... 1.2 3.5 6.8 6.9 7.1 Carbon Emission Reduction (million tons per year)........ 0.055 0.22 0.44 0.44 0.44 ---------------------------------------------------------------------------------------------------------------- As seen in Table 1, the annual estimated social cost (in year 2000 dollars) for each of the five FYs ranges from $18 to $22.4 million. In return, the annual estimated social benefits (in year 2000 dollars) of the green tag values for each of the five FYs ranges from $1 million to $7 million, while carbon emission reductions range from 55,000 tons in FY 2003 up to 440,000 tons in the last three FYs. In addition to the social benefits, the proposed program is also projected to provide other benefits, as noted earlier. These other benefits are summarized in Table 2 for each of the five FYs. Once the program is fully implemented, approximately 300 agricultural producers and rural small businesses are estimated to participate in the program. The projects that these participants would implement are estimated to create approximately 1,800 jobs per year, provide energy cost savings up to $131 million in FY 2007, and save approximately 3 million barrels of oil each year. Table 2.--Other Benefits--Baseline Case ---------------------------------------------------------------------------------------------------------------- FY Item Units ----------------------------------------------------------- 2003 2004 2005 2006 2007 ---------------------------------------------------------------------------------------------------------------- Agricultural producers and rural Number............ 113 238 300 300 300 small businesses served. Jobs Created.................... Number of full 243 887 1,770 1,830 1,890 time equivalents. Energy Cost Savings............. Million dollars... 8.4 35.6 78.4 108.6 131.7 Energy Displaced................ Million barrels... 0.5 1.7 3.3 3.1 3.1 ---------------------------------------------------------------------------------------------------------------- 4. Results--Other Scenarios. As noted earlier, several alternative policy scenarios and sensitivity analysis scenarios were examined to evaluate the effect of variations in several of the parameters. The following paragraphs summarize the effects of three of these other scenarios on green tag values. For more details, please refer to the complete analysis document. i. Grants Only. Under this alternative policy scenario, the Agency would only provide grants in FY 2004 through FY 2007; no guaranteed or direct loans would be made. The effect under this scenario is estimated to be a reduction in green tag benefits of over 75 percent for both the five year period and the useful life of the projects. ii. Change in Subsidy Rate. A 1 percent drop in the subsidy rate (from 5.18 percent to 4.18 percent) in FY 2005 through FY 2007 is estimated to increase green tag benefits by over 30 percent. On the other hand, a 1 percent increase in the subsidy rate (to 6.18 percent) is estimated to result in a 10 percent decrease in green tag benefits. iii. Change in Discount Rate. A decrease in the discount rate from 7 percent to 3 percent increases the present value of the green tag benefits by about 16 percent over the five year period and by over 55 percent over the useful life of the projects. B. Small Businesses This program is targeted to agricultural producers and rural small businesses. Based on data compiled by the USDA Economic Research Service and the Small Business Administration, over 3 million entities would be eligible for this program. The vast majority of agricultural producers also fit the definition of small businesses. Excluding the small percentage of agricultural producers that do not qualify as small entities, the almost 3 million entities would qualify as small businesses under this program. Given this situation, the benefit-cost analysis discussed above can be considered as the relevant analysis for analyzing the impacts of the proposed program on small businesses. VII. Administrative Requirements A. Paperwork Reduction Act In accordance with the Paperwork Reduction Act of 1995, Rural Development will seek OMB approval of the reporting and recordkeeping requirements contained in this proposed rule. Rural Development is committed to compliance with the Government Paperwork Elimination Act, which requires Government agencies, in general, to provide the public the option of submitting information or transacting business electronically to the maximum extent possible. The following estimates are based on the average over the first three years the program is in place. Estimate of Burden: Public reporting burden for this collection of information is estimated to average 6 hours per response. Respondents: Agricultural producers and rural small businesses. Estimated Number of Respondents: 388. Estimated Number of Responses per Respondent: 14. Estimated Number of Responses: 5,335. Estimated Total Annual Burden on Respondents: 32,149. Type of Request: New collection. Abstract: The Farm Security and Rural Investment Act of 2002 (2002 Act) established the Renewable Energy Systems and Energy Efficiency Improvements Program under Title IX, Section 9006. The 2002 Act requires the [[Page 59661]] Secretary of Agriculture to create a program to make grants, loan guarantees, and direct loans to agricultural producers and rural small businesses to purchase renewable energy systems and make energy efficiency improvements. The program will help agricultural producers and rural small businesses to reduce energy costs and consumption and help meet the nation's energy needs. The information requirements contained in this proposed rule require information from grant, guaranteed loan, and direct loan applicants and borrowers. The information is vital for Rural Development to make wise decisions regarding the eligibility of applicants and borrowers, establish selection priorities among competing applicants, ensure compliance with applicable Rural Development regulations, and effectively monitor the grantees and borrowers activities to protect the Government's financial interest and ensure that funds obtained from the Government are use appropriately. This