[Federal Register: July 18, 2005 (Volume 70, Number 136)]
[Rules and Regulations]               
[Page 41263-41338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jy05-15]                         


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Part II





Department of Agriculture





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Rural Business-Cooperative Service



Rural Utilities Service



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7 CFR Part 4280



Renewable Energy Systems and Energy Efficiency Improvements Grant, 
Guaranteed Loan, and Direct Loan Program; Final Rule


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DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

Rural Utilities 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 Services, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Business-Cooperative Service (RBS) is establishing 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 under Title IX, Section 9006. This program will 
help farmers, ranchers, and rural small businesses to reduce energy 
costs and consumption.

EFFECTIVE DATE: This rule is effective July 18, 2005.

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. Authority
II. Background
III. Summary of Changes Since Proposal
    A. Applicant Eligibility
    B. Project Eligibility
    C. Funding, Matching Funds, and Terms of Loan
    D. Eligible Project Costs
    E. Application
    F. Documentation
    G. Evaluation of Applications
    H. Guaranteed Loan Processing and Servicing
    I. Construction Planning and Development
    J. Definitions
    K. Insurance
    L. Feasibility Studies
    M. Energy Audits
    N. Project Requirements After Construction
IV. Discussion of Comments
    A. Definitions
    B. Demonstrated Financial Need
    C. Applicant Eligibility
    D. Project Eligibility
    E. Application and Documentation
    F. Funding
    G. Evaluation/Scoring of Applications
    H. Guaranteed Loans
    I. Direct Loans
    J. Laws That Contain Other Compliance Requirements
    K. Construction Funding and Management
    L. Miscellaneous
V. Regulatory Information
    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. Authority

    The Farm Security and Rural Investment Act of 2002 (Pub. L. 107-
171) (2002 Act) established the Renewable Energy Systems and Energy 
Efficiency Improvements Program under Title IX, Section 9006 (7 U.S.C. 
8106). 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. This program implements this 
mandate.

II. Background

    On October 5, 2004, USDA proposed a loan and grant program for 
renewable energy systems and energy efficiency improvements under 
Section 9006 of the 2002 Farm Bill.
    In response to the Nation's immediate need for a reduction in 
reliance on foreign oil, and to address the increasing demand for 
readily available energy, the Agency is waiving the 30-day waiting 
period between publication of the rule and when it will take effect. 
Since publication of the proposed rule, energy prices have continued to 
rise at an aggressive rate, affecting the Nation at every level, due to 
international events, increasing demand, and low domestic inventories 
and refinery capacities. Allowing the earliest possible investment in 
renewable energy production systems and energy efficiency improvements 
will help the Nation address the current situation. Effecting the rule 
without the 30-day waiting period will provide maximum application time 
prior to the end of the fiscal year to ensure the greatest level of 
investment possible.
    The 9006 Grant Program has been operational since the 2003 fiscal 
year and the final rule makes only minor changes to the proposed rule 
and how the 9006 Grant Program has been operated before. As a result, 
grant applications are not expected to be disadvantaged by this rule's 
earlier implementation. Likewise, because the 9006 Guaranteed Loan 
Program is substantially modeled after the Business and Industry 
Guaranteed Loan Program and because the Final Rule makes only minor 
changes to the Proposed Rule, guaranteed loan applications are not 
expected to be disadvantaged by this rule's earlier implementation.
    For these reasons, the Agency finds that good cause exists for this 
rule's immediate implementation.

III. Summary of Changes Since Proposal

    The following paragraphs summarize the major changes in the final 
rule from the rule proposed on October 5, 2004.

A. Applicant Eligibility

    Under the final rule, a provision has been added that an applicant 
must have made satisfactory progress, as determined by the Agency, 
towards the completion of a previously funded project before it will be 
considered for subsequent funding.
    Small business headquarters may be in either a rural or non-rural 
area at the time of application and at the time of grant disbursement. 
Because the headquarters may be in either location, the proposed rule 
does not need to address this.

B. Project Eligibility

    A condition has been added to project eligibility that sites must 
be controlled by the agricultural producer or small business for the 
proposed financing term of any associated Federal loans or loan 
guarantees. This concept was in the proposed rule as part of the 
technical report requirements. The language has been modified 
concerning control of the system and the role of third parties for 
clarification, and concerning satisfactory sources of revenues.
    For guaranteed loans only, we have added capital improvements to an 
existing renewable energy system as an eligible project.

C. Funding, Matching Funds, and Terms of Loan

    Minimum Funding Levels. Under the final rule, minimum funding level 
for grants for energy efficiency improvement projects only has been 
reduced from $2,500 to $1,500. For guaranteed loans, the minimum 
funding level for all projects has been increased from $2,500 to $5,000 
(less any program grant amounts).

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    Maximum Funding Levels. For grants, the final rule clarifies that 
the $750,000 maximum applied on a per Federal fiscal year basis.
    Matching funds. Under the final rule, passive third-party 
contributions are acceptable matching funds for renewable energy system 
projects eligible for Federal production tax credits, provided the 
applicant meets the applicant eligibility requirements. The proposed 
rule did not address passive third-party contributions.
    Terms of Loan. The maximum term of a loan for equipment has been 
increased from 15 years to 20 years.
    The conditions used to determine whether a loan is sound have been 
modified to add renewable energy subsidies, incentives, tax credits, 
etc., and the borrower's overall credit quality.
    A principal plus interest repayment schedule is now permissible.

D. Eligible Project Costs

    The final rule includes the Technical Reports as an eligible cost. 
Modifications were made concerning the construction of a new facility.

E. Application

    Simplified Application Procedures. Under the final rule, for grants 
and direct loans, projects with total eligible project costs of 
$200,000 or less are eligible to submit simplified applications. The 
final rule provides specific criteria to determine if a project is 
eligible and certain conditions that must be agreed to by the 
applicant.
    For guaranteed loans, the final rule adopts the ``short form'' 
(Form RD 4279-1A) used in the Business and Industry Guaranteed Loan 
(B&I) Program. This form can be used by lenders for projects with total 
eligible project costs equal to or less than $600,000.
    Self-Scoring. Applicants are now required to conduct a self-
evaluation of their project using the same evaluation criteria that the 
Agency will use.

F. Documentation

    Technical Reports. The final rule incorporates a new set of 
technical reports for projects that qualify for simplified applications 
(see paragraph III E). These technical reports require less information 
than the technical reports presented in the proposed rule. For projects 
that do not qualify for simplified applications, the more detailed 
technical reports are required.
    Financial Information. For projects that qualify for and use 
simplified applications, there is much less financial information being 
requested.
    Interconnection Agreements. Applicants are not required to submit 
interconnection agreements with their applications, but instead are 
required to discuss the interconnection agreements, if applicable to 
their project.

G. Evaluation of Applications

    Significant changes were made to the evaluation of applications. 
These changes can be categorized as changes in the evaluation criteria 
and changes in the points awarded. The overall scoring was also 
modified to allow all projects the opportunity to score the same total 
number of points. The following summarizes most of the changes to the 
criteria between proposal and promulgation (changes in points are not 
presented for most criteria).
    1. The addition of a scoring criterion for the technical merit of 
proposed projects.
    2. The deletion of the management criterion.
    3. The addition of a scoring criterion for very small businesses.
    4. Modification of the criterion for small agricultural producers 
by reducing the gross market values at which points can be awarded.
    5. The addition of a scoring criterion for submitting simplified 
applications.
    6. Modification of the environmental benefits criterion by 
replacing ``health and sanitation'' with ``environmental goals'' as the 
basis for this criterion.
    7. The deletion of the cost-effectiveness criterion, which was 
incorporated into the new technical merit criterion.
    8. Awarding points for energy replacement, energy savings, or 
energy generation (at proposal, only energy replacement and energy 
generation were included) and by reducing the points available for 
energy generation projects from 20 to 10.
    9. Modifying the interest rate criterion to be consistent with the 
B&I program by reducing the rate from 1.75 percent to 1.5 percent above 
the prime rate.
    10. The addition of a scoring criterion that awards 5 points to an 
applicant's overall score if the applicant has not been approved to 
receive funds in the 2 previous Federal fiscal years.
    11. The replacement of the ``matching funds'' criterion for grants 
with a ``readiness'' criterion, which looks at the commitments an 
applicant has received for the matching funds from other sources 
instead of the amount of the matching funds already received from other 
sources.

H. Guaranteed Loan Processing and Servicing

    For guaranteed loans, the final rule tracks the B&I program more 
closely. The most important aspects that have changed are: (1) 
Expanding the universe of eligible lenders and (2) authorizing the use 
of multi-notes. Other changes included:
    Credit Quality. A provision has been added that guaranteed loans 
made under 7 CFR part 4280, subpart B must have at least parity with 
guaranteed loans made under the B&I program.
    In addition, a provision has been added that the current status of 
the appropriate renewable energy industry will be considered.
    Personal and Corporate Guarantees. Under the final rule, personal 
and corporate guarantees are not required from passive investors.

I. Construction Planning and Development

    In the final rule, 7 CFR 1924, subpart A has been replaced with 7 
CFR 1780, subpart C. Similarly, for equipment procurement, 7 CFR 1924, 
subpart A has been replaced with 7 CFR 3015.

J. Definitions

    Small Business. Several changes and modifications were made to this 
definition to be consistent with the Small Business Administration's 
(SBA's) definition, deleting the 500 or fewer employees and $20 million 
or less in total annual receipts cap, and including certain electric 
utilities. Nonprofit entities that meet SBA's definition of ``small 
business'' are now allowed.
    Demonstrated Financial Need. The major change to this definition 
was the addition of a ``cashflow'' test.
    New Definitions. The final rule adds definitions for each of the 
renewable technologies and the following terms:
    Design/build project development method.
    Energy assessment.
    Energy assessor.
    Energy auditor.
    Feasibility study.
    Necessary capital improvement.
    Passive investor.
    Post application.
    Qualified consultant.
    Qualified party.
    Simplified application.
    Used equipment.
    Very small business.
    Modified Definitions. The definitions of some terms were modified 
slightly to be consistent with the definition for those terms in the 
B&I program. Definitions that were modified include:
    Applicant.
    Commercially available.
    Energy efficiency improvement.
    Interim financing.
    Renewable energy.

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    Renewable energy system.
    Deleted Definitions. Several definitions that were identical to the 
definitions in the B&I program were deleted and are incorporated by 
reference.

K. Insurance

    Projects with total eligible project costs of $200,000 or less are 
not required to carry business insurance.

L. Feasibility Studies

    Under the proposed rule, business-level feasibility studies 
(referred to as project-specific feasibility studies in the proposed 
rule) were required for all renewable energy projects exceeding 
$100,000 in costs. Under the final rule, business-level feasibility 
studies for renewable energy projects will be required for those 
projects whose total eligible project costs are greater than $200,000.

M. Energy Audits

    Under the proposed rule, energy audits were required for energy 
efficiency improvement projects with costs greater than $100,000. Under 
the final rule, energy audits are required for energy efficiency 
improvement projects with total eligible energy costs greater than 
$50,000.

IV. Discussion of Comments

    Over 60 comment letters were received from a variety of commenters. 
The most comment letters were received from various trade organizations 
and industry groups (over 15 letters) and from State agencies and 
organizations (over 15 letters). Various public interest groups 
submitted approximately 11 letters, while financial institutions 
(credit bureaus and banks) submitted 8 letters. Letters were also 
received from private individuals, towns and cities, and one 
Congressman.
    The following paragraphs summarize the comments and our responses 
to those comments. Twenty-one responses do not require a response under 
5 U.S.C. 553. These responses involve various nonregulatory matters 
such as expressing support for the program or requesting additional 
information. Several responses were outside the scope of the regulation 
and made suggestions that would require changes to other USDA and non-
USDA regulations or internal agency administrative matters. For these 
and similar reasons, these responses are not addressed in this section.

