Actual Expenditures, Last Three Budgets, include funding sources: Actual Actual Estimated Fund Fees/Other Funds $1,505,554 $1,285,972 $814,949

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1 Actual Expenditures, Last Three Budgets, include funding sources: Actual Actual Estimated Fund Fees/Other Funds $1,505,554 $1,285,972 $814,949 Number of FTEs: 2013 FTE 2015 FTE 2017 FTE (Est.) ORS Authority ORS Chapter 470 Legislatively-directed Purpose ORS directs SELP to deploy loan funds using standards and criteria that encourage diversity in projects funded, give preference to projects proposed by individuals and small businesses, ensure acceptability of environmental impacts and require consideration of the potential contribution of a project if developed at other suitable locations to meeting the energy needs of the state. 1. What is the objective of this program or function? Describe the major activities performed under this program. Explain why these functions are still needed. 1 Core Program Function The Small-Scale Energy Loan Program supports State of Oregon energy policy by providing public, private and tribal stakeholders access to energy project capital. SELP issues Article XI-J general obligation bonds to originate fixed-rate long-term loans for qualified Oregon energy projects that invest in energy conservation, renewable energy, and alternative fuels, or that create products from recycled materials. Over SELP s 35-plus-year history, the program has issued more than 900 loans to recipients across the state. Insufficient access to project capital can be a significant obstacle for energy project developers, and when the program was first developed, capital for energy projects was harder to secure through traditional lenders. While the lending environment today is much more favorable to energy-related projects, SELP routinely receives loan inquiries from a wide range of potential borrowers looking to finance their energy projects, suggesting the loan program continues to have a role in supporting energy project finance in Oregon. Ancillary Functions In addition to operating the program s core lending function, SELP staff also administers the Alternative Fuel Vehicle Revolving Loan Fund, a non-enterprise fund established under ORS to promote fleet adoption of alternative fuels by providing capital for the cost of fleet conversion or the incremental cost of new vehicle purchases.

2 2 ODOE maintains several non-enterprise funds related to energy financing. Two of these, the Clean Energy Deployment Fund (ORS ) and the Jobs, Energy and Schools Fund (ORS ), have active fund balances. These accounts are reconciled by SELP staff and incorporated into the loan program s financial statements; however, the SELP program does not have discretionary use of these funds. SELP staff are asked periodically to provide testimony regarding energy financing to the Oregon Public Utility Commission on cases in which ODOE has elected to intervene. Example: PUC Docket UM 1734; PacifiCorp s request to reduce the qualifying facility contract term and lower the qualifying facility standard contract eligibility cap. The team also staffs the volunteer Small Scale Energy Loan Advisory Committee (SELPAC), which provides input on loans. See next section for more details on SELPAC s role. 2. Describe how the program or function is administered. Include flowcharts, timelines, or other illustrations as necessary to describe agency policies and procedures. Program Staff Deployment SELP staff administer all aspects of loan development, applicant underwriting, loan servicing, portfolio management, accounting and daily program operations. Technical underwriting is conducted in collaboration with relevant agency technical staff as needed. The loan program is supported by the Small Scale Local Energy Project Advisory Committee (SELPAC) subject to ORS The nine appointed committee members represent the interests of Oregon citizens and provide broad subject matter expertise to the program in the areas of energy technology, natural resource development, environmental protection, finance, agriculture, local government operations and utility operations. SELPAC is responsible under statute for consulting with the department on the establishment of the standards and criteria for projects to be funded by the loan program as well as making recommendations to the agency director whether program applicants meet the established standards and criteria thus meriting program financing and in what amount. Fund Management The loan program operates as an enterprise fund and relies on program fees and loan interest to sustain operations. The program operates two major funds to carry on program activities: Small Scale Local Energy Project Loan Fund This fund and its sub-accounts, created by Article XI-J of the Constitution and appropriated to the Department under ORS to hold the proceeds from article XI- J bond sales, is the funding source for program loans. Small Scale Local Energy Project Administration and Bond Sinking Fund This fund, created under ORS , is the source for payment of all loan program expense. This fund and its sub-accounts consist of all program fees and interest earned,