collection of information is necessary in order to implement the grant, guaranteed loan, and direct loan program for Renewable Energy Systems and Energy Efficiency Improvements established under the 2002 Act. Copies of this information collection can be obtained from Cheryl Thompson, Regulations and Paperwork Management Burden at (202) 692- 0043. Comments are invited on (1) whether the proposed collection of information is necessary for the proper performance of the functions of Rural Development, including whether the information will have practical utility; (2) the accuracy of the new Rural Development estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology. Comments may be sent to: Cheryl Thompson, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave., SW., Washington, DC 20250. All responses to this notice will be summarized and included in the request for OMB approval. All comments will also become a matter of public record. B. Intergovernmental Review The Rural Development Grant, Guaranteed Loan, and Direct Loan Program is subject to the provisions of Executive Order 12372, which requires 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,'' and in the notice related to 7 CFR part 3015, subpart V. C. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires Federal agencies to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedures Act or any other statute unless the Agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governments. The major purpose of the RFA is to keep paperwork and regulatory requirements from getting out of proportion to the scale of the entities being regulated, without compromising the objectives of the Act. For purposes of assessing the impacts of today's proposed rule on small entities, small entity is defined as: (1) A small business according to the Small Business Administration (SBA) size standards by NAICS code ranging from 500 to 1,000 employees; (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise that is independently owned and operated and is not dominant in its field. In compliance with the Regulatory Flexibility Act (5 U.S.C. 601- 602), the undersigned has determined and certified by signature of this document that this proposed rule would not have a significant economic impact on a substantial number of small entities. This action impacts those who choose to participate in the grant, guaranteed loan, and direct loan program and requires only minimum information/paperwork to evaluate an application. Therefore, a regulatory flexibility analysis was not performed. Although a regulatory flexibility analysis was not performed, the Agency conducted a benefit-cost analysis and an initial regulatory flexibility analysis (IRFA) that examines the impact on small entities. The benefit-cost analysis and the IRFA (referred to as the Unified Analysis) are available for review in the docket and the results are summarized below. The program targets rural small businesses plus agricultural producers. The vast majority of these agricultural producers qualify as small businesses too. Based on data compiled by the USDA Economic Research Service and the SBA, there are approximately 3 million of the entities who would qualify under this program. The benefit-cost analysis reflects a large net beneficial impact. The expenditure of slightly less than $100 million in nominal USDA funds over five years (approximately $20 million per year) from FY 2003 through FY 2007 represents a present value cost in constant year 2000 dollars of approximately $71 million. This sum in turn supports total program funding (USDA funds and private funds) of over $1 billion. The cumulative cash flow benefits through 2007 are $360 million in comparison to the $71 million cost. The cash flow benefits based upon life cycle analysis are $1.5 billion, again based upon this $71 million cost. Given that almost the entire program is directed at small businesses, the burden analysis is a representative measure for small businesses of the reporting, recordkeeping, and other compliance costs. The burden analysis estimated an annual (three-year average) cost of $1.9 million for an estimated 388 applicants per year. As noted above, the proposed rule is directed almost entirely at small businesses. Therefore, the benefit-cost analysis represents the results as it affects small businesses. D. Civil Justice Reform This proposed 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 proposed rule will be preempted, (2) no retroactive effect will be given to this rule, and (3) administrative proceedings in accordance with 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. E. National Environmental Policy Act This document has been reviewed in accordance with 7 CFR part 1940, subpart G. Rural Development has determined that this action does not constitute a major Federal action significantly affecting the quality of the [[Page 59662]] human environment, and, in accordance with the National Environmental Policy Act of 1969, Pub.L 91-190, an Environmental Impact Statement is not required. F. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. L. 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 must prepare a written statement, including a benefit-cost 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 1 year. When such a statement is needed for a rule, section 205 of 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 proposed 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 UMRA. G. Executive Order 13132, Federalism It has been determined under Executive Order 13132, Federalism, that this proposed rule does not have sufficient federalism implications to warrant the preparation of a Federalism assessment. The provisions contained in this proposed 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 levels of government. H. Executive Order 12866, Regulatory Planning and Review Under Executive Order 12866, this proposed rule has been determined to be ``significant'' and, therefore, has been reviewed by the Office of Management and Budget (OMB). The Order defines ``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 in 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 the Executive Order. List of Subjects in 7 CFR Part 4280 Business and industry, Direct loan programs, Economic development, Energy, Energy efficiency improvements, Grant programs, Guaranteed loan programs, Renewable energy systems, Rural areas. For the reasons stated in the preamble, title 7, chapter XLII of the Code of Federal Regulations is amended as follows: CHAPTER XLII--RURAL BUSINESS--COOPERATIVE SERVICE AND RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE 1. Part 4280 is added to read as follows: PART 4280--LOANS AND GRANTS Subpart A--[Reserved] Subpart B--Renewable Energy Systems and Energy Efficiency Improvements Grant, Guaranteed Loan, and Direct Loan Program Sec. 4280.101 Purpose. 