A. Definitions

Applicant
    Comment: One commenter stated that the definition of applicant does 
not include a reference to direct loan applicants and suggested that 
the definition be amended to include such a reference.
    Response: USDA agrees with the commenter and has revised the 
definition to include reference to direct loan applicants.
    In addition, we have revised the term ``applicant'' to apply to 
agricultural producers and rural small businesses seeking a guaranteed 
loan rather than to the lender that is actually submitting the loan 
application to USDA. We did this in order to simplify the terminology 
throughout the rule. Thus, wherever the term ``applicant'' is used, it 
is referring to the agricultural producer or rural small business. When 
the rule applies to the lender, the term ``lender'' is used.
Biomass
    Comment: One commenter stated that the definition of biomass needs 
to be clarified. The commenter pointed out that the biomass definition 
refers to ``other waste materials.'' The commenter notes that, 
traditionally, municipal waste for landfill waste has been included in 
biomass definitions. The commenter believes that, if tires are allowed 
to be placed in a landfill, they may be deemed municipal waste, 
biomass, and inevitably renewable. This theory, according to the 
commenter, appears to be reinforced in the Resource Conservation and 
Recovery Act of 1976. In addition, the commenter points out that the 
State of Nevada, Nevada Revised Statute Chapter 704, has classified 
tires reduced using microwave technology, a very clean process, as 
renewable because they are part of the municipal waste stream and also 
because one of the components of all tires is natural rubber coming 
from trees. The commenter suggests that an administrative bulletin to 
staff, clarifying the intent of the biomass definition, is needed.
    Response: USDA agrees that ``other waste materials'' could lead to 
confusion. However, due to the nature, scope, and complexity of 
renewable energy systems using ``other waste materials,'' USDA cannot 
anticipate all types of ``other waste materials.'' Therefore, new 
materials and technologies will be considered on a case-by-case basis.
    Comment: One commenter requested that clarification be provided as 
to the interpretation of ``paper that is not commonly recycled.'' The 
commenter stated that, while they want all paper to be recycled that 
can be recycled, in many rural settings transportation distances to 
paper recycling purchase points are simply too distant to allow 
affordable recycling once transportation costs are figured into the 
equation. The commenter stated that they have evidence in Missouri of 
how paper pellets can be beneficially utilized as fuel at Northwest 
Missouri State University but cannot be affordably recycled due to the 
distance to any buying center. The commenter asked that USDA clarify 
that if transportation economics preclude affordable recycling of waste 
paper that this meets the criteria of ``not commonly recycled.''
    Response: USDA agrees that the situation posed by the commenter 
should meet the criterion of ``not commonly recycled.'' The situation 
described arises, at least in part, out of the fact that the paper 
recycling is occurring in a rural area. USDA will consider this issue 
on a case-by-case basis.
Capacity
    Comment: One commenter stated the definition of capacity is 
technically incorrect (load implies use not production of energy e.g., 
the electric motor is a three kilowatt load on the system). Capacity 
should describe energy output in a standard measurement (e.g., British 
thermal units (BTU's), kilowatt-hours (kWh), Megawatts). The commenter 
suggested that it be defined as follows:
    ``The sustainable energy output of a generation or heating unit as 
rated by the manufacturer or qualified independent energy organization 
or individual using commonly accepted standard units of measurement.''
    Response: The commenter makes three suggestions for revising the 
definition of ``capacity'' as follows:
    First, the commenter suggests that capacity be described as 
``energy output'' and not as ``load.'' USDA disagrees with this 
suggestion. Load is equally applicable as ``energy output.'' Thus, this 
term has not been changed.
    Second, the commenter suggests that the definition should require 
capacity to express using ``commonly accepted standard units of 
measurement.'' USDA disagrees with the need to insert this language 
into the definition. USDA believes that manufacturer ratings will be in 
the same units of measurement for similar technologies. If not, 
conversions can be applied.
    Third, the commenter suggests that the energy output can also be 
rated by a ``qualified independent energy organization or individual.'' 
USDA

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disagrees with the third suggestion. The ratings assigned by a 
manufacturer are based on standards and provide a standardized, 
consistent baseline for comparisons. Some units eligible for this 
program could be modified by an individual after purchase to change its 
rating. In such instances, an individual would likely hire a third 
party to assign a new rating to the unit. USDA does not believe this is 
a desirable situation, possibly resulting in subjective assessments of 
the rating.
Default
    Comment: Two commenters pointed out that there is no reference made 
to grants being in default, and one of the commenters (Flanders 11-04) 
suggested that ``or grant conditions'' be inserted after ``* * * or 
more loan covenants * * *'' in the third line of the definition.
    Response: USDA agrees with the commenter and has revised the 
definition of default as suggested.
Demonstrated Financial Need
    Comment: One commenter suggested that the definition of 
demonstrated financial need might benefit from a more specific 
definition or an example--for example, ``if the project is otherwise 
unable to achieve at least a 1.20 debt coverage ratio when a loan for 
the long term liability portion is amortized over the life expectancy 
of the project.''
    Response: USDA disagrees that a more specific definition is needed 
within the rule. The example offered by the commenter is one way for 
demonstrating financial need as defined by the regulation.
Energy Efficiency Improvement
    Comment: One commenter pointed out that in the definitions section 
of the proposed rule, ``energy efficiency improvement'' is defined as 
``Improvement to a facility or process that reduces energy 
consumption.'' The commenter then points out that under proposed Sec.  
4280.111(d)(10), the definition is expanded to include, ``or reduced 
amount of energy required per unit of production are regarded as energy 
efficiency projects.'' The commenter suggested that the definition 
under proposed Sec.  4280.103 be expanded to include this concept found 
in proposed Sec.  4280.111(d)(10).
    Response: USDA has not revised the definition as requested by the 
commenter. We have retained the phrase ``that reduces energy 
consumption,'' which allows an applicant to express the reduction in 
energy consumption in a number of ways, including, but not necessarily 
limited to total reduction in energy consumption, energy saved per 
square foot or energy saved per unit of production.
    Comment: One commenter stated that the definition of energy 
efficiency improvement is not explicit enough and recommended that USDA 
add language to the existing definition that clarifies that the primary 
benefit for the improvement must be a reduction in energy consumption. 
According to the commenter, some applications in 2004 relied on 
nonenergy benefits, such as increased product quality, as the 
justification for the project. For some projects, the energy efficiency 
savings were clearly a secondary benefit and would not have had 
sufficient payback to pursue on their own. While these additional 
benefits are valuable and should be factored into the project finances, 
when nonenergy benefits are the primary benefit of a proposed project, 
the commenter believes that such projects should not be considered an 
energy efficiency improvement.
    Response: USDA believes that no change is necessary; this issue is 
addressed in the scoring criteria. Projects saving the most energy will 
score higher. Therefore, USDA expects the primary benefit of the energy 
efficiency improvement program will be energy reduction.
Existing Lender Debt
    Comment: One commenter asked: What if the same lender had an 
existing debt to the borrower with a B&I loan guarantee? The commenter 
suggested striking ``not guaranteed by the Agency'' from the definition 
of ``existing lender debt.''
    Response: The definition of ``existing lender debt'' was removed 
from this rule because it was not used.
Holder
    Comment: One commenter asked: What about in the case where more 
than the guaranteed portion of the loan is sold to a holder? The 
commenter suggested striking ``all or'' leave the word part and strike 
``of the guaranteed portion.''
    Response: As proposed, ``holder'' was defined as ``A person or 
entity, other than the lender, who owns all or part of the guaranteed 
portion of the loan, with no servicing responsibilities.'' USDA 
disagrees that the definition of ``holder'' needs to be revised because 
only the guaranteed portion of the loan can be sold to a holder; that 
is, one cannot sell ``more than the guaranteed portion of the loan'' to 
a holder.
``In-Kind Contributions''
    Comment: One commenter suggested that use of existing towers, such 
as cell phone relay towers, to support wind generators be allowed if 
the towers are certified to be safe and sturdy enough to support the 
chosen generator by a professional engineer. The commenter suggested 
that this could be a standard and specification detail rather than a 
rule component, but that it needs to be allowed.
    Response: USDA does not believe any change is needed to the rule to 
address the situation posed by the commenter. As written, the rule 
allows the use of existing towers as an in-kind contribution if they 
``directly benefit the project.''
Interim Financing
    Comment: One commenter stated that the words ``clear intent'' in 
the definition of ``interim financing'' in the proposed rule are vague 
and suggested striking ``clear intent'' and substituting the words 
``commitment from a lender that.''
    Response: USDA disagrees with the commenter's suggestion and has 
not revised the definition as suggested by the commenter. USDA believes 
applicants need flexibility in showing they have permanent financing, 
and applicants should not be limited to lender commitments. Further, 
USDA does not wish to limit the concept of interim financing to 
``lenders.''
Loan-to-Value
    Comment: One commenter stated that the definition of loan-to-value 
is not consistent with standard industry language and recommended that 
the term be changed to be consistent. The commenter suggested 
substituting the term ``Loan-to-value'' with ``Loan to discounted 
value'' and then revising the content of the proposed rule to 
substitute ``Loan-to-value'' with ``Loan to discounted value.''
    Response: The Agency agrees with the commenter that the rule needs 
to refer to ``discounted value'' and has incorporated this change by 
revising the definition of ``loan-to-value'' accordingly. However, the 
Agency disagrees that the term should be ``Loan to discounted value,'' 
and has retained the term ``loan to value.''
Renewable Energy
    Comment: One commenter suggested adding the word ``biomass'' into 
the second clause so that it reads ``* * * or hydrogen derived from 
biomass or water using wind, solar, biomass, or geothermal energy 
sources.''

