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[This comment was submitted to CARB and has been uploaded by CARB
staff on behalf of the entity identified below.]

Name: California BioEnergy
Date: 9-13-18
Subject: Comments on SB1383 Pilot Financial Mechanism

Dear Mr. Wade:
[Sam Wade, Transportation Fuels Branch Chief, CARB]

California Bioenergy LLC appreciates the work ARB has done in
developing a conceptual pilot financial mechanism ("FM") to reduce
the economic uncertainty associated with the value of LCFS credits.
We want to thank you for the opportunity to submit comments and to
work with you and other stakeholders to craft a successful
program.

As discussed, a FM is critical to bring in nonrecourse debt. Banks
we anticipate, based on historic discussions, will not accept the
revenue risks of the LCFS and RIN programs. A financial mechanism,
with a floor price in excess of established debt service coverage
ratios solves this problem.

Since interest rates for debt are substantially lower than the
returns sought by equity, the levels needed for the FM floor price
are lowered. An ability to fund a project substantially with debt
will also increase the number of projects that are developed, since
project developers will need to raise a lower amount of equity
capital. This will be important for both dairy and nondairy
projects. To be direct, it will also mean a greater portion of
project returns will go to project owners and farmers (for us
project owners and farmers are combined) versus leaving the
community. It will also result in greater project control by these
entities, who will be hands on and likely the best to management
them.

Another key role of a FM is to ensure long-term project operations.
As studied, in the dairy sector the LCFS and RIN credit programs
account for approximately 95% of current revenues. A precipitous
drop could put operating projects at risk. Traditional equity
investors will close down a project that is no longer financially
viable. With substantial state financial contributions and given
the climate goals and urgency, it is key to build projects that
will remain operating for decades.

Thus it would be best to have a FM in place for many years. It is
important to point out that the level of the FM floor price goes
down over time. First the FM should be high enough to pay off debt
and equity (which will be a smaller amount with a debt
contribution). However, once debt is paid off the FM floor price
simply needs to exceed operating costs (including necessary ongoing
capital reinvestments to secure long-term operations).

As a result, we suggest the proposal to end the program after ten
years is modified. It may have two or three stages: a floor price
during a ten-year debt term and a price after the debt term. A
modification may be a floor price for the first five years (helping
secure an equity return), followed by a five-year period to pay off
the balance of debt, followed by a second ten-year lower floor rate
to cover operating costs.

Under a confidentiality agreement if ARB is interested we are
pleased to disclose our estimates of O&M costs, debt service,
capital reinvestments, and other relevant costs. We suspect
competitors will similarly be comfortable sharing these numbers.

Based on our internal discussions after our call we have a handful
of suggestions of next steps. To increase the chance that a program
is developed, we think it would be very helpful for ARB to make a
recommendation on the program approach. To get to that point for
the dairy pilot FM we would suggest a small, focused working group
with a handful of developers. We have worked constructively with
competitors on this topic and other topics and believe all parties
would benefit.

A few key CalBio recommendations follow.

1. We support the inclusion of RINs in the FM as well as the price
of natural gas. RINs contribute substantially to project success.
This inclusion should greatly decrease the likelihood of falling
below the FM floor price as long as the RIN program continues.

2. A creative proposal was put forward to turn to private insurers
to provide guarantees following an initial level of guarantee from
the state. An advantage of a FM working group would be to enter
into discussions with private insurers and see if it is available.
Per AJW's analysis, this may greatly decrease the annual capital
allocations by the state.

3. ARB suggested three state agencies to administer the program:
the State Treasurer (CPFTA or CAEATFA), CEC, and CDFA. (ARB
excluded itself based on a concern over a potential conflict of
interest.) We would recommend ARB selecting the agency and having
them as part of the focused working group. This agency could take
on such roles as running multiple estimates of the costs to the
state based on different approaches and securing proposals from
private insurers. The team will need good modeling resources.

4. The CfD and put option proposals are potentially complex
programs. It would be terrific if we could simplify the approach at
least for the dairy sector. At this point we recommend an
option/insurance approach. In addition, knowing the strike price
(floor price) and option/premium cost each year, may make it easier
both to enter into and to manage the program.

5. We would very likely be willing to pay an annual cost for
participation in a program. Our willingness to pay will of course
reflect the cost and the floor price/insurance guarantee. We may
also want to look at an upfront annual cost and potentially a
second payment after year end if the credit prices exceed a certain
level - thereby furthering the reserves in the state coffers. The
project owner would have an annual commitment, and we would suggest
that the owner doesn't have the ability to cancel participation
based on market conditions. This will decrease the upfront costs
and may increase the total amounts brought in by the state. The
annual commitment will also help secure long-term project
operations.

6. There is a focus in the white paper on competitive solicitations
to get to the most economic price. Given the absence of experience,
project owners will only have estimates based on financial models.
It may be best to review economics with multiple developers and set
a pricing program. It would be a mistake to have program pricing
based on poorly thought out modeling or aggressive bets.

7. It is very important for a project to know it will be able to
secure access to the FM. This in turn enables the developer to
bring in bank, equity, grants - in other words to complete the
capital formation. Needing to enter a competitive solicitation
could slow development down substantially. It would be ideal for
projects that have reached a certain level of project readiness, to
be able to enter a queue and know that they will have access to the
program until allocated funds have run out.

8. The level of project readiness needs to be defined to prevent
projects that are not substantially advanced from holding back
viable projects. This would be a good topic for various parties to
discuss. The importance of the queue and queue rules will also
reflect the amount of state funding. For example, (i) entry into
the queue may require Lease and Feedstock agreements and advanced
permitting; (ii) holding one's place in the queue may reflect start
of construction by a certain date and subsequently reaching COD
(excluding external delays) by a certain date. An escrow payment
may or may not be a helpful component. It could potentially be a
prepayment of the first year's premium/option price. An approach
similar to one outlined here may make more sense than a fixed two
year start date per the ARB presentation. Project owners will want
to start as soon as possible (which will be easier for add-ons to
existing clusters). Delays beyond two years should be accepted both
to accommodate external delays and to decrease bankers' expected
conservative approach; we need them to feel certain that good
projects will return their capital.

9. The white paper raised the topic of integrating grant winners.
This is important if the funding option/insurance price is
competitively defined. If it isn't, but rather a fixed price, it
will also be important to take grant awards into account based on
amount of funds in the FM program. We don't want financed or even
built projects to take the available capacity. Built projects
should perhaps be limited to participation in the second ten-year
period, to help insure long-term project viability.

An important issue that is out of our scope is developing a dairy
pilot program that can be expanded for other LCFS credit generating
sectors.

We would like to thank ARB staff for the opportunity to comment,
and we look forward to working together with you and the broader
industry on the financial mechanism and other aspects of the LCFS
program.

Sincerely, 

Neil Black, President, CalBio

Original File Name: CalBio_ARB_Financial_Mechanism_Comments_9-13-18.pdf

Date and Time Comment Was Submitted: 2018-09-20 08:43:57