4280.102 General. 4280.103 Definitions. 4280.104 Exception authority. 4280.105 Appeals. 4280.106 Conflict of interest. Grants 4280.107 Applicant eligibility. 4280.108 Project eligibility. 4280.109 Grant funding. 4280.110 [Reserved] 4280.111 Application and documentation. 4280.112 Evaluation of grant applications. 4280.113 Insurance requirements. 4280.114 Laws that contain other compliance requirements. 4280.115 Construction planning and performing development. 4280.116 Grantee requirements. 4280.117 Servicing grants. 4280.118-.120 [Reserved] Guaranteed Loans 4280.121 Borrower eligibility. 4280.122 Project eligibility. 4280.123 Guaranteed loan funding. 4280.124 Interest rates. 4280.125 Terms of loan. 4280.126 Guarantee/annual renewal fee percentages. 4280.127 [Reserved] 4280.128 Application and documentation. 4280.129 Evaluation of guaranteed loan applications. 4280.130 Eligible lenders. 4280.131 Lender's functions and responsibilities. 4280.132 Access to records. 4280.133 Conditions of guarantee. 4280.134 Sale or assignment of guaranteed loan. 4280.135 Participation. 4280.136 Minimum retention. 4280.137 Repurchase from holder. 4280.138 Replacement of document. 4280.139 Credit quality. 4280.140 Financial statements. 4280.141 Appraisals. 4280.142 Personal and corporate guarantees. 4280.143 Loan approval and obligation of funds. 4280.144 Transfer of lenders. 4280.145 Changes in borrower. 4280.146 Conditions precedent to issuance of Loan Note Guarantee. 4280.147 Issuance of the guarantee. 4280.148 Refusal to execute Loan Note Guarantee. 4280.149 Requirements after project construction. 4280.150 Insurance requirements. 4280.151 Laws that contain other compliance requirements. 4280.152 Servicing guaranteed loans. 4280.153 Substitution of lender. 4280.154 Default by borrower. 4280.155 Protective advances. 4280.156 Liquidation. 4280.157 Determination of loss and payment. 4280.158 Future recovery. 4280.159 Bankruptcy. 4280.160 Termination of guarantee. Direct Loans 4280.161 Direct Loan Process 4280.162-.192 [Reserved] Combined Funding 4280.193 Combined funding. 4280.194-.199 [Reserved] 4280.200 OMB control number. [Reserved] Authority: 7 U.S.C. 8106. Subpart A--[Reserved] Subpart B--Renewable Energy Systems and Energy Efficiency Improvements Grant, Guaranteed Loan, and Direct Loan Program Sec. 4280.101 Purpose. This subpart contains a program of procedures and requirements for making grants and guaranteed loans, or a combination thereof, to agricultural producers and rural small businesses for the purchase of renewable energy systems and energy efficiency improvements in rural areas. This subpart also presents the process that will be used to provide funds for direct loans. Sec. 4280.102 General. Sections 4280.103 through 4280.105 contain definitions, exception authority, [[Page 59663]] and appeals, which are applicable to all of the funding programs under this subpart. Sections 4280.107 through 4280.117 contain the procedures and requirements for obtaining a grant, and processing and servicing of grants by the Agency. Sections 4280.121 through 4280.151 contain the procedures and requirements for making and processing loans guaranteed by the Agency. Sections 4280.152 through 4280.160 contain the requirements for servicing loans guaranteed by the Agency. These requirements apply to lenders, holders, and other parties involved in making, guaranteeing, holding, servicing, or liquidating such loans. Section 4280.161 presents the process the Agency will use to make direct loans available. Section 4280.193 contains the requirements for obtaining and servicing a combined grant and guaranteed loan. Sec. 4280.103 Definitions. The following definitions are applicable to this subpart. Agency. Rural Development or successor Agency assigned by the Secretary of Agriculture to administer the program. Agricultural producer. An individual or entity directly engaged in the production of agricultural products, including crops (including farming); livestock (including ranching); forestry products; hydroponics; nursery stock; or aquaculture, whereby 50 percent or greater of their gross income is derived from the operations. Annual receipts. The total income or gross income (sole proprietorship) plus cost of goods sold. Applicant. For grant programs, the applicant is the agricultural producer or rural small business that is seeking a grant under this subpart. For guaranteed loan programs, the applicant is the lender that is seeking a loan guarantee under this subpart. Arm's-length transaction. The sale, release, or disposition of assets in which the title to the property passes to a ready, willing, and able disinterested third party that is not affiliated with or related to and has no security, monetary or stockholder interest in the borrower or transferor at the time of the transaction. Assignment guarantee agreement. Form 4279-6. The signed agreement among the Agency, the lender, and the holder containing the terms and conditions of an assignment of a guaranteed portion of a loan. Assumption of debt. The signed agreement by one party to legally bind itself to pay the debt incurred by another. Biogas. Biomass converted to gaseous fuels. Biomass. Any organic material that is available on a renewable or recurring basis including agricultural crops; trees grown for energy production; wood waste and wood residues; plants, including aquatic plants and grasses; fibers; animal waste and other waste materials; and fats, oils, and greases, including recycled