Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF ENVIRONMENTAL QUALITY

OF THE STATE OF MONTANA

In the matter of the amendment of ARM 17.85.103, 17.85.105, 17.85.106, 17.85.110, 17.85.111, 17.85.112, 17.85.113, 17.85.114, 17.85.115 pertaining to definitions, eligible projects, eligible applicants, application procedure, application evaluation procedure, environmental review and compliance with applicable state law, applications and results public, loan terms and conditions and reports and accounting

)

)

)

)

)

)

)

)

)

)

)

NOTICE OF PROPOSED AMENDMENT

(ALTERNATIVE ENERGY REVOLVING LOAN PROGRAM)

(NO PUBLIC HEARING CONTEMPLATED)

TO: All Concerned Persons

1. On March 4, 2013, the Department of Environmental Quality proposes to amend the above-stated rules.

2. The department will make reasonable accommodations for persons with disabilities who wish to participate in this rulemaking or need an alternative accessible format of this notice. If you require an accommodation, contact Elois Johnson, Paralegal, no later than 5:00 p.m., February 19, 2013, to advise us of the nature of the accommodation that you need. Please contact Elois Johnson at Department of Environmental Quality, P.O. Box 200901, Helena, Montana 59620-0901; phone (406) 444-2630; fax (406) 444-4386; or e-mail [email protected].

3. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

17.85.103 DEFINITIONS Unless the context requires otherwise, as used in this subchapter:

(1) through (3) remain the same.

(4) "Capital investments for energy conservation purposes when done in conjunction with an alternative energy system" means a capital investment that is used for an energy conservation purpose that is in the same structure as, and is constructed, installed, or otherwise put in service as part of, or at about the same time as, an alternative energy system to reduce the size of energy system needed.

(5) and (6) remain the same.

(7) "Geothermal system" means a system that transfers energy either from the ground, by way of a closed loop, or from ground water, by way of an open loop, for the purpose of heating or cooling a ~~residential~~ building or ~~small business~~ for a commercial or industrial process.

(8) "Low emission wood or biomass combustion device" ~~has the same meaning as~~ is a device that meets the standards:

(a) in 15-32-102, MCA; or

(b) adopted by a local air pollution control program established under 75-2-301, MCA.

(9) through (12) remain the same.

(13) "Residence" means any single- or multi-family, primary, or secondary dwelling place.

(14) "Return on investment" is a calculated simple payback for a system based on the installed cost of components, the current value of energy produced when the system goes into service, and the estimated useful life of the equipment.

~~(13)~~ (15) "Small business" means one that:

(a) is independently owned and operated ~~and that is~~;

(b) is not dominant in its field of operation; and

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The department proposes to add definitions of terms listed in 75-25-102(1), MCA, and to clarify existing definitions. In (4), the program proposes to allow energy conservation measures that will decrease the size of the proposed renewable energy system. For instance, in the case of a solar electric system, it makes sense to replace an older appliance that uses more electricity with a newer, more efficient appliance. The department proposes to amend (7) to allow the program to lend money for geothermal systems in any type of building or for a commercial or industrial process. Eligible applicants in 75-25-101, MCA, include individuals, small businesses, units of local government, units of the university system, and nonprofit organizations. The current rule limits the eligible geothermal systems to residences or small businesses. Therefore, the department proposes to allow funding of a project in any kind of building, as long as the applicant is eligible. The reason for the proposed amendment to allow funding of geothermal systems for commercial or industrial processes is that geothermal systems may be used to provide heating or cooling of processes such as the water used in a car wash or laundromat to wash cars or clothes. These are legitimate uses of geothermal energy that can accomplish the purposes of the loan program and should be eligible for funding. Under (8), a biomass system could be financed if it meets local air pollution control program guidelines. This amendment is proposed to maximize use of the fund. A definition of "residence" is proposed to be added in (13) to satisfy the requirement in 75-25-102, MCA, that it be defined. The proposed definition is taken from Webster's Dictionary and has been modified to pertain to the program. The proposed definition of "return on investment" in (14) refers to the factors used to evaluate whether or not a proposed system meets the program's intent to finance systems that make sense for Montana's climate and resources. The program does not intend to apply a specific rate of return (on investment) to determine project eligibility, as the program is designed to assist viable emerging technologies to penetrate the market. The definition of "small business" in (15) is proposed to be amended to add a criterion that the business employs fewer than 100 individuals. The term "small" requires a size limitation. The size of 100 employees was chosen to be consistent with other DEQ programs, specifically the definition of small business in 75-2-103, MCA.