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    Response: USDA agrees with the commenter that the word ``biomass'' 
needs to be added and has revised the definition for renewable energy 
as suggested. The lack of the word in the proposed rule was an 
oversight.
    Comment: One commenter asked if the Agency would recognize as 
``renewable energy'' that generated from conversion of a renewable fuel 
into heat, electricity, and/or mechanical power.
    Response: Yes, USDA would recognize as ``renewable'' energy 
generated from the conversion of a renewable fuel into heat, 
electricity, or mechanical power. USDA revised the definition of 
``renewable energy system'' to read as follows: A system that produces 
or produces and delivers usable energy from a renewable energy source. 
We believe this revision specifically addresses the commenter's 
question.
    Comment: One commenter asked if a project that manufactures 
biofuels (biodiesel, ethanol, etc.) from various forms of biomass is 
eligible, or must that project include energy generation from that 
renewable fuel to qualify. This commenter also asked if existing on-
site energy generation technologies are converted to biofuel usage from 
diesel or other nonrenewable fuel use, either in part or completely, 
would this conversion be considered an acceptable ``renewable energy 
project?''
    Response: A project that solely manufactures biofuels from various 
forms of biomass is eligible under this program. The project does not 
need to generate energy.
    The conversion of existing on-site energy generation technologies 
to biofuel from diesel or other non-renewable fuel qualifies as a 
renewable energy project for the purposes of the 9006 program. USDA 
points out that for purposes of determining the amount of funds 
available for such conversion, total eligible project costs would be 
based on the cost of performing the conversion alone, not on the cost 
of an equivalent replacement unit.
    Comment: One commenter asked if a project that qualifies at the 
State level as ``renewable'', would automatically be acceptable, based 
on the state-level determination, for meeting minimum eligibility 
requirements for Agency support. Conversely, the commenter asked, if 
mandated compliance with State and local permitting (as a nonrenewable 
project) would obviate Agency funding if a project is not considered 
renewable under State guidelines but that project satisfies the 
criteria in this program.
    Response: A State-level determination alone would not be acceptable 
to qualify a project as ``renewable'' under this program. To be judged 
renewable under this program, the project must meet the requirements of 
this program.
    Any project that is deemed a renewable project under this program 
is eligible to receive funding under this program regardless of how a 
State defines the project (i.e., as a nonrenewable project), but the 
project still must be in compliance with all applicable State and local 
permitting requirements for that project regardless of how it is 
defined.
    Comment: One commenter noted that State rules permit various 
maximum percentages (usually around 25 percent) of nonrenewable fuel 
that can be used to augment and ``firm'' energy generation from 
renewable sources and asked how this would impact Agency assessment of 
a proposal. The commenter then asked how a prospective applicant or 
borrower can ascertain this status prior to commitment of resources.
    Response: USDA understands the commenter's position and is amenable 
to considering such projects for funding under this program. However, 
the Agency has decided not to revise the rule, but instead will 
evaluate each proposed project on a case-by-case basis. This will 
maximize the number of eligible projects the Agency can consider. USDA 
will rely on the expertise of the technical experts who review the 
applications to make the determination as to whether the project 
qualifies as ``renewable'' under this program. This review will 
evaluate the actual renewable energy usage, energy displacement, and 
energy saving, as applicable.
Small Business
    Comment: A number of commenters suggested making several revisions 
to the definition of small business. Four commenters suggested that the 
definition be changed so that the cap of $20 million in annual receipts 
is removed and a small business is defined only by the number of 
employees of 500 or less. Two of these commenters believe the $20 
million maximum in annual receipts disqualifies and discourages many 
grain elevators, ethanol producers, biodiesel producers, and other 
possible business ventures in rural America.
    The third commenter stated that the definition of small business 
provided in the rule was duplicative with SBA guidelines and offered a 
one-size-fits-all dimension to the program. According to this 
commenter, this penalizes certain small businesses that meet SBA 
definitions, but not the specific limits outlined in this definition. 
The commenter was particularly concerned that Rural Electric 
Cooperatives would be excluded from participation in the program.
    Finally, the fourth commenter stated that capping the annual 
revenues at $20 million would eliminate the eligibility of a 
significant number of companies who could benefit and provide 
substantial value to the renewable energy program, in particular the 
ethanol industry. The commenter states that the ethanol industry 
provides benefits on many fronts and should be allowed to participate 
in the 9006 program, but the cap would exclude this industry because 
the majority of plants are in excess of this sales limitation.
    A fifth commenter recommended that USDA expand eligibility to allow 
all rural electric utilities to host applications. This commenter 
pointed out that many rural electric cooperatives and public utility 
districts fail to meet eligibility requirements because of large annual 
receipts, even though their profit margins are small and stated that 
rural utilities are important partners and should be eligible 
applicants.
    Two commenters suggested that more explanation as to the definition 
of an eligible cooperative is needed. One of these commenters stated 
that referring to the IRS code is not quick helpful information when 
prospective applicants are trying to figure out whether they are 
eligible or not. The other commenter requested more description of what 
type of cooperative is eligible `` perhaps in the definition portion of 
the proposed regulations.
    Response: USDA agrees that the definition of ``small business'' 
needs to be revised. USDA believes that the definition needs to be 
consistent with SBA's definition and by doing so, the revised 
definition simplifies the application process and eligibility 
determination, provides for greater consistency in eligibility 
determinations, and increases program access. Therefore, USDA has 
revised the definition to remove the caps on annual receipts and on the 
number of employees.
    In addition, USDA has revised the definition to specifically 
include electric utilities, including Tribal or governmental electric 
utilities, that provide services to rural consumers on a cost-of-
service basis, without support from public funds or subsidy from the 
Government authority establishing the district, provided that such 
utilities meet SBA's definition of small business.
    Also, the purpose of the parenthetical reference to the IRS code 
was to minimize the number of questions as to

[[Page 41269]]

whether cooperatives qualified under section 501(c)(12) (of the 
Internal Revenue Code) were eligible for this program (which they are), 
not to limit this program to only those cooperatives qualified under 
section 501(c)(12). USDA does not believe that it is necessary to 
remove the reference to the IRS code, because a cooperative would know 
if the referenced IRS code applied to it or not. Therefore, we have 
elected not to remove reference to the IRS code.
    Lastly, USDA disagrees that more description of the type of 
cooperative is needed, especially in light of the revision to the 
definition of small business, which allows any cooperative to be 
eligible as long as it meets the definition of a small business.
    Comment: One commenter recommended that the receipt and employee 
``size'' threshold be applied only to the location being served by the 
project.
    Response: As discussed in the response to the previous comment, 
USDA has revised the definition of small business to remove the 
``size'' threshold. Thus, this comment is now moot.
Qualified Consultant
    Comment: One commenter noted that there is no definition for 
``qualified consultant.'' The commenter recommended that a ``qualified 
consultant'' should be established as a party that has demonstrated 
with past efforts the ability to compile not only a project assessment 
but also a comprehensive business model and plan for execution.
    Response: USDA agrees that a definition of ``qualified consultant'' 
is needed and has added it to the definitions section.

B. Demonstrated Financial Need

Funding From Other Sources
    Comment: A number of commenters were concerned that including the 
phrase ``other funding sources'' in the definition of ``demonstrated 
financial need'' would disqualify applicants who can obtain funding 
elsewhere. One of the commenters recommended that the definition of 
demonstrated financial need be altered to make clear that State 
financial assistance for renewable energy systems or energy efficiency 
improvements will not affect an applicant's eligibility for the 9006 
program.
    Another commenter stated that the proposed definition appears to 
disqualify applicants who would combine funding from the 9006 program 
with private and public loan programs.
    One commenter recommended that State program co-funding, such as 
State Clean Energy Trust Funds, should be encouraged by USDA, and not 
disallowed.
    Response: While USDA does not disagree with the commenters' 
concerns, we have retained essentially the same concept in the final 
rule. Specifically, we have replaced the phrase ``or other funding 
sources'' with ``and commercially available resources.'' The final 
definition adopted in the rule is in alignment with other Rural 
Development programs, which have a ``credit elsewhere'' test. Section 
9006(b) requires a demonstration of financial need.
    Comment: One commenter stated that, although requirements for in-
kind contributions were reasonable, strictures against any other 
Federal co-funding could restrict applications. The commenter observed 
that an applicant could receive funding from Federal sources other than 
USDA. Rather than impose a blanket ban on other Federal funding, the 
commenter recommended that USDA develop a specific list of programmatic 
funding exclusions. Four other commenters suggested that co-funding 
from State rebate programs be fully allowed. Another commenter stated 
that USDA should allow full co-funding from State public benefit rebate 
programs.
    Response: USDA made an administrative determination that the 25 
percent limit for grant funding of a project is applicable to funds 
received under the 9006 program and all other Federal grants, unless 
there is statutory authorization permitting the other Federal funding 
to be used for the grantee's match. No changes have been made in the 
final program.
Financial Need
    Comment: One commenter stated that the requirement to demonstrate 
financial need creates a possible catch-22 for applicants. On the one 
hand, USDA is seeking to safeguard the public's money by requesting 
significant assurances that every grant project will be financially 
viable, yet also requires the applicant to prove financial need. When 
the grant amount is capped at 25 percent (by law), this creates a 
rather thin margin to work within. The commenter stated that the grant 
program should be looked at as analogous to soil conservation cost-
share programs where the grant amount is a public provision of 
assistance to a participant for assuming the risk inherent in adopting 
a new, and in some cases, early commercial and site specific 
technology. For this reason, the proof of demonstrated financial need 
should be understood to include the credibility that government support 
of a new business investment provides to lenders who would not 
otherwise provide needed gap financing.
    Response: USDA in general concurs with the commenter. It is our 
hope that by our willingness to fund projects that have undergone and 
passed the technical review under the 9006 program would, in turn, 
encourage lenders to see these projects as worthwhile projects, as well 
and extend funding to them. Further, the change made to the definition 
of ``demonstrated financial need'' that focuses on the need of the 
project should help address the concerns raised in this comment.
    Comment: One commenter stated that the demonstration of a financial 
need should not be a threshold factor for applicant eligibility to 
participate in this program. According to the commenter, this provision 
anticipates an applicant that cannot afford the project without the 
assistance, yet it requires a highly engineered project. If an 
applicant must demonstrate a financial need as defined, the possibility 
of assembling the highly technical application diminishes.
    Response: USDA does not have the discretion to remove the 
demonstration of financial need as a requirement for receiving a grant 
under the 9006 program; this is a statutory requirement in section 
9006(b). However, USDA has significantly lowered the application 
requirements for projects with total eligible project costs of $200,000 
or less, which significantly reduces the amount of financial 
information that would be required and by developing less detailed 
requirements for the Technical Report (see Appendix A). Further, the 
Agency has added a second component to the definition of ``demonstrated 
financial need'' that focuses on the need of the project. Therefore, we 
have addressed this commenter's concerns as much as possible.
Project Versus Applicant Financial Need
    Comment: One commenter observed that the proposed rule defines 
financial need as an applicant's need rather than a project's need, and 
felt that this wording would penalize applicants with good credit or 
assets. The commenter recommended that USDA redefine ``demonstrated 
financial need'' to something like the following: ``The demonstration 
that the project is not economic or would not occur without the grant 
assistance.''
    Another commenter stated that there is confusion as to whether 
``financial need'' refers to the proposed project or

[[Page 41270]]

to the actual assets of the applicant. The commenter recommended that 
this eligibility criteria be clarified and suggested that financial 
need be determined by looking at the project itself. According to the 
commenter, the relevant question is whether a grant is necessary to 
make this project financially feasible and/or successful. In the 
current language, the commenter asserts that it is unclear whether 
applicants with sound personal credit and financial portfolios will be 
penalized or deemed ineligible. The commenter believes that projects 
where the participants have sound financial histories are more likely 
to succeed and should not be put at a disadvantage.
    Response: The Agency has adopted this suggestion by modifying the 
definition of ``demonstrated financial need.''
    Comment: Five commenters suggested that USDA base financial need 
criteria on project payback, not the applicant's financial resources 
and liquidity. If the 9006 grant will materially reduce the project 
payback period and similar projects are not commonplace in the 
applicant's area, the commenter believes there is a de facto financial 
need. One commenter stated that this seems inconsistent with the 
overall intent of the program, and favors larger scale projects.
    Response: USDA disagrees that project payback is a proper criterion 
for determining financial need. The definition, as proposed, was 
consistent with USDA policy for a ``credit elsewhere'' test. 
Maintaining the same definition across its programs simplifies cross-
program requirements easing the burden for program participants and end 
users and establishes a clear, consistent, and objective standard for 
demonstrating a financial need for Rural Development grant assistance. 
Therefore, USDA has not incorporated the commenters' suggestion.
    In addition, USDA has revised the definition of ``demonstrated 
financial need'' to include ``that the project proposed by the 
applicant cannot achieve the income and cashflows to sustain it 
financially over the long term without grant assistance.'' This was 
added because the large upfront investment often prevents projects from 
producing sufficient cash flow at current energy prices without outside 
support. In addition, the scale of many small projects creates 
diseconomies of scale that further exacerbate this condition.
Demonstration of Financial Need
    Comment: One commenter stated that the subsection 9006(b) of the 
statute states that a farmer, rancher, or small business shall 
demonstrate financial need as determined by the Secretary. This 
provision was included to ensure that assistance is directed to the 
country's smaller producers and rural small businesses that typically 
lack the financial resources necessary to purchase renewable energy 
systems or make energy efficiency improvements.
    Section 4280.103 of the proposed rule defines ``demonstrated 
financial need'' as ``(t)he demonstration by an applicant that the 
applicant is unable to finance the project from its own resources or 
other funding sources without grant assistance.'' This definition is 
vague. Nowhere does the proposed rule describe how the Secretary 
assesses the applicant's ability or inability to finance the project 
without grant assistance.
    An applicant is required to submit a tremendous amount of financial 
documentation and, under proposed Sec.  4280.111(a)(3), to describe how 
it meets the requirement of demonstrated financial need but is given no 
indication of how need is determined.
    The proposed rule must be amended to specify precisely how 
financial need--and thus eligibility under proposed Sec.  4280.107(f)--
shall be demonstrated.
    In the absence of a clearly defined system for assessing financial 
need, USDA should consider establishing an income or revenue limit for 
grant eligibility. Only those applicants below a certain income or 
revenue threshold would be eligible to participate in the grant 
program. A revenue limit for financial need eligibility has the benefit 
of clarity and would reduce the burdensome volume of financial 
documentation required of grant applicants, thereby streamlining the 
application process. Consistent with the statute, all applicants must 
remain eligible for loans and loan guarantees.
    Response: The definition of ``demonstrated financial need'' has 
been revised to include two tests under which all applicants will be 
evaluated as to a demonstration of financial need. The first test is a 
``creditworthiness'' test--the applicant is unable to finance the 
project from its own and commercially available resources. The second 
test is the ``cashflow'' test--the project proposed by the applicant 
cannot achieve the income and cashflows to sustain it financially over 
the long term without grant assistance.
    Under the creditworthiness test, the applicant must certify that 
they cannot obtain credit elsewhere and provide sufficient information 
or documentation to permit the Agency to make an independent 
determination. The Agency has not limited the information or 
documentation that can be provided to support the applicant's need in 
order to give the applicant the greatest degree of flexibility in 
demonstrating this requirement. If the applicant fails to provide 
sufficient information to meet this requirement, the Agency will 
contact them for additional information until it can make its own 
independent determination. In order to provide uniform Agency 
determinations, the Agency expects to issue additional guidance to its 
field offices on what has been approved as acceptable evidence of 
financial need, which will also be made available to the public.
Financial Need Criterion
    Comment: One commenter recommended that applicants for grants not 
have to demonstrate financial need. According to the commenter, 
approving and funding a grant application should rest on the quality of 
the proposal and the scoring criteria and not necessarily on the 
financial need of the applicant. According to the commenter, it is 
difficult for applicants to prove that they have enough finances to 
match 75 percent of the project, but that they financially need the 
last 25 percent from USDA to get the project off the ground.
    Response: The 2002 Farm Bill, Section 9006(b), requires a farmer, 
rancher, or rural small business to demonstrate financial need in order 
to be eligible for a grant under this program. Thus, USDA does not have 
the discretion to eliminate this requirement and has not done so in the 
final rule.
    Comment: Two commenters stated that the authorizing language for 
Section 9006 makes clear that financial need is a primary condition for 
any applicant to receive funding under the program. According to the 
commenters' interpretation of the law, financial need is the only 
eligibility requirement, and all other conditions in the program are 
secondary to it. The commenters believe that the proposed rule does not 
reflect the primacy of financial need as required by statute.
    These commenters also expressed the concern that the proposal does 
not clearly define the extent of the required explanation or its 
relevance to the application process. The commenters recommended that 
USDA make it explicit in the rule that demonstrated financial need is 
an eligibility requirement of the program and create a system by which 
all applications will be reviewed to confirm that they meet the 
financial need condition in the statute. The commenters offered 
examples of possible requirements, including: Requiring all applicants 
to