fats, oils, and greases. It does not include paper that is commonly recycled or unsegregated solid waste. Borrower. All parties liable for the loan except for guarantors. Capacity. The load that a power generation unit or other electrical apparatus or heating unit is rated by the manufacturer to be able to meet or supply. Commercially available. Systems that have a proven operating history and an established design, installation, equipment, and service industry. Conditional commitment (Form 4279-3). The Agency's notice to the lender that the loan guarantee it has requested is approved subject to the completion of all conditions and requirements. Default. The condition where a borrower is not in compliance with one or more loan covenants as stipulated in the Letter of Conditions, Conditional Commitment, or Loan Agreement. Deficiency balance. The balance remaining on a loan after all collateral has been liquidated. Deficiency judgment. A monetary judgment rendered by a court of competent jurisdiction after foreclosure and liquidation of all collateral securing the loan. Delinquent loan. A loan where a scheduled loan payment has not been received within the due date and any grace period as stipulated in the promissory note and loan agreement. Demonstrated financial need. The demonstration by an applicant that the applicant is unable to finance the project from its own resources or other funding sources without grant assistance. Eligible project cost. The total project costs that are eligible to be paid with grant and/or guaranteed loan funds. Energy audit. A written report by an independent, qualified entity or individual that documents current energy usage, recommended improvements and their costs, energy savings from these improvements, dollars saved per year, and the weighted-average payback period in years. Energy efficiency improvement. Improvements to a facility or process that reduce energy consumption. Existing business. A business that has completed at least one full business cycle. Existing lender debt. A debt not guaranteed by the Agency, but owed by a borrower to the same lender that is applying for or has received the Agency guarantee. Fair market value. The price that could reasonably be expected for an asset in an arm's-length transaction between a willing buyer and a willing seller under ordinary economic and business conditions. Fair market value of equity in real property. Fair market value of real property as established by appraisal; less the outstanding balance of any mortgages, liens, or enhancements. Financial feasibility. The ability of the business to achieve the projected income and cash flow. The concept includes assessments of the cost-accounting system, the availability of short-term credit for seasonal business, and the adequacy of raw materials and supplies, where necessary. Grant close-out. When all required work is completed, administrative actions relating to the completion of work and expenditures of funds have been accomplished, and the Agency accepts final expenditure information. Holder. A person or entity, other than the lender, who owns all or part of the guaranteed portion of the loan, with no servicing responsibilities. In-kind contributions. Applicant or third-party real or personal property or services benefiting the Federally assisted project or program that are contributed by the applicant or a third party. The identifiable value of goods and services must directly benefit the project. Interconnection agreement. The terms and conditions governing the interconnection and parallel operation of the grantee's or borrower's electric generation equipment and the utility's electric power system. Interim financing. A temporary or short-term loan made with the clear intent that it will be repaid through another loan. Interim financing is frequently used to pay construction and other costs associated with a planned project, with permanent financing to be obtained after project completion. Lender. The organization making, servicing, and collecting the loan that is guaranteed under the provisions of this subpart. Lender's agreement, Form 4279-4. Agreement between the Agency and the lender setting forth the lender's loan responsibilities when the Loan Note Guaranteed is issued. [[Page 59664]] Loan agreement. For guaranteed loans, the agreement between the borrower and lender containing the terms and conditions of the guaranteed loan and the responsibilities of the borrower and lender. Loan Note Guarantee, Form 4279-5. The terms and conditions of the guarantee issued and executed by the Agency. Loan-to-value. The ratio of the dollar amount of a loan to the dollar value of the discounted collateral pledged as security for the loan. Matching funds. The funds needed to pay for the portion of the eligible project costs not funded or guaranteed by the Agency through a grant or guaranteed loan under this program. Matching funds can not include grants from any Federal grant program. Negligent servicing. The failure to perform those services which a reasonable, prudent lender would perform in servicing (including liquidation of) its own portfolio of loans that are not guaranteed. The term includes not only the concept of a failure to act, but also not acting in a timely manner, or acting in a manner contrary to the manner in which a reasonable, prudent lender would act. Nonprogram (NP) loan. An NP loan exists when credit is extended to an ineligible applicant and/or transferee in connection with a loan assumption or sale of inventory property; in cases of unauthorized assistance; or a borrower whose legal organization has changed, resulting in the borrower being ineligible for program benefits. Other waste materials. Inorganic or organic materials that are used as inputs for energy production or are by-products of the energy production process. Parity. A lien position whereby two or more lenders share a security interest of equal priority in collateral. In the event of default, each lender will be affected on a pro rata basis. Participation. Sale of an interest in a loan by the lender wherein the lender retains the note, collateral securing the note, and all responsibility for loan servicing