17.85.105 ELIGIBLE PROJECTS (1) The department shall fund alternative energy projects and capital investments for energy conservation purposes when done in conjunction with an alternative energy system that the department determines will best ~~enable the state to meet the legislative mandate to reduce reliance on nonrenewable~~ promote the use of alternative energy sources and distributed generation, as set forth in the state's Energy Policy Act (90-4-1001, MCA).

(2) To be eligible for funding, a project ~~or portion of a project~~ must be:

(a) ~~conducted~~ located within Montana;

(b) technically appropriate for Montana's climate ~~and available generation resources~~; and

(c) the construction or installation of an alternative energy system that generates energy through a proven methodology for the sole use of the customer-generator or for net metering, or for capital investments for energy conservation purposes when done in conjunction with an alternative energy system in a structure owned or leased by an entity listed in Title 75, chapter 25, part 1, MCA, as an eligible recipient of a loan.

(3) remains the same.

(4) An applicant must own or lease the real property where a project is proposed. For leased property, the applicant must submit the owner's permission for the project with the application. If the department determines that a lien on the real property is required, the department may not issue the loan unless each legal owner of the property signs the security agreement.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The proposed amendment to (1) serves to further clarify the types of projects that will be financed and removes the "legislative intent" language that could not be documented and replaced it with language taken from the state's Energy Policy Act. The proposed amendment to (2) provides that the project must be located within the state; the term "conducted" does not accurately describe the type of projects installed through the program, and the program intends to finance only projects physically located within the state. The stricken language in (2)(b) was originally intended to allow the department to reject a project it considered not to be technically appropriate for the type of resource expected to be present in Montana. This language is vague and has not proved to be a consideration in evaluating loan applications approved to this point. The proposed amendment to (2)(c) would add language allowing a project in a structure leased by an applicant to be eligible for a loan. This would make the list of eligible projects consistent with (4), which is proposed to be amended to allow a lessee to be an eligible applicant. The proposed amendment to (4) concerning ownership and security would allow loans to be financed for projects that are approved by the property owner, who may or may not be the loan applicant, in keeping with commercial lending practices.

17.85.106 ELIGIBLE APPLICANTS (1) ~~Any person may apply, except for the following and their immediate families~~ Unless specifically excluded in (2), the department may consider an application from a person listed in 75-25-101, MCA, for a loan to fund a project under the Act and these rules:.

(2) The department may not consider an application for a loan from the following person, or that person's immediate family:

(a) a department employees whose duties are directly related to energy conservation or alternative energy; and

(b) a department contractors actively working on energy conservation or alternative energy projects at the time of application.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The proposed amendment to (1) would implement the requirement that, to be eligible to receive a loan, an applicant must be one of the persons listed as eligible in the AERLP statute, 75-25-101, MCA: an individual, small business, unit of local government or the university system, or a nonprofit organization.

The proposed amendment to (2) would provide that contractors and department employees who are not directly or actively working with department energy programs are eligible applicants. The reason for the proposed amendment is to narrow the exclusion of eligible applicants to those who are directly or actively involved in energy conservation or alternative energy, because only these persons would have a conflict of interest or an appearance of conflict of interest.

17.85.110 APPLICATION PROCEDURE (1) remains the same.

(2) An applicant shall submit itemized costs for equipment and installation and any additional or supplemental material as requested by the department.

(3) and (4) remain the same.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The proposed amendment would implement the department's intent to use itemized cost information to determine the loan amount. Use of itemized costs will allow the department to verify cost information and ensure that loans are not approved for more than the cost of the project.

