Darrell Issa Vs. First Solar: Can Politics Sink the Stock?

NEW YORK ( TheStreet) -- It's dubious business to base investment decisions on politics, but in the solar sector, there is no escaping the outsized role of government.

The latest case of politics meddling in the fortunes of solar stocks is an old one: The Solyndra bankruptcy and Department of Energy loan guarantee program.

This week, Rep. Darrell Issa (R. Calif.), head of the House Committee on Oversight and Government Reform, made it clear that he has it in for First Solar ( FSLR) as part of the broader "making of political hay" while the sun can be shined on the DOE loan program.

Issa didn't mince words when discussing the problems he sees in the DOE loan guarantees provided to large-scale First Solar projects, entitling a lengthy section of a House committee report, "The First Solar Scheme."
Darrell Issa, House Republican, sees political hay in "The First Solar Scheme."

The report was prepared ahead of Department of Energy Secretary Steven Chu's appearance before Issa's committee. Chu's response on Tuesday: "Enough already."

That's a good enough and understandably flippant response for an Obama administration official to make in what is a very political battle with Republicans looking to score points over energy policy. In fact, I was content to dismiss it myself as one more scene of Solyndra absurd theater.

Upon further reflection, though, that's not good enough to comfort First Solar investors concerned that one more negative headline for a large-scale solar project could have the potential to sink the company's shares.

The First Solar project that Issa zeroes in on, Antelope Valley Solar Ranch, is the only project still awaiting initial funding of the loan guarantee, an event scheduled to take place on April 6. It was already delayed once as permitting issues required an extension of the former DOE deadline.

If in a worst-case scenario the loan guarantee was stopped and the utility company that has provided the equity funding, Exelon ( EXC) was able to renege on its investment as a result, First Solar would be left to fund the project itself. The solar company is not in a cash flow situation to carry that load right now. Therefore, this kind of event would send First Solar shares toward single-digit territory.

Let's stress, this is a worst-case scenario, but it can't be ignored. The good news, though, is that if First Solar is headed for single digits, it seems a long shot that Issa's attack will be the reason.

"The First Solar Scheme" has three sections: (1) the obviously political aims of a Republican opponent of the president; (2) the technical aspects of the DOE loan program and the original congressional language that authorized the loans -- which Issa says the DOE violated in granting First Solar project loans; and (3) the scope of Issa's Oversight committee as a matter of House procedures in determining the fate of any First Solar project loan guarantee.

Politics and House procedures favor First Solar. The technical issues related to the language used in the congressional authorization may seem complicated, but they are fairly straightforward. One thing that has become clear to me in all the time covering the DOE loan guarantee program and Solyndra is the extent to which the DOE was extremely deliberative in this process, with it being brand new territory for all concerned. In the words of several lawyers with whom I have spoken, who represented projects that applied for the DOE loan program, the one phrase used over and over again to describe the process was that it's "like a slow death."

This process makes for a voluminous file of emails to cherry-pick from in making allegations. In the end, there does not seem to be any smoking gun for Issa among the thousands of words he expended in his damning House report.

The political aspects of the Issa vs. First Solar situation can be boiled down to three findings.
  • Political issue No. 1: Issa gets a lot of backing from the oil and gas lobby.
  • In fact, an analysis of oil and gas campaign contributions done by the Center for Responsive Politics in 2011 showed that Issa led all members of the House Committee on Oversight and Government Reform in contributions from oil and gas. While oil and gas is not Issa's No. 1 source of lobbying contributions, he even passed oil state Oklahoma Republican James Lankford in terms of committee members. As of 2011, Issa was also seeing a steadily increasing level of cash from the oil and gas lobby compared with earlier in his career, according to the Center for Responsive Politics. Issa's home state of California is one of the country's top oil producers.
  • Political issue No. 2: Issa bleeds a lot of ink over First Solar's Agua Caliente project, before admitting he has no real case to make against it.
  • Issa argues at length in "The First Solar Scheme" that the use of inverter technology on the First Solar Agua Caliente project was not a legitimate way for the DOE to define the project as being "innovative."

    The way the word "innovative" is defined in the DOE loan program authorization -- applying to the Energy Policy Act of 2005 and the stimulus act of 2009 -- is the central debate point in Issa vs. First Solar.

    Issa argues that since First Solar thin film panels were not innovative, the company had to turn to other technologies being used on the project -- an inverter that allows the energy generated from the panels to switch between the AC/DC currents.

    The House report refers to the process of using an inverter for the purpose of meeting the "innovation" stipulation as "falsification" and "highly questionable," primarily because these inverters had been in use in Europe for years.

    The original rule-making language regarding the loan guarantees was very clear on one point, though: The use of technology overseas did not bar it from being defined as "innovative" when applied to a U.S. project. Issa has to admit this at the end of his Agua Caliente project attack.

    "While according to the rule, foreign commercial use of a technology is not a bar to deeming domestic use innovative, the broad commercial use in Europe reflects the disrespect DOE applies to the actual innovativeness requirement."