and liquidation. Power purchase arrangement. The terms and conditions governing the sale and transportation of electricity produced by the grantee or borrower to another party. Pre-commercial technology. Technologies that have emerged through the research and development process and have technical and economic potential for application in commercial energy markets but are not yet commercially available. Promissory Note. Evidence of debt. A note that a loan recipient signs promising to pay a specific amount of money at a stated time or on demand. Renewable energy. Energy derived from a wind, solar, biomass, or geothermal source; or hydrogen derived from biomass or water using wind, solar, or geothermal energy sources. Renewable energy system. A process that produces energy from a renewable energy source. Rural. Any area other than a city or town that has a population of greater than 50,000 inhabitants and the urbanized area contiguous and adjacent to such a city or town according to the latest decennial census of the United States. Small business. A private entity including a sole proprietorship, partnership, corporation, and a cooperative (including a cooperative qualified under section 501(c)(12) of the Internal Revenue Code) but excluding any private entity formed solely for a charitable purpose, and which private entity is considered a small business concern in accordance with the Small Business Administration's (SBA) Small Business Size Standards by North American Industry Classification System (NAICS) Industry found in 13 CFR part 121; provided the entity has 500 or fewer employees and $20 million or less in total annual receipts including all parent, affiliate, or subsidiary entities at other locations. Spreadsheet. A table containing data from a series of financial statements of a business over a period of time. Financial statement analysis normally contains spreadsheets for balance sheet items and income statements and may include funds flow statement data and commonly used ratios. The spreadsheets enable a reviewer to easily scan the data, spot trends, and make comparisons. State. Any of the 50 States, the Commonwealth of Puerto Rico, the Virgin Islands of the United States, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, the Republic of Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands. Subordination. An agreement whereby lien priorities on certain assets pledged to secure payment of a loan will be reduced to a position junior to, or on parity with, the lien position of another loan in order for the borrower to obtain additional financing, not guaranteed by the Agency, from the lender or a third party. Total project cost. The sum of all costs associated with a completed, operational project. Sec. 4280.104 Exception authority. The Administrator may, in individual cases, make an exception to any requirement or provision of this subpart that is not inconsistent with any authorizing statute or applicable law if the Administrator determines that application of the requirement or provision would adversely affect the USDA's interest. Sec. 4280.105 Appeals. Only the grantee, borrower, lender, or holder can appeal an Agency decision made under this subpart. In cases where the Agency has denied or reduced the amount of final loss payment to the lender, the adverse decision may be appealed by the lender only. An adverse decision that only impacts the holder may be appealed by the holder only. A decision by a lender adverse to the interest of the borrower is not a decision by the Agency, whether or not concurred in by the Agency. Appeals will be handled in accordance with 7 CFR part 11. Any party adversely affected by an Agency decision under this subpart may request a determination of appealability from the Director, National Appeals Division, USDA, within 30 days of the adverse decision. Sec. 4280.106 Conflict of interest. No conflict of interest or appearance of conflict of interest will be allowed. For purposes of this subpart, conflict of interest includes, but is not limited to, distribution or payment to an individual owner, partner, stockholder, or beneficiary of the applicant or borrower or a close relative of such an individual when such individual will retain any portion of the ownership of the applicant or borrower. Grants Sec. 4280.107 Applicant eligibility. To receive a grant under this subpart, an applicant must meet each of the criteria, as applicable, as set forth in paragraphs (a) through (f) of this section. (a) The applicant or borrower must be an agricultural producer or rural small business. (b) Individuals must be citizens of the United States (U.S.) or reside in the U.S. after being legally admitted for permanent residence. (c) Entities must be at least 51 percent owned, directly or indirectly, by individuals who are either citizens of the U.S. or reside in the U.S. after being legally admitted for permanent residence. (d) If the applicant or borrower or an owner has an outstanding judgment obtained by the United States in a [[Page 59665]] Federal Court (other than in the United States Tax Court), is delinquent in the payment of Federal income taxes, or is delinquent on a Federal debt, the applicant or borrower is not eligible to receive a grant or guaranteed loan until the judgment is paid in full or otherwise satisfied or the delinquency is resolved. (e) In the case of an applicant or borrower that is applying as a rural small business, the business headquarters must be in a rural area and the project to be funded also must be in a rural area. (f) The applicant must have demonstrated financial need. Sec. 4280.108 Project eligibility. For a project to be eligible to receive a grant under this subpart, the proposed project must meet each of the criteria, as applicable, in paragraphs (a) through (f) of this section. (a) The project must be for the purchase of a renewable energy system or to make energy efficiency improvements. (b) The project must be for a pre-commercial or commercially available and replicable technology. (c) The project must be technically feasible, as determined using the procedures specified in Sec. 4280.112(c). (d) The project must be located in a