[[Page 41271]]

demonstrate that they otherwise would not be able to pay for or finance 
the proposed project; an automatic presumption that there is no 
demonstrable financial need in projects with a payback of 2 years or 
less by virtue of the sheer profitability of such a project, or in 
projects which are requesting funding for less than 10 percent of the 
project cost; or a presumption of demonstrated financial need when the 
applicant is a small agricultural producer.
    Response: The commenters made three specific recommendations. The 
first recommendation was to require all applicants to demonstrate 
financial need. As provided in the statute, financial need is required 
only of grant applicants. This eligibility criterion was stated in 
proposed Sec.  4280.107(f). USDA believes this is explicit. USDA does 
not believe that this grant eligibility requirement needs to be or 
should be part of the loan program.
    The second recommendation was to implement an automatic presumption 
of no demonstrable financial need for projects with a payback of 2 
years or less, or for projects requesting funding of less than 10 
percent. As noted in a previous response, USDA does not consider 
payback to be an adequate measure of financial need. Financial need 
speaks to having the resources available to put a project in place, not 
to its projected revenue stream. Therefore, USDA does not consider it 
appropriate to implement a presumption of financial need on the basis 
of payback. USDA also does not believe that the amount of a funding 
request (10 percent or other) is also an adequate measure on which to 
base a presumption of financial need. Therefore, USDA rejected this 
suggestion as well.
    The third suggestion was to base a presumption of financial need 
when the applicant is a small agricultural producer. Again, USDA does 
not believe that this is an appropriate measure.

C. Applicant Eligibility

    Comment: One commenter recommended that public-private partnerships 
be allowed to apply for funds under the 9006 program.
    Response: The target of this program is private entities (i.e., 
farmers, ranchers, and small businesses), as stated in the statute 
authorizing the 9006 program. USDA cannot expand the statutory scope of 
applicants to include public entities, including those in public-
private partnerships. Therefore, USDA has not revised this criterion of 
applicant eligibility.
    Comment: One commenter stated that the eligibility of some 
nonprofits for this program is still not clear. The commenter stated 
that they have had nonprofits apply which were organized for 
charitable, educational, and scientific purposes. Technically, 
according to the proposed definition of a small business, they are 
eligible because they are not formed solely for charitable purposes.
    Two other commenters requested that nonprofit organizations be 
allowed to apply for grants and loans under the 9006 program.
    Response: USDA agrees that clarification is required, but disagrees 
that nonprofits, in general, should be allowed. We have revised the 
definition of small business to allow any of the entities specifically 
identified in the definition (e.g., electric utilities) to participate 
in the 9006 program if they also happen to be nonprofit entities. 
Otherwise, nonprofit entities remain excluded.
    Comment: One commenter encouraged the broadening of the scope of an 
eligible applicant for loans and guaranteed loans to include a business 
supplying a service to an agricultural enterprise, such as manure 
management in the form of an anaerobic digester and power generation 
plant. Another commenter made a similar comment, recommending that USDA 
expand eligibility to allow Renewable Energy/Energy Efficiency experts 
to aggregate projects without ownership requirements.
    Response: USDA is authorized by the language in the 2002 Farm Bill 
to provide grants to farmers, ranchers, and rural small businesses for 
the purchase of renewable energy systems and energy efficiency 
improvements. If the new, nonagricultural enterprise as presented by 
the first commenter meets the definition of a small business, then it 
would be eligible to apply for a grant.
    As to the second comment, the role of an aggregator is more 
equivalent to a professional service provider who brings together 
eligible applicants to assist in project development and 
implementation. The role of an aggregator is anticipated by the Agency, 
but the aggregator itself is not an eligible entity. The Agency sees no 
reason to change the ownership requirements just because an aggregator 
is being used.
    Comment: Three commenters requested that USDA consider modifying 
the rule to allow small business owners who have their headquarters in 
larger cities to also apply for the program. According to one 
commenter, the policy of limiting access to renewable energy grants to 
existing rural companies tends to discourage small businesses that are 
start-ups or happen to reside outside of a rural area, from using this 
program to invest, promote renewable energy projects, and create jobs 
in rural areas. The commenter stated that it is not unreasonable for a 
company to want to know that it is about to receive a grant before it 
takes all of the necessary steps to secure its rural location. The 
commenter requested that, if USDA does not change the rural residency 
requirement for the applicant, the requirements and the consequences of 
not meeting it are made clearer in the Notice of Funds Availability 
(NOFA), which did not clearly require the business headquarters to be 
in a rural area at the time of application.
    Response: USDA agrees with the commenter that the proposed 
requirement for eligible applicant businesses to be located and have 
their headquarters in a rural area may limit access to start-up 
companies that are located in a non-rural area from investing in 
renewable energy systems or energy efficiency improvements. In the 
final rule, both the rural small business and the project must be 
located in a rural area. The business headquarters, however, may be 
located in either a rural or non-rural area. Thus, we do not believe it 
is necessary to address the location of the rural small business' 
headquarters in the rule.

D. Project Eligibility

    Comment: Three commenters expressed concern about large commercial 
wind projects. The commenters provided numerous reasons for their 
opposition of the use of the proposed program to support large-scale, 
commercial-wind projects. The comments focused on the commenter's 
claims of adverse social, environmental, and ecological impacts and the 
high costs and low economic benefits of wind energy projects.
    Response: USDA is bound by the statute to include wind projects in 
the program and does not see the need to differentiate between wind 
projects based on size or commercialization.
    Comment: One commenter requested that fuel cells that utilize non-
renewable fuels be eligible for funds under the proposed program for 
the short-term. The commenter believes that labeling fuel cells as 
renewable energy sources will help speed commercialization and will 
hasten the process by which the industry can achieve further cost 
reductions in manufacturing. Like many emerging technologies, cost 
constraints stand in the way of implementing fuel cell technologies. If 
USDA allows fuel

[[Page 41272]]

cell adopters to tap readily existing fuels, farmers will have the 
ability to demonstrate this technology at a more affordable price, 
while realizing the tremendous advantages this technology offers.
    Response: The statute requires eligible projects to utilize 
renewable energy. USDA cannot expand this requirement to fuel cells 
that utilize only nonrenewable fuels. As noted in a previous response, 
USDA is amendable to considering projects that use nonrenewable fuel to 
some extent.
    Comment: One commenter suggested that hydropower be added to the 
list of approved technologies associated with this rule. The commenter 
requested the addition of small hydroelectric power generating 
facilities (i.e. less than 5,000 kW) to the program, perhaps in a 
manner similar to that included in the proposed HR 6 Energy Policy Act.
    Response: The statute authorizing the 9006 program does not include 
hydropower in the definition of ``renewable energy,'' and, therefore, 
hydropower projects are not eligible for funds under this program.
    Comment: One commenter noted that, as proposed, eligible projects 
for biomass and bioenergy specifically exclude livestock waste. The 
commenter points out that there are emerging technologies involving 
thermochemical conversion of animal waste (for example, from livestock 
processing facilities) to synthetic oil. The commenter believes that 
these projects should be eligible for funding.
    Response: USDA agrees with the commenter that all animal waste 
projects fall into the anaerobic digester category. USDA also agrees 
that the emerging technology described by the commenter would be 
eligible for funds under the 9006 program. As these emerging 
technologies become more mainstream (i.e., become pre-commercial or 
commercial), USDA intends to expand the technical guidance to address 
new technologies. The final rule incorporates provisions to allow new 
technologies to apply for funding even if the technology is not 
addressed in either appendix to the regulation.
    Comment: One commenter suggested that the projects for solar water 
pumping and use of solar for hydrogen fuels for farm-based engine 
generator sets, and photovoltaics to drive farm and food processing 
compressors, refrigeration, and motors should be allowed as eligible 
projects.
    Response: Each of the specific applications identified by the 
commenter is an eligible project under the 9006 program.
    Comment: One commenter suggested that for both large and small 
solar projects, the rule includes as eligible projects those that 
provide solar air heating and water heating with no active storage. The 
commenter provided suggested language.
    Response: USDA agrees with the commenter that projects that provide 
solar air heating and water heating with no active storage are eligible 
under the 9006 program. We have revised the definitions of solar 
projects such that such technologies are implicitly eligible by not 
addressing the type of heat transfer mechanism.
    Comment: One commenter believes that the proposed program only 
gives token support for alternative energy developments and that by 
restricting most grant and loan support for existing commercial 
alternative energy systems, no real competition with the petroleum 
industry is offered. The commenter then goes on to claim that the most 
promising alternative energy programs are not supported or they are 
sabotaged as in the case of hydrogen fuels development under the 
proposed program. While there are many cost-effective sources of 
hydrogen, Federal programs are requiring the use of petroleum for 
hydrogen fuels.
    Response: USDA appreciates the need for alternative energy 
developments. However, the responsibility for developing and funding 
such alternative energy systems, including the development of hydrogen-
based technologies, does not reside in USDA. The Department of Energy 
is responsible for bringing research and development opportunities to 
fruition; that is, to the pre-commercial and commercial stages. Once 
such technologies reach these phases, there is a high probability of 
their successful implementation. USDA will use the 9006 programs to 
fund only those projects for which there is the high probability of 
success. We believe that this is an appropriate and responsible 
approach for the distribution of grants and loans under this program.
Wind Projects
    Comment: One commenter found the requirements in the small wind 
section to be overly burdensome for the applicant, as specifically 
discussed below:
    The rules for wind turbines under 100 kW capacity are not clear in 
regards to the need for use of professional engineers--the proposed 
rule explicitly states that only projects over $100,000 will require 
that the services of a professional engineer to be used, yet the 
description for design and engineering in the proposed rule states:
    ``Small wind systems must be engineered by either the wind turbine 
manufacture or other qualified party. Systems must be offered as a 
complete, integrated system with matched components. The engineering 
must be comprehensive including turbine design and selection, tower 
design and selection, specification of guy wire anchors and tower 
foundation, inverter/controller design and selection, energy storage 
requirements as applicable, and selection of cabling, disconnects and 
interconnection equipment as well as the engineering data needed to 
match the wind system output to the application load if applicable.''
    The commenter expressed concern that this language can easily be 
interpreted to mean that unless a complete component package including 
the components required by utility rules for interconnection is 
purchased from a turbine manufacturer, or the applicant or the system 
dealer must hire their own professional engineer to certify the system, 
in fact these rules may require hiring two engineers as there are 
electrical components, as well as civil or mechanical engineering 
components. Many components, such as the batteries, inverters, and 
cabling for small projects can be purchased off-the-shelf from a 
variety of vendors. Individuals with the necessary technical skills and 
experience (as documented in the project team section) can safely 
select these standard components. Signoff by utility staff as to the 
adequacy of interconnection equipment should also be sufficient for 
approving those components. The commenter is also concerned that the 
rule language as written will be interpreted to mean that each project 
requires a professional engineer to sign off on the entire project. 
Such requirements could certainly add undo costs to projects.
    The commenter recommended the following:
    ``Small wind systems must be designed and engineered to assure 
safety and reliability of the project. For small wind systems, either 
the wind turbine manufacturer or other qualified party must design and 
engineer the turbine, tower and tower foundation (including guy wire 
anchor specification) as a complete and integrated system. As outlined 
in the proposed Sec.  4280.111(d)(8)(iv), interconnection design and 
equipment must be approved by the local utility if the turbine is to be 
interconnected to the electric power distribution grid. Finally, all 
other components, including energy storage, must be selected and 
matched