17.85.111 APPLICATION EVALUATION PROCEDURE (1) The department shall review each application to determine if it is complete. If the department determines that an application is not complete, the department shall inform the applicant within 30 days after the department receives the application. The department shall list the application deficiencies in writing. An applicant may resubmit after correcting all identified deficiencies for completeness and program eligibility. The department shall notify an applicant of a deficiency or ineligible project within 30 days after receiving an application and allow an applicant to correct a deficiency.

(2) through (2)(c) remain the same.

(3) The department, or a third party designated by the department, shall evaluate whether an applicant whose application met the criteria in (2) ~~is credit worthy~~ meets the financial criteria in (4). If the evaluation is performed by a third party, that party shall advise the department whether to approve or deny credit.

(4) The evaluation must be consistent with the standard practices of financial institutions and must consider for each loan requested:

(a) the type, size, risk, repayment period, and complexity ~~of the loan requested,~~;

(b) the financial capacity of the borrower to repay; and

(c) any other factor the department believes is necessary to meet the loss ratio required in Title 75, chapter 25, part 1, MCA.

~~(4)~~ (5) When the loan fund reaches a point where there are applications for more money than is available, the department shall prioritize applications based on the following criteria, which are not necessarily listed in the order of priority:

(a) and (b) remain the same.

(d) and (e) remain the same.

(f) the ~~demographic~~ diversity of borrowers in the project portfolio; and

(g) remains the same.

~~(5)~~ (6) The department shall post the ranking of the criteria listed in ~~(4)~~ (5) on the loan program web site and refer to the web site on printed program materials when it becomes necessary to prioritize the award of available funds.

~~(6)~~ (7) If the department approves an application pursuant to these rules, the department shall indicate its decision to issue a loan by authorizing ~~a servicing agreement and the release of funds~~ loan documents.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The purpose of the proposed amendments is to clarify the process the department will use to evaluate applications and to simplify the rule language and make it consistent with other rules in this subchapter. The department does not intend to use time limits or application deficiencies to halt an application's process. The department has historically worked with individual applicants to gather the information necessary to determine technical and financial eligibility and does not intend to set limits on the amount of time it will allow applicants to respond to requests for information. The amendments to (3) are proposed to clarify that the department and its contractors will use industry-standard criteria to evaluate an applicant's financial status, using past payment history and current income to determine the applicant's ability to repay a loan. This is meant to ensure that the department will not exceed the loan loss requirements set forth in 75-25-103, MCA. Further, the proposed amendment would clarify that the evaluator (either the department or a third-party financial contractor assigned to conduct the financial evaluation) would use standard financial criteria to evaluate applications. The proposed amendment to (4) would add the financial capacity of the borrower to repay to the criteria the department must consider in evaluating whether to issue a loan. The department proposes this amendment because 75-25-102(1)(a), MCA, requires the department to adopt rules establishing eligibility criteria, including the financial capacity to repay the loans. In (5)(c), the department proposes to replace "investment/return ratio" with "the return on investment" as a tool to use in prioritizing which loan application to approve. The department proposes this amendment because "investment/return ratio" is not currently defined and the department is required by 75-25-102(1)(a), MCA, to adopt rules including eligibility criteria that include "return on investment." That phrase is defined in proposed ARM 17.85.103(14). In (5)(f), the department proposes to add "borrowers" to clarify that it is the diversity of borrowers in the loan program that will be used as a tool to prioritize which loan applications to approve. The proposed amendments to (6) reflect the current business environment that relies on web sites to bring current information quickly to the public. When the program began, the department predominantly used print media and software programs to keep web sites up-to-date were not readily available. The added language is intended to reflect current practices. In (7), the term "servicing agreement" would be replaced by the term "loan documents" to describe the loan commitment statement, promissory note, disclosure, and security agreement used to contract with the borrower for repayment. This is proposed to more accurately describe the documents that would be authorized when a loan is issued.

