In its drive to refinance a federal loan guarantee for now-bankrupt solar company Solyndra, the U.S. Department of Energy developed an unprecedented interpretation of the law that increases the likelihood of further taxpayer losses on dubious investments in renewable energy companies.

The new legal interpretation of the Energy Policy Act of 2005 allows the Energy Department to give private investors priority in repayment of federally guaranteed loans, meaning those investors will be repaid before taxpayers in the event of a bankruptcy.

Title XVII Subsection 1702(d)(3) of the law requires that all Energy Department loan guarantees "be subject to the condition that the obligation is not subordinate to other financing." Until early 2011, that meant the government could not repay private investors before recouping taxpayer money.

Two Treasury Department officials who testified before a House Energy and Commerce subcommittee last week said they had never before seen taxpayers subordinated to private investors in the repayment of a government loan.

Until Solyndra, that is. In February 2011, the Energy Department helped refinance the struggling solar company's loan in a way that gave private lenders priority in repayment of their loans.

Under the restructuring agreement, the first $75 million of private investment would be repaid before taxpayers saw a dime. Reps. Fred Upton, R-Mich., and Cliff Stearns, R-Fla., who chair the House Energy and Commerce Committee and its investigative subcommittee, respectively, said the restructuring agreement "violated the plain letter of the law."

At the time, both the U.S. Department of the Treasury and the White House Office of Management and Budget also raised concerns about the move's legality. But the Energy Department defended its position in a pair of internal memos.

The subordination provision of the law, argued Susan Richardson, chief counsel of the department's Loan Programs Office, is "applicable only as a condition precedent to the issuance of a loan guarantee. It is not a continuing obligation or restriction."

In other words, by Richardson's argument, the law only applies to the initial loan guarantee, not to subsequent restructuring agreements.

Subordination was necessary to secure further financing for Solyndra, since, Richardson wrote, "Investors are unlikely to make an equity investment in a distressed company on commercially acceptable terms."

Richardson further argued that subordination was consistent with congressional intent, since the purpose of Subsection 1702(d)(3) is to recoup as much taxpayer money as possible (she claimed, contrary to OMB, that liquidation would provide fewer returns for taxpayers).

Under the Energy Department's new interpretation, then, subordination is a tool to keep the most distressed companies afloat by securing capital where creditors would not otherwise consider investing.

In other words, according to Heritage Foundation analyst Nick Loris, the department's new standard subordinates taxpayer repayment only for high-risk companies, and "ensures that the public pays for the failures while the private sector reaps the benefits of any successes."

The Energy Department has created a situation in which taxpayers are given lower priority for repayment precisely for those companies that are least likely to repay lower-priority investors.

The result: taxpayers were subordinated to Solyndra's private investors, and the first $75 million of repayment will go to the latter, which includes an investment firm tied to George Kaiser, a major donor to President Obama.

An Energy Department spokesman confirmed that this legal rationale had never before been used to give private investors priority in the repayment of a government loan. But having now established the position that Subsection 1702(d)(3) does not apply to restructuring agreements, the department has opened the door the yet more Solyndras -- dubious investments that shoulder taxpayers with excessive financial risk.

It must also be asked: Why was Solyndra the first company in the history of this loan guarantee program to have its private investors bumped to the front of the line? DOE has prohibited Richardson from conducting a transcribed interview with Energy and Commerce under oath, suggesting that the department is not eager to answer such questions.

Lachlan Markay is an investigative reporter for the Heritage Foundation's Center for Media and Public Policy.