rural area. (e) The applicant (for grants) or borrower (for guaranteed loans) must be the owner of the system and control the operation and maintenance of the proposed project. A qualified third-party operator may be used to manage the operation and/or maintenance of the proposed project. (f) All projects financed under this subpart must be based on satisfactory sources of revenues in an amount sufficient to provide for the operation and maintenance of the system or project. Sec. 4280.109 Grant funding. (a) The amount of grant funds that will be made available to an eligible project under this subpart will not exceed 25 percent of eligible project costs. (1) The only eligible project costs are those costs associated with the items identified in paragraphs (a)(1)(i) through (ix) of this section, as long as the items are an integral and necessary part of the total project: (i) Post-application purchase and installation of equipment, except agricultural tillage equipment and vehicles; (ii) Post-application construction or project improvements, except residential; (iii) Energy audits or assessments; (iv) Permit fees; (v) Professional service fees, except for application preparation; (vi) Feasibility studies; (vii) Business plans; (viii) Retrofitting; and (ix) Construction of a new facility only when the facility is used for the same purpose, is approximately the same size, and based on the energy audit will provide more energy savings than improving an existing facility. Only costs identified in the energy audit for energy efficiency projects are allowed. (2) The applicant must provide at least 75 percent of eligible project costs to complete the project. Applicant in-kind and other Federal grant awards cannot be used to meet the matching fund requirement. However, the Agency will allow third-party, in-kind contributions to be used in meeting the matching fund requirement. Third-party, in-kind contributions will be limited to 10 percent of the matching fund requirement of the grantee. The Agency will advise if the third-party, in-kind contributions are acceptable in accordance with 7 CFR part 3015. (b) The maximum amount of grant assistance to one individual or entity will not exceed $750,000. (c) Applications for renewable energy systems must be for a minimum grant request of $2,500, but no more than $500,000. (d) Applications for energy efficiency improvements must be for a minimum grant request of $2,500, but no more than $250,000. Sec. 4280.110 [Reserved] Sec. 4280.111 Application and documentation. The following requirements apply to all grant applications under this subpart. (a) Application. Separate applications must be submitted for renewable energy system and energy efficiency improvement projects. For each type of project, only one application may be submitted. (1) Table of Contents. The first item in each application will be a detailed Table of Contents in the order presented below. Include page numbers for each component of the proposal. Begin pagination immediately following the Table of Contents. (2) Project Summary. A summary of the project proposal, not to exceed one page, must include the following: Title of the project, description of the project including goals and tasks to be accomplished, names of the individuals responsible for conducting and completing the tasks, and the expected timeframes for completing all tasks, including an operational date. The applicant must also clearly state whether the application is for the purchase of a renewable energy system or to make energy efficiency improvements. (3) Eligibility. Each applicant must describe how the grantee or borrower meets the requirements of Sec. 4280.107. (4) Agricultural producer/rural small business information. All applications must contain the following information on the agricultural producer or rural small business seeking funds under this program: (i) Business/farm/ranch operation. (A) A description of the ownership, including a list of individuals and/or entities with ownership interest, names of any corporate parents, affiliates, and subsidiaries, as well as a description of the relationship, including products, between these entities. (B) A description of the operation. (ii) Management. The resume of key managers focusing on relevant business experience. If a third-party operator is used to monitor and manage the project, provide a discussion on the benefits and burdens of such monitoring and management as well as the qualifications of the third party. (iii) Financial Information. (A) Explanation of demonstrated financial need. (B) For rural small businesses, a current balance sheet and income statement prepared in accordance with generally accepted accounting principles (GAAP) and dated within 90 days of the application. Agricultural producers should present financial information in the format that is generally required by commercial agriculture lenders. Financial information is required on the total operations of the agricultural producer/rural small business and its parent, subsidiary, or affiliates at other locations. (C) Rural small businesses must provide sufficient information to determine total annual receipts of the business and any parent, subsidiary, or affiliates at other locations. Voluntarily providing tax returns is one means of satisfying this requirement. Information provided must be sufficient for the Agency to make a determination of total income and cost of goods sold by the business. (D) If available, historical financial statements prepared in accordance with GAAP for the past 3 years, including income statements and balance sheets. If agricultural producers are unable to [[Page 59666]] present this information in accordance with GAAP, they may instead present financial information for the past 3 years in the format that is generally required by commercial agriculture lenders. (E) Pro forma balance sheet at startup of the agricultural producer's/rural small business' business that reflects the use of the loan proceeds or grant award; and 3 additional years, indicating the necessary start-up capital, operating capital, and short-term credit; and projected cash flow and income statements for 3 years