17.85.112 ENVIRONMENTAL REVIEW AND COMPLIANCE WITH APPLICABLE STATE LAW (1) ~~The applicant shall provide information about the project, as requested on the application form, in order to allow the department to review the proposed project for compliance with state law.~~ Prior to ~~executing a servicing agreement~~ issuing a loan under ARM 17.85.111, the department shall review each application to determine if a categorical exclusion from environmental review, as defined in ARM 17.4.603, applies. A categorical exclusion may apply if the requirements of (3) through (5) are met. If the department determines that a categorical exclusion does not apply, the department shall conduct a review under ARM Title 17, chapter 4, subchapter 6, to determine if ~~the department's approval of a loan for the project~~ loan issuance may result in significant effects to the quality of the human environment.

(2) remains the same.

(3) Except as provided in (4), the granting of a loan under this subchapter is categorically excluded from the requirement in Title 75, chapter 1, part 2, MCA, to conduct an environmental review if the loan is for any of the following projects:

(a) solar electricity/photovoltaic (solar/PV):

(i) an appropriately sized system or unit on an existing rooftop; or

(ii) a 60 kilowatt (kW) or less system installed on the ground;

(b) wind turbine - a system of 20 kilowatts (kW) or less;

(d) solar thermal hot water - appropriately sized for residences or small non-residential buildings;

(e) geothermal - a closed loop ground source heat pump system, with a capacity of ten tons or less, that uses either a horizontal or vertical ground loop;

(f) biomass thermal - a system that:

(i) has a capacity of three million British thermal units (MMBTUs) or less per hour;

(ii) meets the standards set in 15-32-102, MCA; or

(iii) meets the standards adopted by the local air pollution control program having jurisdiction where the system is to be installed.

(4) A categorical exclusion may not be applied to the granting of a loan for a project under (3) if:

(a) the department has received information indicating that public controversy exists over the project's potential effects on the quality of the human environment; or

(b) the project might affect:

(i) a sensitive environmental or cultural area; or

(ii) an endangered or threatened species or critical habitat for that species.

(5) The department shall document its decision to apply a categorical exclusion by referencing the application, providing a brief description of the proposed action, describing how the action meets a criterion for a categorical exclusion in (1), and documenting that the project does not fall under a criterion in (4).

(6) The department may, to assist in planning or decision making, prepare an environmental assessment on a project that is categorically excluded under this rule.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The sentence that is proposed to be stricken in (1) is redundant, based on the requirements in ARM 17.85.110 that the applicant submit an application, and in ARM 17.85.111 that the department review the applications and use the information submitted. The department intends to use the information submitted by the applicant to begin the environmental review process and will request additional information from the applicant as needed to complete the required environmental assessment.

Sections (3) through (6) are proposed to reduce the cost of administering the alternative energy program. Preparation of an environmental assessment for a project listed in (3) is unnecessary as long as the circumstances in (4) are not present, because the project will not have a significant environmental impact. The department has made this determination through preparation of a programmatic environmental assessment. See paragraph 4 below.

17.85.113 APPLICATIONS AND RESULTS PUBLIC (1) Applications and ~~reports~~ information submitted to the department pursuant to this subchapter may be made public, except in cases in which the demand of individual privacy clearly exceeds the merits of public disclosure. The department may publish lists of projects, including applicant names, locations, technologies, and amounts loaned. The department shall keep personal information needed for financial evaluation in a secure location.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: This proposed amendment is intended to make applicants and the public aware that information about loans may be made available to the general public and to detail the information that may be posted on web sites. The department will follow state and federal laws governing the release of information and the protection of sensitive personal information. The department intends for the program to be transparent to the public.

17.85.114 LOAN TERMS AND CONDITIONS (1) and (2) remain the same.

(3) The department may not issue a loan unless the ~~applicant financially qualifies as credit-worthy based on the evaluation in ARM 17.85.111(3)~~ department or its contractor determines that the borrower has the capacity to repay the loan.

(4) through (4)(e) remain the same.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The proposed amendment of (3) would strike the term "credit worthy" and substitute a statement that the department or its contractor will not issue a loan unless the applicant's financial status indicates the loan is likely to be repaid. This proposed amendment is necessary because the department believes that the term "credit worthy" is unclear.