3 program loan receivables, monies transferred from the Small Scale Local Energy Project Loan Fund and any gifts, grants or legislative appropriations. Loan Approval Process Applications to the loan program are initially reviewed and underwritten according to standards promulgated under ORS and the professional judgement and expertise of the SELP loan officers. Technical project review is conducted with the assistance of staff from the ODOE Policy and Innovation Division as warranted. Once the review and underwriting of an application has been completed, the department provides SELPAC with a written summary of the relevant findings and makes a recommendation regarding project funding and proposed loan terms. SELPAC in turn reviews the presented application and makes a recommendation to the agency director regarding financing and loan terms or conditions. The agency director is responsible for making loan approvals. Pursuant to OAR , in the following circumstances SELPAC review is not obtained and loan requests are directly referred to the agency director for approval: (a) Any loan request, other than state agency loan requests, of less than $100,000 (b) State agency loan requests of less than $500,000 (c) Loan assumption requests of less than $100,000 by non-governmental borrowers; and (d) Loan increase requests of less than $25,000 and less than 10 percent of the original approved loan amount where the total loan amount exceeds the limits set for committee review. Loan Funding Process SELP has the capacity to issue taxable and tax-exempt state XI-J general obligations bonds including private activity bonds to fund approved loan requests. The sale of XI-J bonds is facilitated by the State Treasurer through the Debt Management Division and only occurs after a loan has been approved. Because costs associated with issuing debts can be significant, the Debt Management Division typically requires the Department to identify approximately $5 million in approved loans before authorizing a bond sale. Loan amounts less than $5 million can be funded via a bond sale; however, doing so may require combining SELP needs with other state programs in the same sale. This can increase the complexity and cost of a sale and is therefore used infrequently. The loan program has historically used internal cash flow generation to fund smaller loans that are not large enough to merit the sale of bonds. This process involves transferring resources from the Small Scale Local Energy Project Administration and Bond Sinking Fund to the Small Scale Local Energy Project Loan Fund. The transfer of funds from the bond sinking fund to the project loan fund may only occur during periods of sinking fund adequacy as articulated under ORS (3). 3. Provide a summary of key performance measures and other outcomes that convey the effectiveness and efficiency of this function or program. 3

4 4 SELP has made 903 loans to date with the total amount loaned exceeding $612 million. The program has operated autonomously as an enterprise fund since inception in 1979 and is the oldest green financing program in the country. SELP has originated loans for energy projects located in all 36 Oregon counties. To date the program has suffered loan losses of approximately 5.5 percent of total originations, which is higher than insured U.S. commercial banks based on reported federal data. 1 However, using the same data set and excluding the two largest SELP loan losses, the program s percent of loan losses to loan originations becomes more favorable when compared to insured U.S. commercial banks on average, with a rate of 0.88 compared to 0.95 over the period surveyed. 4. Describe any important history regarding this program, including how the services or functions have changed from the original intent. Describe problems or lawsuits that have been encountered in this program. SELP was established by the Oregon State Legislature in 1979 under ORS Chapter 470 with a legislatively referred constitutional amendment passing in 1980 to authorize the issuance of state Article XI-J bonds for small scale local energy projects. The program made its first loan in 1981 and has operated continuously without general fund support since that time. Program Challenges Bond Sinking Fund Deficit SELP currently has a forecasted deficit in the Small Scale Local Energy Project Administration and Bond Sinking Fund. The cumulative forecasted deficit is currently $15.6 million through 2034 with the first bond sinking fund shortfall projected to occur April, A projected deficit in the bond sinking fund was first recognized in December 2008 and has been reported since that time on SELP financial statements, official bond sale summaries and in the program s biennial reports to the legislature. The sinking fund deficit is the result of $30.7 million in loan losses sustained on loans the department originated between the years 2007 and Of the $30.7 million in losses suffered, over $28 million is attributable to losses from two loans: Cascade Grain Products, LLC ($18.1M) and Peak Sun Materials Corporation ($10.2M). These two losses represent 84 percent of program loan losses to date. Lack of Program Funding In order to eliminate the bond sinking fund deficit without an infusion of outside capital, SELP must generate significant new loan volume every year going forward. A 2013 JP Morgan analysis of the SELP loan portfolio calculated new loan originations of $14.6 million would be needed annually over the lifetime of the loan portfolio to eliminate the bond sinking fund deficit. Historically, the loan program funded smaller dollar loans out of internal cash as many loan requests are not large enough to warrant a bond sale. Under the statutory organization of the program accessing program cash is accomplished through a transfer out of the bond sinking fund. Such transfers are permitted only when there is adequate forecasted 1 Federal Financial Institutions Examination Council (US), Total Net Loan Charge-offs to Total Loans for Banks [NCOTOT], retrieved from FRED, Federal Reserve Bank of St. Louis May 9, 2016.