[[Page 41273]]

by a qualified technician as part of a comprehensive system design.''
    Response: We agree that for the smaller wind systems, an applicant 
may purchase certain components off-the-shelf from various vendors. For 
small wind systems with total eligible project costs equal of $200,000 
or less, the rule requires the applicant, in part, to ``certify that 
their project will be designed and engineered so as to meet the 
intended purpose'' and to provide authoritative evidence that the 
system will be designed and engineered so as to meet its intended 
purpose. We believe this addresses the commenter's concern.
    For small wind systems with total eligible project costs greater 
than $200,000, however, we have retained the same language as in the 
proposed rule. These larger small wind projects are more likely to 
require complete packages, and applicants are less likely to ``piece 
together'' such a system.
    Finally, under the final rule, for renewable energy projects with 
total eligible project costs greater than $400,000, the services of a 
professional engineer are required. We believe this requirement is more 
in line with the level of complexity associated with the larger 
renewable energy projects and appropriate for small wind projects that 
should exceed this level of cost.
    Comment: One commenter suggested that, for wind projects, the 
applicant should also describe whether or not sources of income will 
include--in addition to annual revenue from electricity sales--the 
value of Federal or State incentives, such as production tax credits. 
For methane digesters on dairy farms, the applicant should also state 
whether or not sources of income will include--in addition to income 
from sale of electricity--noncash savings from bedding costs, excess 
bedding sales, carbon and tax credits, heating energy savings (e.g. 
water), or any other farming efficiencies.
    Response: For large wind projects, the proposed rule required a 
description of ``annual project revenues including, but not limited to, 
electricity sales, production tax credits, revenues from green tags, 
and any other production incentive programs throughout the life of the 
project.'' For small wind projects, the proposed rule required a 
description of ``applicable investment incentives, productivity 
incentives, loans, and grants.'' For anaerobic digesters, the proposed 
rule required a description of ``annual project revenues and expenses'' 
and of ``applicable investment incentives, productivity incentives, 
loan, and grants.''
    The Agency believes that this language adequately addresses the 
question of tax credits and production incentive credits. While we have 
not specifically identified noncash savings from bedding costs, excess 
bedding sales, heating energy savings, or other farming efficiencies in 
the final rule, USDA agrees that they can be legitimate ``other sources 
of revenues'' provided they are directly related to the project and 
their value is sufficiently documented.
    Comment: One commenter referred to the recent General Accounting 
Office (GAO) report on wind energy (GAO 04-756, Renewable Energy--Wind 
Power's Contribution to Electric Power Generation and Impact on Farms 
and Rural Communities, September, 2004), which, according to the 
commenter, showed that wind energy was not benefiting either the rural 
economy or farmers in general.
    The GAO report described the problems that currently exist but did 
not define a mechanism to deal with the problems other than to call for 
an implementation of the authorized Section 9006 program and to 
establish better coordination between government agencies.
    The commenter provided information related to several issues 
related to wind energy and also provided the following specific 
recommendations to address the known issues:
     An alternative to large, utility-scale systems that could 
provide a better strategy would be the use of smaller turbines in 
``windsheds'' that could be structured around cooperative ownership. 
Smaller turbines require less capital per unit and allow greater 
distribution and more access points on the transmission grid because of 
lower output. In partnership with or as a subset of traditional rural 
electric cooperatives and the private utilities serving rural areas, 
farmers could own and manage the system, offset individual electrical 
use, and provide power to the grid.
     This approach creates two separate opportunities for 
diffuse rural networks where the turbine is sized to complement 
existing grid infrastructure.
    (a) Farm-scale horizontal axis turbines mounted on tall, self-
erecting towers that do not require special roads or large cranes. 
Here, smaller swept areas can be more effective because blade forces 
are reduced, particularly in severe events, making for lower costs and 
simplifying installation/service.
    (b) Farm-scale vertical axis turbines designed to work efficiently 
at the lower wind speed and more turbulent flow seen at lower 
altitudes.
     Technical and financial support for these farm-scale 
systems should be a high priority for a variety of reasons:
    (a) Diffuse systems are robust, and definitely not susceptible to 
terrorist attack.
    (b) Boost farm income and utilize a renewable resource.
    (c) Enable rural economic development.
    (d) Opportunity to symbiotically combine wind energy production 
with other forms of alternative energy production such as methane 
production.
     Create an independent third-party evaluation program via a 
dedicated grant to evaluate wind turbines that are suitable for on-farm 
use and capable of producing significant electricity for the grid. No 
single organization has the resources needed for this organization. 
This program should be independent of existing government evaluation 
programs focusing on certification and/or technical development. 
Existing government programs (such as National Renewable Energy 
Laboratory (NREL) and Sandia) have inherent conflicts-of-interest when 
it comes to making specific product evaluations and recommendations. 
This program should utilize existing government expertise and resources 
whenever reasonable. The primary award should be made to a proactive 
nonprofit organization with no technology conflicts. Sub-awards for the 
comprehensive evaluation of specific components should be made to 
organizations with existing resources and expertise. This program will 
also conduct one or more random inspections of the production 
factory(ies) to evaluate production quality control practices. 
Evaluations will go beyond minimum specifications and safety issues to 
include projected operating and maintenance costs, ease of 
installation, installation costs, quality, etc. As part of the 
demonstration program, this group should coordinate with the 
Environmental Protection Agency's Office of Air and Radiation (OAR) to 
link utilities interested in purchasing power from renewable sources 
with farm-scale, farmshed cooperatives.
     Fund a demonstration project via a dedicated grant which 
documents the issues and feasibilities associated with actually 
creating a diffuse, large-scale, regional, on-farm, integrated wind-
farm; and which integrates wind energy electricity production with the 
production of electricity from another form of renewable energy which 
can be used to offset the inherent variability of wind energy 
production.
    Response: USDA appreciates the findings of the GAO report. This

[[Page 41274]]

regulation considered those findings when promulgating this regulation. 
The commenter then goes on to identify five specific recommendations, 
which the Agency addresses below.
    First, the Agency agrees that use of smaller turbines, rather than 
large, utility-scale systems, is desirable and encourages applicants to 
partner with others. Nothing in the proposed rule or in the final rule 
prohibits the adoption of this type of system or partnership.
    Second, the commenter identifies two types of turbines that could 
be used to implement the smaller turbine approach in the first 
recommendation. To the extent that such turbines have technical merit, 
this would be determined during the evaluation of the application. 
Otherwise, there is nothing that needs to be addressed in the final 
rule with regard to this second recommendation.
    Third, the commenter recommended that the rule give high priority 
to these farm-scale systems. In the final rule, there are two 
mechanisms that are likely to give preference to farm-scale systems 
because such systems are likely to be lower-cost systems (i.e., total 
eligible project costs of $200,000 or less). First, the effort required 
to prepare a grant application for such systems has been reduced. 
Second, more points are now awarded to the smallest agricultural 
producers and to very small businesses. To the extent that such farm-
scale systems are proposed by these applicants, they would be awarded 
more points than larger-scale systems.
    Fourth, the commenter recommended creating an independent third-
party evaluation program via a dedicated grant to evaluate wind 
turbines. The purpose of the 9006 program is to provide funds for the 
purchase of renewable energy systems and energy efficiency improvement 
projects. The funding of an independent evaluation program is not part 
of the scope of the authorizing statute. USDA notes that we are 
currently working with EPA's OAR to develop assistance in working with 
utilities on interconnection and power agreements.
    Fifth and last, the commenter recommended funding a demonstration 
project via a dedicated grant. As noted in the previous paragraph, the 
purpose of the 9006 program is to provide funds for the purchase of 
renewable energy systems and energy efficiency improvement projects. 
The funding of demonstration projects for any renewable energy system 
is not part of the scope of the authorizing statute.
Miscellaneous
    Comment: One commenter recommended that specific grants be 
established to permit the applicant to evaluate local, State, and 
national regulations and permits and licenses pertaining to the 
location and construction of facilities producing biofuels, biopower, 
and biobased products.
    Response: As stated in the authorizing statute, the 9006 program is 
for the purchase of renewable energy systems and energy efficiency 
improvements. The program was not designed to provide funds to stand-
alone studies of requisite permits and licenses or evaluations of 
applicable regulations. However, USDA recognizes that obtaining such 
permits and licenses are inherent costs to implementing a renewable 
energy system or an energy efficiency improvement project. Therefore, 
USDA included such costs as part of the eligible project costs for 
which funds can be obtained.
    Comment: One commenter noted an apparent contradiction between 
eligible project costs in proposed Sec.  4280.109(a)(1)(ii) and (ix) 
and stated that banks would not finance the item specified in proposed 
Sec.  4280.109(a)(1)(iii) and (vii).
    Response: With regard to items specified in proposed Sec.  
4280.109(a)(1)(ii) and (ix), the first item refers to construction and 
project improvement costs that occur after the application has been 
received by the Agency. The second item refers to costs associated with 
the construction of a new facility. Projects will incur one or the 
other of these two costs, not both. This section does not imply that a 
project would be expected to incur both of the costs or that a project 
would be expected to incur all of the listed eligible project costs. 
For example, renewable energy projects would not be expected to incur 
energy audit or assessment costs. Therefore, we disagree that there is 
a contradiction.
    With regard to the items specified in proposed Sec.  
4280.109(a)(1)(iii) and (vii), all of these items can be capitalized 
and are financeable as part of the project. These items are not 
``stand-alone'' items to be individually or collectively financed apart 
from the project. A lack of interest, on the part of some potential 
lenders, in financing these costs does not persuade USDA to remove them 
for the lenders that may be interested.
    Comment: One commenter recommended that the rule be clarified that 
``remanufactured'' equipment can only qualify where a demonstrated and 
consistent remanufacturing process is performed on the equipment. The 
commenter was concerned that USDA not award funding to ``refurbished'' 
generators that are likely to fail in several years and cease to 
operate due to lack of parts and expertise. According to the commenter, 
this is a small but real problem in the used wind turbine market that 
USDA should be mindful of in determining which projects are eligible 
for funding.
    Response: Under the 9006 program, an applicant may propose to use 
new, remanufactured, or refurbished parts in their project. Where 
remanufactured or refurbished parts are proposed to be used, they must 
be reliable and meet the requirements of their intended application for 
the project's design life or as would a new piece of equipment. It is 
USDA's intent that sufficient information is submitted with the 
Technical Report to allow a thorough evaluation of the project to occur 
during the technical review to allow the reviewers to assess the 
likelihood of success for all projects, including those proposing to 
use refurbished or remanufactured parts. Applicants proposing to use 
such parts are advised that they may need to provide more information 
in their Technical Report to justify and support the use of such 
refurbished or remanufactured parts.
    Comment: Several commenters inquired as to whether equipment used 
for wind projects should be restricted to new and unused equipment 
only, or whether remanufactured or refurbished equipment could also be 
used. One commenter specifically noted that used equipment not be 
allowed.
    Response: As noted in the previous response, remanufactured or 
refurbished equipment is allowed under the 9006 program. However, USDA 
does not believe that used equipment should be allowed because the 
quality of used equipment cannot be determined. Therefore, we have 
added a definition of ``used equipment'' to the rule to distinguish 
``used equipment'' from refurbished or remanufactured equipment, which 
is allowed if such equipment is essentially equivalent to new and 
unused equipment.
    Comment: One commenter requested clarification on the role of 
third-party operators. The commenter notes that the proposed rule 
specifies that the applicant must be the owner of the project and 
control the operation and maintenance of the proposed project, and that 
a qualified third-party operator may be used to manage the operation 
and/or maintenance of the project. The commenter stated that, as they 
understood the section, large wind projects using business models that 
utilize equity investors to take advantage of the Federal production 
tax credit are eligible. In this case, the applicant remains the 
``general partner''

