After nearly two years of effort, California regulators are getting ready to propose a new tool to make the return on investment in commercial building efficiency as simple as adding repayment to monthly utility bills [PDF]. But energy efficiency advocates are crying foul, saying the proposal contains recent changes that could strangle on-bill repayment (OBR) in its cradle.

The problem, according to the Environmental Defense Fund (EDF) and others, is that the California Public Utilities Commission’s proposal for an OBR pilot program requires written consent, rather than automatic transfer, of OBR agreements when properties change ownership.

That, they say, could subject OBR contracts to the same tangle of complications that encumber other property ownership-tied financing schemes and make them unattractive to lenders. EDF, which drafted the original concept, has placed the blame on California’s big three investor-owned utilities, which it says have lobbied the CPUC heavily this month, right before the new language requiring written consent of transfer was added to the proposal.

“We’ve estimated that just in the non-residential market, over twelve years, Californians could save $37 billion” through private investment of about $5 billion that EDF believes a well-structured OBR program would facilitate, Scott Hofmeister, energy efficiency associate with EDF, said in a Tuesday interview. “This is all incremental, because of the benefits of OBR -- it provides this inherent credit enhancement,” which differentiates it from other commercial building loans that aren’t secured by the steady repayment stream that utility bills provide.

But “without that transferability clause, lenders are in no better position than they’d be in an unsecured position,” he said. With the CPUC set to vote on the proposal this Thursday, Sept. 19, there’s not much time to change the rules -- but “there’s still time, we think, for them to reconsider, not just our arguments, but the arguments of the financial institutions, to get this thing right.”

The Promise -- and Complications -- of Utility Bills as a Secure Repayment Stream

CPUC’s proposed decision lays out the arguments for and against automatic transferability in terms of how it could be structured, starting from a proposal from consultant Harcourt, Brown & Carey (HBC). Real estate and financial experts may find the following excerpt useful:

To achieve transferability, HBC recommended adoption of an OBR tariff, but noted differing views about whether notice, or notice and consent, would be required. HBC also speculated that adoption of OBR as a tariffed service might provide the added benefit of changing the characterization of the borrower’s obligation for accounting or financial reporting purposes. EDF, Renewable Funding, and APC bootstrap this latter idea into a novel theory: adoption of an OBR tariff that describes the loan as a “receipt for service,” transforms the debt obligation into energy service, “not a debt of the originating customer,” and is transferable without consent to successors in possession of the property.

 The IOUs vigorously dispute the validity of this theory. They contend that a forced transfer and conditioning of service upon payment of a third-party loan obligation incurred by a former customer is a bad precedent and conflicts with many aspects of California law, including enforceability of contracts and collection of debts.

CPUC’s proposal concludes that utility pilot projects for commercial buildings should require “utilities to develop uniform OBR tariff language that includes transferability of the obligation through written consent (and other mechanisms), and service disconnection for default on the debt obligation.”

EDF’s concerns about this language have been echoed by a host of commentators, including financial institutions that would come up with the cash that OBR would pay back. Steven Vierengel, a Citigroup director who’s been a vocal proponent of new efficiency financing models, said at a February Citi/EDF conference that “automatic transferability without subordination will be critical to the success of an OBR program.”

Businesses like SolarCity, Metrus Energy and SCIenergy that hope to use OBR as one of many efficiency financing tools to push into new markets have also weighed in on how important it will be to secure that repayment stream against foreclosures, failure to make electricity bill payments by previous owners, and other disruptions.

SolarCity, which also provides energy efficiency software to its residential solar customers, wrote in an August comment to the CPUC that adding written consent requirements “may frustrate or completely nullify the benefits of OBR or limit the applicability of any lessons learned from the pilot.” Metrus Energy CEO Bob Hinkle noted in a July letter to EDF that “survivability of the OBR obligation through a foreclosure, is what separates OBR from a second lien, unsecured loan or other traditional financing products.”

California, as a trendsetter in energy efficiency policy, could have an outsized impact on how on-bill financing and repayment plans take shape in other states, Hofmeister added. New Hampshire has a Department of Energy-backed program for on-bill repayment, and Hawaii and Connecticut have passed laws enabling similar programs in those states, he said -- but those markets are much smaller. 

Questions over who’s entitled to what kinds of legal recourse for investments made by previous owners are cropping up in other new efficiency financing models, including property-assessed clean energy (PACE) structures. Solving these questions will allow the securitization of efficiency investments to capture the proven returns that energy efficiency investments offer.