5 cash flow in the bond sinking fund to meet all debt obligations. As the program has operated with a persistent projected sinking fund deficit for many years, no cash can be transferred from the bond sinking fund leaving SELP unable to fund new loans through internal revenue generation. In December, 2015 SELP staff was notified by the Debt Management Division that the Treasury Department would not facilitate additional SELP lending, eliminating any potential bond funding for energy projects or access to additional capital resources. Consequently, the loan program is currently unable to originate new loans and thus unable to meaningfully contribute to reducing the bond sinking fund deficit. The loan program has a number of projects in the loan pipeline that are currently unable to be fully funded: a municipal district heating project in Harney County, an alternative-fuel vehicle project in Klamath County and a university central plant upgrade project in Jackson County. Unfavorable Interest Rate Environment Like any loan program, SELP is subject to market forces that impact the cost of capital. In 1980, the prime lending rate was percent. In 1980, the prime rate ended the year at percent, and SELP originated loans at an average rate of 10.9 percent. From 2008 to 2015, prime rate was unchanged at 3.25 percent; currently prime is 3.50 percent, and SELP originated loans in 2015 at an average rate of 4.38 percent with half of the loan originations receiving an interest rate subsidy under the High Performance Schools Pilot program. In the current interest rate environment, SELP loans no longer represent low-cost funds, particularly for the type of low-risk projects the program is targeting, and SELP will likely experience limited loan portfolio growth if potential borrowers have access to reasonable commercial financing terms. 5. Describe who or what this program or function affects. SELP serves all areas of the state and all private, public and tribal entities developing eligible energy projects in Oregon. 6. If the program or function works with local, regional, other state agencies, or federal agencies, include a brief description of these entities and their relationship to the ODOE program or function. Please identify the roles assigned to each agency. As a program with significant granted bonding authority, SELP works closely with the Oregon Department of Treasury s Debt Management Division to issue the general obligation bonds that fund approved energy loans. The Treasury Department is responsible for directly obligating the state under the terms of a bond issuance thus the bond funding of prospective SELP loans is subject to that agency s approval. The loan program has historically served as a significant funding source for local irrigation district s small-scale hydro-power projects as well as originating over $150 million in loans to state universities for eligible energy projects. 5

6 7. Explain if, and why, each of the key functions is most appropriately placed within ODOE, and how duplication with other related agencies is avoided. The origination of energy loans requires business development within the Oregon energy sector as well as the underwriting of potentially complex energy projects. Staff from ODOE s Policy and Innovation Division assist SELP in understanding specific energy technologies and by facilitating access to potential borrowers. It is unlikely the loan program could obtain similar technical and business development assistance at other agencies. The combination of ODOE technical expertise, energy incentive programs, and SELP financing under collaborative agency leadership provides an efficient and comprehensive synergy of services supporting energy project developers and allows for coordinated and effective stakeholder outreach and business development. 6