[[Page 41275]]

in the limited liability corporation, while the equity partner is a 
``limited partner.'' Some form of this business model is used by most 
successful farmer-owner large turbine wind projects. As such, the 
commenter recommends that USDA not limit an applicant's ability to 
bring in equity partners to take advantage of tax credits. It appears 
that the current language is sufficient for this purpose, but the 
commenter believes it is an issue that merits some scrutiny.
    Second, some definition or clarification of what constitutes a 
qualified third-party operator is needed. Clarification of this 
definition is important because State USDA officials have made 
different interpretations on what a ``qualified third-party operator'' 
is.
    Response: USDA agrees that the rule should not limit an applicant's 
ability to bring in equity partners as described by the commenter and 
has revised the final rule to allow ``passive investors'' to 
participate in the 9006 program.
    The commenter also requested some definition or clarification as to 
what constitutes a qualified third-party operator, because of the 
potential for many different interpretations being made by Agency 
employees. The Agency has included a definition of ``qualified party,'' 
which provides general guidance.
    While this definition has been added, it is USDA's intent that the 
determination of who actually qualifies as a ``qualified party'' will 
be made by the technical reviewers and not by State USDA staff. As the 
pool of technical reviewers will be small (perhaps two or three per 
technology), USDA anticipates that different interpretations will not 
be an issue. In addition, what constitutes a qualified party will vary 
depending on the specific technology being proposed. USDA believes the 
best place to deal with this determination is at the technical review 
stage and not in the regulations implementing the 9006 program.
    Comment: One commenter suggested that USDA limit loan guarantees 
(and direct loans, if made available) to farm-scale systems. The 
commenter referred specifically to wind turbines, where scale should be 
defined by the ability to provide significant electricity to the grid 
to meet national needs. The commenter recommended that individual wind 
turbines should be greater than 50 kW and less than 999kW, but that 
tower heights should not be limited. According to the commenter, the 
development of self-erecting towers, which do not require the use of 
large cranes for installation and maintenance with their specialized 
infrastructure, make it feasible for farm scale turbines to be deployed 
on tall towers to efficiently capture the higher speed and less 
turbulent winds at higher altitudes.
    Response: USDA disagrees with the commenter. USDA believes that the 
loan guarantee program should be available to all renewable energy 
projects regardless of size if the project and the applicant meet the 
eligibility criteria. Therefore, USDA has not revised the rule as 
suggested by the commenter.
    Comment: One commenter stated that by restricting grants and loans 
to existing commercial energy systems, the proposal acts to impede real 
progress in renewable energy. The commenter recommended that USDA fund 
innovative/new types of renewable energy projects at the 75 percent 
level. Referring to U.S. Code Title 18, Part I, Chapter 105, Sections 
2151 and 2156, the commenter stated that it is illegal to interfere 
with national defense preparations, and claimed that the proposed rule 
acts to prevent the development of innovative renewable energy 
technologies, helps to sustain the demand for U.S. petroleum imports 
from the volatile Middle East, and sabotages efforts to reduce 
dependence on petroleum imports, as well as homeland security efforts.
    Response: By statute, USDA is limited to funding projects at the 25 
percent level for grants and at the 50 percent level for loans. We 
cannot increase this to 75 percent as requested. To the extent that the 
commenter is suggesting that this program be used to fund renewable 
energy technologies still in the research and development (R&D) stage, 
as noted in a previous response to this commenter, it is DOE's 
responsibility, not USDA's, for assisting in the development of 
innovative and new types of renewable energy projects.
    Comment: One commenter objected to provisions requiring the 
applicant or borrower to be the owner of the system and also to control 
the operation and maintenance of the project. The commenter felt that 
this would exclude many energy installers and energy service providers. 
The commenter recommends that USDA should ``adjust eligibility criteria 
or modify the program to allow for rural small business with expertise 
in renewable energy and energy efficiency installation to aggregate 
projects and submit applications without ownership requirements.'' A 
second commenter also recommended that rural small businesses with 
expertise in renewable energy and energy efficiency installation be 
allowed to aggregate projects and submit applications without being 
required to retain ownership and control of all systems.
    Response: USDA disagrees with the commenters. As noted in a 
previous response, the 9006 program is for the purchase of renewable 
energy systems and energy efficiency improvements. By purchasing 
either, one becomes the owner. USDA, therefore, believes ownership 
requirement is an inherent part of this program and has not revised the 
rule as requested.

E. Application and Documentation

General
    Comment: One commenter recommended that applicants be encouraged to 
partner with intermediaries that provide ``full service'' energy 
assistance, which would include (1) help in applying for Section 9006 
awards; (2) conducting energy audits; and (3) project management.
    Response: USDA concurs that it would be useful to applicants and 
USDA if applicants partner with ``intermediaries'' to provide full 
service energy assistance. However, the approach used by the applicant 
in developing their application and obtaining other services is a 
business decision and beyond the scope of the regulation. Therefore, 
this comment has not been adopted.
    Comment: Several commenters suggested that USDA allow applications 
on-line or on a CD-ROM.
    Two commenters recommended that USDA allow applicants to submit 
proposals electronically, either on-line or on a CD-ROM. This will 
enable complete technical review and scoring based on full 
applications.
    Three commenters suggested that an on-line application process 
would reduce redundant and duplicative entries by allowing common 
information to be populated on required forms. It also would guide 
applicants through the process and thereby reduce the number of 
incomplete applications, and it would standardize the final application 
documents, thereby facilitating application review by Rural Development 
and NREL staff(s). Rural Development has experience in developing such 
an online application system for lenders in its B&I Loan Guarantee 
program.
    Another commenter discussed a possible online application process, 
stating that while this is a great option to have, it should not be the 
only means by which an applicant can apply for the program. High-speed 
Internet access is not widely available in rural America and dial-up 
access can make an on-line application process slow and

[[Page 41276]]

tumultuous. Rural America is in the process of transitioning to 
computer-based records and applications. If USDA made applying for the 
program an on-line only process, there is a serious risk that many 
potential applicants would be inappropriately excluded from the 
program. We would also suggest that USDA develop application forms and 
templates that can be downloaded and completed off-line. The forms 
should be available in formats that are accessible for a variety of 
operating systems (i.e., Mac and Windows) and word processing software 
(i.e., MS WordTM and WordPerfectTM).
    Response: USDA policy is to provide electronic application 
capabilities. This capability will be developed for this program after 
promulgation of the final regulation. The standard government forms are 
already available electronically. CD ROMS and faxed information is 
acceptable at this time. Along with evaluating the possibility of on-
line applications, USDA will consider the security of such submittals.
Streamline and Simplify Application Process
    Comment: Many commenters recommended that USDA adopt a less 
burdensome application process for smaller projects. Some of these 
commenters suggested the development of a short-form. Commenters felt, 
for example, that the application process was too complex for energy 
efficiency improvements, the effort to apply too extensive relative to 
the benefit obtained, the burden was unreasonable for small producers, 
and the entire application process was discouraging to potential 
applicants.
    Response: USDA agrees with the commenters that a more streamlined 
approach is needed for smaller projects that will reduce the burden to 
the applicant, but at the same time provide the Agency with sufficient 
information to evaluate the merits of the proposed project. To this 
end, USDA has implemented a simplified application procedure for grant 
projects with total eligible project costs of $200,000 or less. The 
simplified application procedure requires significantly less effort on 
the part of the applicant by requiring less detailed Technical Reports. 
In addition, the less detailed Technical Reports may also be submitted 
for guaranteed loans for projects with total eligible project costs of 
$200,000 or less.
    Comment: One commenter recommended that USDA simplify the 
application process for projects less than 200 kW.
    Response: As noted previously, USDA has implemented a simplified 
application process for grant projects with total eligible project 
costs of $200,000 or less and for both grants and guaranteed loan 
applications, a less detailed Technical Report for projects with total 
eligible project costs of $200,000 or less. USDA elected to do this 
based on cost rather than capacity because cost cuts across all 
technologies (not all projects could be described in terms of 
kilowatts).
    Comment: One commenter stated that the burden analysis estimates 
the annual cost over a 3-year period has been $1.9 million for an 
estimated 388 applicants. This means an average of about $5,600 per 
applicant is needed to participate in this program. If a farmer or 
rancher is netting $25,000 per year, which is generous in many cases, 
the program is demanding an outlay of 22 percent of annual profits to 
participate. Also, if the grant received is fairly large, say $25,000 
on a $100,000 project, the ``burden amount'' is still 22 percent of the 
grant received since application costs are not allowable project 
amounts. This defacto increases the participants match amount to 
$80,600 or a 76 percent match ($80,600/$105,600 = 0.763). For medium to 
smaller sized operations, the estimated burden costs are significant.
    Response: As noted in an earlier response, USDA is implementing a 
streamlined application process for projects with total eligible 
project costs of $200,000 or less. This streamlined application process 
will result in less burden to those who use it, including the smaller 
sized operations. Also, USDA cannot accommodate the commenter's request 
because the statute limits the matching funds for grants to 25 percent 
and USDA does not have the authority to raise this limit.
Direct Rebate Program
    Comment: Many commenters recommended adding a rebate program to the 
9006 program to reduce the burden for commercially viable, proven, and 
environmentally beneficial technologies to help streamline the 
application process and reduce the administrative burden to USDA. One 
commenter suggested that a rebate program be a fixed grant amount for 
specific off-the-shelf technologies installed.
    Response: USDA is not authorized to use rebates in implementing 
this program. In lieu of such a program, USDA is implementing a 
simplified application process for grants where funds are disbursed at 
project completion. We believe the simplified application process 
achieves many of the burden reductions that could be achieved under a 
direct rebate program.
    The simplified application process is only available to projects 
with total eligible project costs of $200,000 or less. In selecting the 
$200,000 value, USDA first considered the exposure the Agency would 
incur if a project was approved, but never built--the higher the total 
eligible costs, the greater the exposure. For example, if USDA selected 
a value of $1 million to be funded at the maximum level of 25 percent, 
the Agency could lose $250,000 if the project was never completed, 
which USDA considers too high of an exposure. USDA then reviewed the 
type of projects that were funded under the 2003 and 2004 NOFAs. USDA 
assessed that projects with total eligible project costs of $200,000 or 
less tended to be smaller projects with a smaller likelihood of not 
being completed, thereby lowering the Agency's exposure. A $200,000 
total eligible cost project at 25 percent would result in a $50,000 
exposure by the Agency. While not an insignificant sum, the types of 
projects that would be built and the desire to open the project to more 
applicants led the Agency to select this value for the design build 
program with reimbursement at completion.
Pre-Applications
    Comment: Four commenters suggested that USDA add an optional pre-
proposal review step to the application process. They stated that some 
official department prior review of a one- to three-page Proposal 
Summary would give applicants an understanding of their eligibility and 
better guidance, before all of the expenses for a feasibility study are 
incurred. Pre-proposals are being used in some competitions to minimize 
the burden on proposal preparer and increase the overall quality of the 
submitted proposals that the reviewers must process. Pre-proposals are 
intended to provide intermediate feedback as to whether the applicant 
is on track in gathering and articulating some of the key information 
required for a successful project and whether that project would be 
appropriate for funding.
    One commenter suggested that the pre-proposal be structured to 
minimize inputs by the applicant, while providing evaluators and 
reviewers key information in determining the approval of the 
application. The pre-proposal could be structured in such a way to give 
evaluators enough insight on the project design so that more specific 
direction on the needs of a full proposal could be given to the 
applicant. The