17.85.115 REPORTS AND ACCOUNTING (1) remains the same.

(2) Upon completion of construction or installation, a loan recipients shall provide the department with ~~an accounting of loan expenditures~~ documentation that the project was installed as indicated in the loan application. Documentation must include a photograph of the completed installation and any additional information requested by the department.

(3) Loan recipients shall submit annual reports to the department during the term of their loan on a form provided by the department. Reports must estimate the amount of energy produced by the installed system during the year, provide information about system and component reliability, and provide all financial information required by the department's financial contractor. The department may conduct site visits to verify installations and the loan recipient shall allow the department access at reasonable times for this purpose.

(4) remains the same.

AUTH: 75-25-102, MCA

IMP: 75-25-102, MCA

REASON: The proposed amendment to (2) would require a loan recipient to document that the project was installed as proposed in order to ensure that the loan has been used for the purposes for which it was granted. Existing (3) was intended to collect energy production information from borrowers to meet statutory requirements. The information collected was incomplete and not technically accurate, so the department now uses standard engineering practices to calculate energy production based on installed system capacity, equipment specifications, and climate data. As a result, the department proposes to amend (3) to eliminate the collection of incomplete and inaccurate information. Energy information is included in the annual outcomes report required in 75-25-103, MCA.

4. Concerned persons may submit their data, views, or arguments concerning the proposed action in writing to Elois Johnson at Department of Environmental Quality, P.O. Box 200901, Helena, Montana 59620-0901; phone (406) 444-2630; fax (406) 444-4386; or e-mail [email protected], no later than February 28, 2013. To be guaranteed consideration, mailed comments must be postmarked on or before that date. In addition, the department has prepared an environmental assessment demonstrating that the projects to be categorically excluded under proposed ARM 17.85.112(3) and (4) have negligible environmental impact. That environmental assessment may be viewed on the department's web site at www.energizemontana.com. An electronic or hard copy of that document may also be obtained from Elois Johnson at the addresses listed above. Oral or written comments on the environmental assessment may also be submitted in the same manner as for the proposed rule amendments.

5. If persons who are directly affected by the proposed action wish to express their data, views, or arguments orally or in writing at a public hearing, they must make written request for a hearing and submit this request along with any written comments they have to Elois Johnson at Department of Environmental Quality, P.O. Box 200901, Helena, Montana 59620-0901; phone (406) 444-2630; fax (406) 444-4386; or e-mail [email protected], no later than February 28, 2013.

6. If the department receives requests for a public hearing on the proposed action from either 10% or 25, whichever is less, of the persons who are directly affected by the proposed action; from the appropriate administrative rule review committee of the Legislature; from a governmental subdivision or agency; or from an association having not less than 25 members who will be directly affected, a hearing will be held at a later date. Notice of the hearing will be published in the Montana Administrative Register. Ten percent of those persons directly affected has been determined to be ten based on the 91 members of the Montana Renewable Energy Association.

7. The department maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding: air quality; hazardous waste/waste oil; asbestos control; water/wastewater treatment plant operator certification; solid waste; junk vehicles; infectious waste; public water supplies; public sewage systems regulation; hard rock (metal) mine reclamation; major facility siting; opencut mine reclamation; strip mine reclamation; subdivisions; renewable energy grants/loans; wastewater treatment or safe drinking water revolving grants and loans; water quality; CECRA; underground/above ground storage tanks; MEPA; or general procedural rules other than MEPA. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to Elois Johnson, Paralegal, Department of Environmental Quality, 1520 E. Sixth Ave., P.O. Box 200901, Helena, Montana 59620-0901; faxed to (406) 444-4386; e-mailed to [email protected]; or may be made by completing a request form at any rules hearing held by the department.

8. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

Reviewed by: DEPARTMENT OF ENVIRONMENTAL

QUALITY

/s/ John F. North BY: /s/ Tracy Stone-Manning

JOHN F. NORTH TRACY STONE-MANNING, Director

Rule Reviewer

Certified to the Secretary of State, January 22, 2013.