    Sources in Washington familiar with the loan program also note that the "innovative" clause was voluntarily added by the Department of Energy to the rulemaking process for the loan guarantee program, as opposed to being in the original language of the Energy Policy or stimulus acts. This does not suggest that the DOE was trying to "sneak" anything past Congress.

    In the end, all Issa has when it comes to Agua Caliente is a charge of "disrespect."

    In short, accuse, damn, accuse, damn some more, add a major "however" that shows you don't really have a legal leg to stand on, and then damn again before moving on.
  • Political issue No. 3: Issa concludes "The First Solar Scheme" with a laundry list of First Solar problems, none of which have anything to do with the narrow issue of the DOE loan review process.
  • The House report says that since the DOE loans were approved First Solar has encountered serious financial problems that put the DOE funded projects in jeopardy. It mentions the huge slide in shares of First Solar in 2011, the scaling back of its panel production, the firing of its CEO, and an investigation by the Securities and Exchange Commission into violations of Regulation FD.

    The House report contends that a decision by First Solar to not go ahead with plans for a Mesa, Arizona-based plant to supply large-scale projects suggests that the projects will never create the jobs promised. While First Solar may have dangled the carrot of manufacturing jobs before the DOE, the fact of the matter is that the loan guarantee was not for a manufacturing plant, and there was no Congressional quota on how many jobs need to be created by a project.

    The House report also notes the problems that First Solar panels have experienced in high heat conditions, recently revealed by the company, and which raise concerns about whether the panels will work in the long-term. It's a legitimate issue for First Solar and its project partners, but all of this has little bearing on the only issue with which House Oversight can make a determination: Did the DOE properly review and grant loan guarantees?

    Someone on the House Oversight staff evidently spent a lot of time reading the solar trade press, but none of it will result in the committee being able to keep this issue alive unless it can prove that the First Solar Antelope Valley project loan guarantee broke the letter of the law.

  • The only issue that matters
  • The House Oversight report contends that the DOE flaunted two rules:

    A "one technology per sponsor" rule (by having more than one similar solar project receive loans):

    "A Project Sponsor or Applicant may only submit one Pre- Application or Application for one project using a particular technology. A Project Sponsor or Applicant, in other words, may not submit a Pre- Application or Application for multiple projects using the same technology."

    And the rule on innovative technology:

    Innovative technology is one that is not yet commercial, and commercial technology is defined in the final rule as, "a technology in general use in the commercial marketplace in the United States at the time the Term Sheet is issued by DOE. A technology is in general use if it has been installed in and is being used in three or more commercial projects in the United States in the same general application as in the proposed project, and has been in operation in each such commercial project for a period of at least five years."

    Agua Caliente featured two innovative technologies: Fault-ride through technology inverters and dynamic voltage regulation, while Antelope Valley used these two technologies and single-axis trackers (which allow the panels to track the movement of the sun during the day).

    The House report harps on emails from a DOE engineer who says that the trackers cannot be deemed innovative, and since the other two innovative technologies were already in use on Agua Caliente, there was no basis for approving a loan guarantee for Antelope Valley. Issa's report positions these emails as a "whistle blower's" attempts being thwarted.

    In fact, the trackers would not have to be deemed innovative as a stand-alone technology for the project to receive loan approval based all three technologies together creating an innovative project.

    The fault-ride through technology and dynamic voltage regulation could have been the basis for the Agua Caliente approval, while adding the trackers as part of a project featuring these two technologies could have been the basis for the approval of Antelope Valley. The one technology per sponsor rule could define the "technology" as the overall design of the solar project, and not any one feature of it, which would make the allegation that the projects were breaking the one technology per sponsor rule a dead end. This was the definition of innovation which the same engineer who Issa's report positions as a silenced whistle blower ultimately used as the basis for determining the Antelope Valley project's eligibility.

    This definition of innovation at the level of the project is what the House Oversight committee would have to prove is a violation, and yet, it's not at all clear after all the words and allegations that Issa came up with anything that proves a violation.
  • House Oversight Authority
  • Finally, there is the issue of just what the House Oversight committee could do anyway, and one thing it can't do is tie up the loan guarantee.

    Oversight authority is just what it claims to be: Oversight but no legislative authority. Issa's committee can judge whether a loan guarantee was approved on a right or wrong basis, but in the end would have to refer the case to the Department of Justice or Inspector General. While the House Oversight committee probably won't drop this issue any time soon, it can't do anything in the interim to stop the DOE loan guarantee.

    Darrell Issa can make the lives of a lot of people at First Solar and the Department of Energy miserable for a while longer, but when it comes down to it, the House Committee on Oversight is going to have a difficult time proving its lack of "innovation" case.

    Or as one DOE loan expert who worked on several projects that received approvals put it, "I think at this point the Issa committee staff also understand, but are playing dumb in order to make political hay."

    -- Written by Eric Rosenbaum from New York.

    >To contact the writer of this article, click here: Eric Rosenbaum.

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