[[Page 41277]]

commenter provided specific guidelines on how the pre-proposal process 
could be implemented.
    Response: USDA has decided not to formalize a pre-application 
process within the 9006 program because the Agency does not believe it 
is the best way to achieve the goals sought by the commenters. 
Applicants can obtain the same guidance that a pre-application process 
would provide by contacting their State Offices. USDA advises 
applicants to work with their State Offices as early in the application 
process as possible to help assess whether they and their projects are 
eligible prior to conducting other, more expensive application 
procedures. USDA will provide implementation and training materials to 
further help both the State Offices and prospective applicants. By 
providing this information outside the rulemaking process, USDA 
maintains greater flexibility in providing assistance to prospective 
applicants.
Technical Review
    Comment: One commenter suggested modifying and/or minimizing the 
technical reviews by NREL. If an engineer or engineering firm approves 
technical feasibility of the proposed project for the applicant, accept 
the information from the engineer. If NREL must perform a technical 
concurrence or refutation of the project, a system should be 
established that allows feedback to the applicants. If there is a bias 
against a particular technology or approach to renewable energy, 
communicate that with the States so they can perform better outreach.
    Response: USDA will review the technical feasibility of any project 
seeking funds under the 9006 program, regardless of the qualifications 
of the engineer or engineering firm hired by the applicant. Further, 
USDA or its designated contractor(s) will conduct the technical reviews 
in a manner that we deem fit and appropriate to the evaluation of the 
technical merits of each project. This review will be conducted without 
any bias on the type of project being proposed. If an applicant 
believes that his or her project has been unfairly denied, the 
applicant has the right to appeal that decision to USDA.
Application
    Comment: One commenter stated that in the past, technical reviews 
had been compromised due to missing portions of the application. The 
commenter recommended that applicants submit two copies, one to the 
National Office and one to the appropriate USDA State Office, thereby 
ensuring that both offices have the complete data required to evaluate 
the application.
    Response: USDA agrees with the commenter that two applications 
should be submitted, and the final rule has been revised to reflect 
that. However, in the final rule, the two copies will be submitted to 
the Rural Development State Office, which is the responsible office for 
implementing the 9006 program, including the scoring of the 
applications. The State Office will then forward a copy of the 
application and its score to the National Office, whose role is to 
establish the procedures for the 9006 program and to rank the 
applications from all 50 States.
Application Content
    Comment: One commenter stated that there is no mention of 
submitting organizational documents. The proposal only asks for a 
description of the business, farm, or ranch operation and ownership. 
The commenter stated that they had encountered applications stating 
they had a partnership, but when the reviewer asked for a copy of the 
partnership agreement--the applicants said it was a verbal agreement. 
Is that acceptable? What assurance is there that the applicants are a 
legally formed entity? Also, only by examining the Articles of 
Incorporation can you determine whether nonprofits were organized 
solely for charitable purposes.
    Response: USDA agrees with the comment and the final rule requires 
applicants, except for sole proprietors, to submit a copy of their 
legal organizational documents.
    Comment: One commenter, commenting on proposed Sec.  
4280.111(a)(4)(iii)(A), stated that, because the demonstration of a 
financial need is not an appropriate threshold factor, the explanation 
of such a need should not be required in the application.
    Response: Section 9006(b) requires a farmer, rancher, or rural 
small business to demonstrate financial need in order to be eligible 
for a grant under this program. Therefore, USDA must include this 
requirement. In the final rule, all grant applicants must submit a 
statement certifying that they have financial need. Those grant 
applicants not using the simplified application process must also 
submit sufficient information to allow the Agency to make its own 
determination of the applicant's financial need. For those grant 
applicants using the simplified application process, the Agency may 
request the applicant to provide supplemental information that will 
allow the Agency to make its own determination of the applicant's 
financial need.
    Comment: One commenter requested clarification on how USDA intends 
to use the information provided in the application by agricultural 
producers on the gross market value of their agricultural products for 
the calendar year preceding the year in which they submit their 
application. The commenter stated that if this information is to be 
used to document a producer as a true agricultural producer for program 
eligibility, this is fine. However, if a single year's crop gross 
market value is used by USDA to determine financial need, the commenter 
stated that this is inappropriate, noting that crop year 2004 is a rare 
year in which farmers in many States are realizing record yields in 
concert with steady crop prices. The commenter believes that this rare 
year of plenty should not be used to restrict eligibility for grants 
under the 9006 program.
    Response: USDA will use this information to determine whether an 
applicant qualifies as a ``small agricultural producer'' when it scores 
applications. While it will not be used to determine if an applicant is 
an agricultural producer, it will be supporting evidence that the 
applicant is an agricultural producer. Finally, it will not be used to 
determine an applicant's financial need. USDA does not believe the 
final rule needs any modification or clarification.
    Comment: One commenter asked whether applicants will be required to 
have a Federal tax ID number at the time of application, along with the 
DUNS number.
    Response: Yes, both are required.
    Comment: One commenter made the following points:
     The Table of Contents is superfluous and has not been 
helpful when it has been included.
     Pro forma balance sheet--only the cashflow statement has 
provided useful information when the application was for a grant only.
     Business market information is not really needed for 
renewable energy systems if the applicant has a power purchase 
agreement or letter of intent to do so.
    Response: In the final rule, the Agency has elected to keep the 
Table of Contents. It assists the applicant in organizing its 
application materials to its best advantage. It itemizes requested data 
to ensure complete information at the outset. It acts as an organizer 
of information for more efficient and timely review.

[[Page 41278]]

    With regard to the pro forma balance sheet, we have elected not to 
require it for projects with total eligible project costs equal of 
$200,000 or less. For very small businesses, pro formas are not always 
as accurate or helpful as they are for larger projects. Therefore, we 
have eliminated the requirement for pro forma balance sheets for 
smaller projects. However, we have retained it for larger projects 
(i.e., those projects with total eligible project costs greater than 
$200,000) due to the nature, scope and complexity, and financial risk.
    Finally, the specific requirement for business market information 
from the general application section has been removed, but is still 
required in the Technical Reports for certain projects where such 
information is important to the feasibility of the project. In 
addition, such information would be provided in the business-level 
feasibility study, if one is required.
    Comment: One commenter referred to the credit reports required for 
those owning more than 20 percent and suggested an exception for 
nonlocal financial owners making use of Federal tax credits.
    Response: USDA has revised the rule to make it easier for passive 
investors, which would include nonlocal financial owners making use of 
Federal tax credits, to participate in renewable energy projects. To 
this end, we have revised the credit report requirement such that 
credit reports are not required for passive investors (and for those 
corporations listed on a major stock exchange).
Power Purchase Agreement (PPA) and Interconnection Agreements
    Comment: Five commenters recommended that USDA exempt 100 kW or 
less renewable energy projects from the requirement of having a PPA or 
interconnection agreement. According to the commenters, renewable 
generators up to 100 kW are guaranteed the right to interconnect under 
Section 210 of Public Utilities Regulatory Policies Act (PURPA), 1978. 
In most States the interconnection rules, including net metering 
availability, are spelled out. No PPA or, according to one commenter, a 
project-specific interconnection agreement, is required. One of the 
commenters stated further that, in most States, the interconnection 
rules, including net metering availability, are spelled out and that no 
PPA or project-specific interconnect agreement, which can take 
considerable time and expense to obtain, is required.
    Response: USDA disagrees that projects funded under the 9006 
program should not be required to obtain a PPA or an interconnection 
agreement when the applicant intends to sell power generated by the 
proposed project. For many of these projects, the ability to sell power 
makes them financially feasible. If the project is interconnected with 
an electric power system, it is inherent that an interconnection 
agreement and a PPA must be made. These agreements and arrangements are 
covered by different regulations and policies (State, Federal, public 
utility) that are beyond the scope of the regulation. Agreements with 
the utility buying the power will help ensure USDA that it is funding 
projects that will come to fruition.
    Comment: One commenter stated that requiring the applicant to 
provide an interconnection agreement or a letter of intent for an 
interconnection agreement should not be an application requirement for 
any project pursuant to this program. The commenter stated that this 
provision forces the applicant to rely upon the third-party utility to 
provide assistance or information that may not be required of that 
utility by law. While all utilities must interconnect in Iowa, the law 
does not currently provide a time in which the utility must 
interconnect, and the applicant may not be able to obtain such a letter 
from the utility in order to meet the requirements of the application 
process. Second, utilities do not often enter into interconnection 
agreements until the engineering plans are submitted, potentially 
amended, and approved by the utility, and the regional transmission 
operator if necessary; and so unless a project is ready for the 
installation and construction phase, it is unlikely that the applicant 
would be able to obtain an interconnection agreement or even a letter 
of intent.
    Response: As noted in the previous response, USDA is still 
requiring applicants to obtain the necessary PPA and/or interconnection 
agreements prior to USDA obligating funds to a project. We concur with 
the commenters that an agreement or letter of intent may be beyond the 
applicant's ability to obtain at the time of application. Therefore, 
USDA has revised what is required at the time an application is 
submitted. Under the final rule, an applicant is required in the 
application to demonstrate familiarity with the regulations and utility 
policies. In order to do this, it is necessary that the applicant be 
knowledgeable of the interconnection and power purchase arrangement 
available to them, and that they demonstrate to USDA that they have a 
working knowledge of these requirements for their project. In addition, 
in the Technical Report, the applicant is required to describe the 
utility system's interconnection, requirements, power purchase 
agreements, or licenses where required. USDA advises applicants to 
provide sufficient information in this regard because the 
interconnection and PPA are critical elements in determining whether 
the project has technical merit.
    Because USDA considers these agreements to be critical, the scoring 
of applications for those projects that are proposed for 
interconnection will receive the maximum available points if the 
necessary agreements or letters of intent to award these agreements are 
submitted with the applications.
    Comment: One commenter stated that applicants are required to 
provide an economic impact analysis for their project. The commenter 
feels this is an additional area to streamline, improve, and simplify 
the application process by eliminating this requirement for 
agricultural producers and small businesses.
    Response: An economic impact study is part of the business-level 
feasibility study. As noted in a later response, the business-level 
feasibility study is mandatory for renewable energy projects with total 
eligible project costs greater than $200,000 under the 9006 program. 
When a business-level feasibility study is required, the economic 
impact study is still a part of such a study.
    Comment: One commenter requested that renewable energy systems that 
the exemption for providing a feasibility study conducted by a 
professional engineer (PE) be raised to more than $100,000. The 
commenter observed that his organization had forgone project 
applications because the feasibility study would have cost more than 
$25,000.
    Response: Business-level feasibility studies prepared by an 
independent, qualified consultant, not necessarily a PE, will be 
required for renewable energy projects with total eligible project 
costs greater than $200,000.
    Comment: Several commenters expressed concern regarding consistency 
with the $100,000 threshold throughout the rule and the units 
associated with it, as it related to the proposed feasibility studies 
and other requirements.
    One commenter stated that the proposed rule's requirements for a 
feasibility study were inconsistent. In this section, a feasibility 
study is required for projects with a total cost above $100,000, while 
in the SUPPLEMENTARY INFORMATION section, a feasibility study is 
defined as being required for grant requests over $100,000. Commenter 
stated that these

[[Page 41279]]

inconsistencies would confuse the reader and recommended that the 
wording be changed so that a feasibility study was required when the 
total project cost was above $250,000.
    Another commenter recommended that feasibility studies be required 
only for projects over 100 kW.
    A third commenter stated that the threshold for requiring a 
feasibility study for renewable energy projects is not consistent 
between the preamble discussion and the proposed regulation. In the 
preamble, it refers to projects in excess of $100,000, and in the 
regulations, it refers to requests in excess of $100,000. As the 
request cannot exceed 50 percent of the total project, this is a 
significant difference. The commenter recommended the threshold be 
based on the size of the project and not the size of the request (this 
is a more consistent value to base the requirement on); however, the 
threshold should be increased to $500,000. The Rural Development Office 
should have the ability to waive this requirement if the application is 
for an existing business and the renewable energy system does not have 
a significant impact on their operation (similar to the ability to 
waive feasibility studies in the current B&I program).
    A fourth commenter requested clarification of $100,000 threshold 
for additional requirements. The multiple references to the $100,000 
threshold for ``feasibility study for renewable energy systems,'' 
``services of professional engineer,'' and ``energy audits'' is unclear 
in the proposed rule and needs clarification (i.e., either total 
project request or total project cost). The commenter recommended a 
return to the language and requirements as stated in the 2004 NOFA 
published in the Federal Register (69 FR 25234-25259, May 5, 2004) for 
``feasibility study for renewable energy systems.''