supported by a list of assumptions showing the basis for the projections. (F) For agricultural producers, identify the gross market value of your agricultural products for the calendar year preceding the year in which you submit your application. (iv) Production information for renewable energy system projects. (A) Provide a statement as to whether the technology to be employed by the facility is commercially or pre-commercially available and replicable. Provide information to support this position. (B) Describe the availability of materials, labor, and equipment for the facility. (v) Business market information for renewable energy system projects. (A) Demand. Identify the demand (past, present, and future) for the product and/or service and who will buy the product and/or service. (B) Supply. Identify the supply (past, present, and future) of the product and/or service and your competitors. (C) Market niche. Given the trends in demand and supply, describe how the business will be able to sell enough of its product/service to be profitable. (vi) A Dun and Bradstreet Universal Numbering System (DUNS) number. (b) Forms, certifications, and agreements. Each application submitted under paragraph (a) of this section must contain, as applicable, the items identified in paragraphs (b)(1) through (15) of this section. (1) Form SF-424, ``Application for Federal Assistance.'' (2) Form SF-424C, ``Budget Information--Construction Programs.'' Each cost classification category listed on the form must be filled out if it applies to your project. Any cost category item not listed on the form that applies to your project can be put under the miscellaneous category. Attach a separate sheet if you are using the miscellaneous category and list each miscellaneous cost by not allowable and allowable costs in the same format as on Form 424C, ``Budget Information--Construction Programs.'' All project costs must be categorized as either allowable or not allowable. (3) Form SF-424D, ``Assurances--Construction Programs.'' (4) AD-1049, ``Certification Regarding Drug-Free Workplace Requirements.'' (5) AD-1048, ``Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion--Lower Tiered Covered Transactions.'' (6) A copy of a bank statement or a copy of the confirmed funding commitment from the funding source. Matching funds must be included on the Application for Federal Assistance (SF 424) and Budget Information--Construction Programs (SF 424C). (7) Exhibit A-1 of RD Instruction 1940-Q, ``Certification for Contracts, Grants and Loans,'' required by Section 319 of Public Law 101-121 if the grant exceeds $100,000 or Exhibit A-2 of RD Instruction 1940-Q, ``Statement for Loan Guarantees,'' required by Section 319 of Public Law 101-121 if the guaranteed loan exceeds $150,000. (8) If the applicant or borrower has made or agreed to make payment using funds other than Federal appropriated funds to influence or attempt to influence a decision in connection with the application, Form SF-LLL, ``Disclosure of Lobbying Activities,'' must be completed. (9) AD-1047, ``Certification Regarding Debarment, Suspension, and Other Responsibility Matters--Primary Covered Transactions.'' (10) Form RD 400-1, ``Equal Opportunity Agreement.'' (11) Form RD 400-4, ``Assurance Agreement.'' (12) If the project involves interconnection to an electric utility, a copy of a letter of intent to purchase power, a power purchase agreement, a copy of a letter of intent for an interconnection agreement, or an interconnection agreement will be required from your utility company or other purchaser for renewable energy systems. (13) If applicable, intergovernmental consultation comments in accordance with Executive Order 12372. (14) Applicants and borrowers must provide a certification indicating whether or not there is a known relationship or association with an Agency employee. (15) Each applicant must prepare an environmental impact analysis as specified in Sec. 4280.114(d). (c) Feasibility study for renewable energy systems. Each application for a renewable energy system project, except for requests of $100,000 or less, must include a project-specific feasibility study prepared by a qualified independent consultant. The feasibility study must include an analysis of the market, financial, economic, technical, and management feasibility of the proposed project. The feasibility study must also include an opinion and a recommendation by the independent consultant. (d) Technical requirements reports. The technical report must demonstrate that the project design, procurement, installation, startup, operation and maintenance of the renewable energy system or energy efficiency improvement will operate or perform as specified over its design life in a reliable and a cost effective manner. The technical report must also identify all necessary project agreements, demonstrate that those agreements will be in place, and that necessary project equipment and services are available over the design life. All technical information provided must follow the format specified in paragraphs (d)(1) through (10) of this section. Supporting information may be submitted in other formats. Design drawings and process flow charts are encouraged as exhibits. A discussion of each topic identified in paragraphs (d)(1) through (10) of this section is not necessary if the topic is not applicable to the specific project. Questions identified in the Agency's technical review of the project must be answered to the Agency's satisfaction before the application will be approved. The applicant must submit the original technical requirements report plus one copy to the State Rural Development Office. For small solar and small wind projects, the narrative portion of technical requirements portion of the proposals, excluding supporting documentation and drawings, should be less than ten pages. Projects costing more than $100,000 require the services of a professional engineer (PE). Depending on the level of engineering required for the specific project or if necessary to ensure public safety, the services of a PE may be required for smaller projects. (1) Biomass, bioenergy. The technical requirements specified in