--Feasibility study for renewable energy systems. Each application for 
a renewable energy system project, except for requests of $50,000 or 
less, must include a project-specific feasibility study prepared by a 
qualified independent consultant.''

    If stating thresholds in terms of total project costs, it would 
read:

--Each application for a renewable energy system project, except for 
projects costing $200,000 or less, must include a project-specific 
feasibility study prepared by a qualified independent consultant.''

    For the use of the services of a PE, the proposed rules reads: 
``Projects costing more than $100,000 require the services of a 
professional engineer (PE).'' This requirement would no longer fit the 
above statement on requirements for a feasibility study; thus, we 
suggest a change of threshold for the requirement of a PE.
    The commenter suggested the following language:
    ``Project requests of more than $50,000 will be required to employ 
the services of a professional engineer (PE).''
    If stating thresholds in terms of total project, costs, it would 
read:
    ``Project costing more than $200,000 will be required to employ the 
services of a professional engineer (PE)''
    The energy audit requirement is a good requirement for any energy 
efficiency project. The commenter suggested the following language if 
all thresholds are stated in the amount requested:
    ``For energy efficiency improvement projects with a request in 
excess of $25,000, an energy audit is required.''
    A fifth commenter stated that using the word ``request'' is 
unclear. A question remains as to whether feasibility studies are 
required for projects with a total cost of $100,000 or if they are 
required for those projects in which the Federal share or Federal 
request will be $100,000. The latter would provide for feasibility 
studies required for those projects that cost $400,000 or above.
    Response: First, an explanation of the thresholds used by USDA is 
discussed in other comments in this preamble.
    Second, as noted previously, the requirement for a stand-alone, 
business-level feasibility study will be required for renewable energy 
projects with total eligible project costs greater than $200,000.
    Third, in the final rule, with two exceptions, all levels at which 
certain requirements are incurred (e.g., energy audits, use of a PE) 
are now consistently expressed in terms of ``total eligible project 
costs.'' The first exception is under the loan program, where certain 
requirements are associated with ``loan requests.'' The second 
exception is under Sec.  4280.115, where certain requirements are based 
on the cost of the contract.
Business-Level Feasibility Study for Renewable Energy Systems
    Comment: One commenter stated that according to the proposed rule, 
``because of factors of cost and complexity for renewable energy system 
projects of more than $100,000 a project-specific feasibility study 
will be required.'' It is our understanding that feasibility studies 
that are completed prior to the award are eligible for reimbursement 
under this program. If feasibility studies completed prior to the award 
are not eligible for reimbursement, the commenter recommended that two 
phases of the program be implemented. One phase for the feasibility 
study/business plan/planning phase and one phase for project 
implementation. The commenter proposed that this could be similar to 
the Value-Added Producer Grant program. By allowing applicants to 
conduct a feasibility study with program funds before implementing 
their project, USDA can ensure that the implemented projects are of 
high quality and have a high probability for success.
    Response: In the proposed rule, the requirement for a project-
specific feasibility study (renamed as a business-level feasibility 
study in the final rule to better characterize the type of study and to 
distinguish from the Technical Report) was mandatory for renewable 
energy projects of more than $100,000. In the final rule, the Agency 
has revised this position to reflect that a business-level feasibility 
study will be required for renewable energy projects with total 
eligible project costs greater than $200,000.
    As noted in a previous response, the 9006 program is for the 
purchase of renewable energy systems and energy efficiency projects. 
The preparation of the Technical Reports are legitimate project costs 
and thus, are eligible costs for reimbursement provided the project is 
awarded a grant or loan. USDA will not pay for the costs of a study 
that are incurred for a project that is not successful or for ``stand 
alone'' studies.
Technical Reports
    Comment: Two commenters recommended streamlining the application 
process for small projects by reducing the technical requirements or by 
incorporating this information into the project narrative. One of the 
commenters was specifically concerned about the requirements for small 
wind and small solar projects.
    Response: As noted in previous responses, USDA has provided a 
simplified application process for grants for projects with total 
eligible project costs of $200,000 or less. The Agency believes most 
small solar and small wind projects will be eligible for this 
simplified application process. Part of the simplified application 
process is the development of a ``reduced'' technical report for these 
smaller projects. The Agency believes that the reduced technical 
reports will significantly streamline the application process and 
reduce the burden to the applicant.

[[Page 41280]]

    Comment: One commenter recommended including the general 
requirements in the regulation while developing more specific 
requirements in a guidance document that can be updated periodically.
    Response: USDA, in general, agrees with the commenter on both 
comments. First, the rule has been revised to include the general 
requirements for the Technical Report in the body of the rule, but with 
more specific requirements in the appendices to the regulation, not as 
guidance documents.
    Comment: One commenter suggested that identifying the schedule of 
utilities and regional transmission operators, where necessary, is not 
always possible. According to the commenter, the requirement for 
applicants not interconnecting to identify the interconnection and PPAs 
and schedules thereof is not necessary for those applicants not 
interconnecting. The commenter pointed out that many utilities do not 
require interconnection agreements for projects installed on the 
customer side of the meter, but the utility may require some safety 
equipment assurances and so simple proof of that investigation should 
be appropriate.
    Response: USDA agrees with the commenter that such agreements are 
not applicable to applicants who are not interconnecting. The revised 
rule language now uses these agreements as an illustration of one of 
the types of agreements that may be necessary.
    Comment: One commenter stated that the last sentence in proposed 
Sec.  4280.111(d) should be removed or explained further. The proposed 
rule does not clearly establish a threshold level, beyond those 
projects that cost more than $100,000, at which projects will require a 
professional engineer. The proposed rule does not establish who will 
decide what level of engineering is required or what kind of public 
safety issues will require the assistance of an engineer.
    Response: The sentence the commenter is referring to says: 
``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.'' In general, the level of 
engineering required for smaller projects can widely vary. It is not 
practicable within this rulemaking to address each situation that may 
arise. Each project will have its own specific circumstances--the 
nature of the project itself, the site where the project is located, 
and the State and local requirements (e.g., public safety issues) that 
apply to the project.
    It is the proper role of the applicant to ensure public safety. It 
is the applicant's responsibility to determine what are the proper 
measures to be put into place. These measures may require the services 
of a PE. The language is included so as not to transfer the applicant's 
responsibility to USDA. The Agency will evaluate the technical merit of 
each project. Certain projects, especially those using pre-commercial 
technologies or those not pre-engineered, may be determined by USDA to 
need the services of a PE to assure technical viability.
    USDA advises all applicants to work with their State Office and 
other knowledgeable technical entities to determine whether their 
project requires the use of a PE and the type of PE. For these reasons, 
the Agency has not changed this language (although in the final rule 
the level at which a PE is required has been raised to $200,000 total 
eligible project costs).
    Comment: One commenter also referred to the last sentence in 
proposed Sec.  4280.111(d). This commenter noted that there could be 
many engineers involved on one project that oversee many different 
areas of the project that could hold responsibility for the design 
(civil, structural, mechanical, process, and electrical).
    The commenter believes that the requirement should state something 
along the lines of: ``Projects costing more than $100,000 will be 
required to employ the services of a professional engineer (PE), or a 
team of Professional Engineers that will ensure that all aspects of the 
project conform to National, State, and local codes.''
    Response: USDA agrees that a team of professional engineers can be 
used, and has revised the wording accordingly.
    With regards to referencing national, State, and local codes, 
compliance with these codes is addressed in the Technical Report 
requirement and USDA does not believe it necessary to repeat it here. 
We point out that, as installed, all projects have to meet all 
applicable national, State, and local codes. If the project is not 
compliant with applicable codes, it is not eligible for funds under the 
9006 program.
    Comment: One commenter asked about the use of foreign engineering. 
Questions raised by the commenter were: What if the project is designed 
by an engineer in Germany? Other countries do not have the same 
licensing requirements for engineers as the United States does, so 
there cannot be a ``PE'' certifying the technology. How are foreign 
engineers going to be able to ensure their technology meets or exceeds 
U.S. regulations when they are not even able to review documents 
without the use of an interpreter?
    Response: There is nothing in the rule that prohibits an applicant 
from employing the services of a foreign engineer, as long as the 
foreign engineer is licensed in the area in which the project will be 
built. This is required of any engineer, American or foreign--the 
engineer must be licensed in the jurisdiction in which the project is 
located regardless of where the person resides or what country the 
engineer is a citizen of. USDA notes, however, that an applicant does 
not need a PE to certify the technology. If an applicant uses foreign 
engineers who are not appropriately licensed, then someone who is 
properly licensed will have to be employed. USDA expects that most 
foreign engineers that an applicant would use for renewable 
technologies have done business in the United States and are familiar 
with the necessary licensing requirements. Thus, we do not expect the 
use of foreign engineers on projects under this program will be a major 
issue.
    Comment: One commenter stated that applicants not planning to sell 
the excess energy generated should not be required to provide data 
identifying existing demand, supply, and the market niche for the 
energy produced.
    Response: USDA agrees with the commenter. Further, the Agency 
believes that these data are not required of any applicant, except as 
they would be needed when a business-level feasibility study is 
required. The final rule has been revised accordingly.
    Comment: One commenter, commenting on proposed Sec.  
4280.111(d)(1)(i), suggested removing the first sentence completely or 
providing some parameters as to how USDA will qualify project teams.
    Response: The sentence referred to by the commenter states ``The 
biomass project team will vary according to the complexity and scale of 
the project.'' While USDA has removed this sentence in the main body of 
the rule, we have retained it for the Technical Reports in Appendix B. 
We point out that it is the applicant's responsibility to assemble a 
qualified project team, the exact composition of which will vary from 
project to project. If an applicant is unsure of what constitutes a 
qualified project team, USDA advises the applicant to contact their 
State Office, trade associations, and other knowledgeable persons in 
the renewable technology field. It is our intent to ensure that 
applicants adopt good engineering and business practices in developing 
their projects; it is not our intent to define what those practices 
are.

[[Page 41281]]

Once an application has been received, it will be reviewed by experts 
in the technology for that project. These experts will be able to 
assess the qualifications of the proposed project team.
    Comment: One commenter, commenting on several sections of the rule 
(e.g., proposed Sec. Sec.  4280.111(d)(1)(ii)(A), (C), and (F) a