paragraphs (d)(1)(i) through (x) of this section apply to renewable energy projects that produce fuel, thermal energy, or electric power from a lignocellulosic biomass source, including wood, agricultural residue excluding animal wastes, or other energy crops considered biomass or bioenergy projects. The major components of bioenergy systems will vary significantly depending on the type of feedstock, product, type of process, and size of the process but in general [[Page 59667]] includes components around which the balance of the system is designed. (i) Qualifications of project team. The biomass project team will vary according to the complexity and scale of the project. For engineered systems, the project team should consist of a system designer, a project manager, an equipment supplier, a project engineer, a construction contractor or system installer, and a system operator and maintainer. One individual or entity may serve more than one role. The project team must have demonstrated expertise in similar biomass systems development, engineering, installation, and maintenance. The applicant must provide authoritative evidence that project team service providers have the necessary professional credentials or relevant experience to perform the required services. The applicant must also provide authoritative evidence that vendors of proprietary components can provide necessary equipment and spare parts for the system to operate over its design life. The application must: (A) Discuss the proposed project delivery method. Such methods include a design, bid, build where a separate engineering firm may design the project and prepare a request for bids and the successful bidder constructs the project at the applicant's risk, and a design build method, often referred to as turn key, where the applicant establishes the specifications for the project and secures the services of a developer who will design and build the project at the developer's risk; (B) Discuss the biomass system equipment manufacturers of major components being considered in terms of the length of time in business and the number of units installed at the capacity and scale being considered; (C) Discuss the project manager, equipment supplier, system designer, project engineer, and construction contractor qualifications for engineering, designing, and installing biomass energy systems including any relevant certifications by recognized organizations or bodies. Provide a list of the same or similar projects designed, installed, or supplied and currently operating and with references if available; and (D) Describe the system operator's qualifications and experience for servicing, operating, and maintaining biomass renewable energy equipment or projects. Provide a list of the same or similar projects designed, installed, or supplied and currently operating and with references if available. (ii) Agreements and permits. The applicant must identify all necessary agreements and permits required for the project and the status and schedule for securing those agreements and permits, including the items specified in paragraphs (d)(1)(ii)(A) through (G) of this section. (A) Biomass systems must be installed in accordance with applicable local, State, and national codes and regulations. Identify zoning and code issues, and required permits and the schedule for meeting those requirements and securing those permits. (B) Identify licenses where required and the schedule for obtaining those licenses. (C) Identify land use agreements required for the project and the schedule for securing the agreements and the term of those agreements. (D) Identify any permits or agreements required for solid, liquid, and gaseous emissions or effluents and the schedule for securing those permits and agreements. (E) Identify available component warranties for the specific project location and size. (F) Systems interconnected to the electric power system will need arrangements to interconnect with the utility. Identify utility system interconnection requirements, power purchase arrangements, or licenses where required and the schedule for meeting those requirements and obtaining those agreements. This is required even if the system is installed on the customer side of the utility meter. For systems planning to utilize a local net metering program, describe the applicable local net metering program. (G) Identify all environmental issues, including environmental compliance issues, associated with the project. (iii) Resource assessment. The applicant must provide adequate and appropriate evidence of the availability of the renewable resource required for the system to operate as designed. Indicate the type, quantity, quality, and seasonality of the biomass resource including harvest and storage, where applicable. Where applicable, also indicate shipping or receiving method and required infrastructure for shipping. For proposed projects with an established resource, provide a summary of the resource. (iv) Design and engineering. The applicant must provide authoritative evidence that the system will be designed and engineered so as to meet its intended purpose, will ensure public safety, and will comply with applicable laws, regulations, agreements, permits, codes, and standards. Projects shall be engineered by a qualified entity. Systems must be engineered as a complete, integrated system with matched components. The engineering must be comprehensive including site selection, system and component selection, and system monitoring equipment. Systems must be constructed by a qualified entity. (A) The application must include a concise but complete description of the biomass project including location of the project, resource characteristics, system specifications, electric power system interconnection, and monitoring equipment. Identify possible vendors and models of major system components. Describe the expected electric power, fuel production, or thermal energy production of the proposed system as rated and as expected in actual field conditions. For systems with a capacity more than 20 tons per day of biomass, address performance on a monthly and annual basis. For small projects such as a co