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HomeMy WebLinkAboutStaff Report 234-09TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DEPARTMENT: UTILITIES DATE: MAY 18, 2009 CMR: 234:09 REPORT TYPE: CONSENT SUBJECT: Approval of Plan to Develop Three Options for a City of Palo Alto Utilities Customer Energy Efficiency Financing Program RECOMMENDATION After researching four options that could provide a City of Palo Alto Utilities (CPAU) customer energy efficiency financing program, staff recommends that City Council direct staff to develop a multi-prong approach to meet customer needs by offering different solutions over a timeline that would allow programs to phase in as soon as they are possible. • The first, early option would be to contract with a lending agency to provide energy efficiency loans. This program is likely able to start within six months. • In parallel, City Council would direct staff to undertake a thorough legal and administrative review of one or both of the following programs: (i) an on-bill or off-bill financing program; (ii) a municipal financing program that would allow property owners to repay energy efficiency loans through superior liens on property tax bills. Pursuing different program options provide the greatest flexibility to customers in financing efficiency upgrades, allowing both residential and business customers to recei ve loans for a variety of upgrades at a low or no cost interest rate (depending on the City's cost to buy down the interest rate). If Council does direct staff to implement a financing option, staff will return to Council with the details of the programs and a more complete timeline after detailed legal and project reviews are completed. This will be delivered to Council by the end of the third quarter in 2009. BACKGROUND City Council members have requested that staff review financing options for CPAU customer energy efficiency installation projects. A financing program helps to overcome the first cost barrier that inhibit customers from investing in energy efficient equipment. Depending on the repayment terms of the financing program, the loan payments would be offset by the energy cost CMR: 234:09 Page 1 of 8 savings, resulting in significantly lower upfront cost to the customer. Staff has reviewed four program types available in the industry: 1. Superior liens payable on property tax bills, 2. Notes secured by a Deed of Trust, 3. On-Bill or Off-Bill Financing, and 4. Contracting with a lending agency to provide efficiency loans. To date, staff has spoken with several utility, industry and City representatives, and completed a preliminary analysis of the costs and risks associated with each type of financing program. Each type of financing program for customer energy efficiency and renewable projects has different legal, financial, and customer costs, benefits, and risks. Each methodology would require some lead time to implement and most would require additional staffing for program development and administration. The types of energy efficiency financing are summarized below. A full discussion of the costs, benefits, and risks is presented below in the Discussion section. Superior Liens Payable on Property Tax Bills: Charter cities may use one of two methods to create superior liens on property which secure the repayment of energy retrofit loans. The first is to create contractual assessments; the second is to create a Mello-Roos community facilities district. Each of these debts is paid on the property owner's property tax bill, through a contractual assessment that is not a tax. Note Secured By Deed of Trust from the Property Owner A note secured by deed of trust is a lien on the property and is paid on a monthly or other time period basis. Repayment may also be required within a short period of time or upon sale. However, such a lien is last in priority after other liens. In other words, in the event of foreclosure, this lien will be last to be paid back from the equity left in the property (if any exists) after other pre-existing mortgages and liens. This makes the property appraisal prior to the retrofit much more important. If the City does not do an extensive appraisal, it is possible to lose money when homes are foreclosed. On the other hand, formal appraisals increase the cost of making the loans in the first place. According to the Santa Clara County Assessor's Office, eight properties were foreclosed in Palo Alto in calendar year 2008. Loan Paid on Utility Bill ("On-Bill Financing") or with the Utility Bill ("Off-Bill Financing") Another option is a loan taken by the customer from the utility for an energy efficiency upgrade. The loan is repaid on the utility bill and is called "on-bill financing." This kind of loan is unsecured and thus dischargeable upon bankruptcy. This option is likely only available to businesses under California law. Loans to customers would come with significant cost, reporting, and auditing requirements for the City. A variation of this option is to provide "Off-Bill Financing." In this option, the utility provides funding for a project, and the bill is manually computed separately from a utility bill. The bill for an energy efficiency project can be included with the utility bill. Contracting with a Lending Agency (Bank or Credit Union) to Provide LowlNo-Cost Efficiency Loans A program widely undertaken by many utilities including Alameda Municipal Power and City of Palo Alto several years ago is for the utility to work with a lending institution or credit agency to provide loans for customers' efficiency projects. Staff is currently discussing the interest of the local credit union in revitalizing this program. CMR: 234:09 Page 2 of 8 DISCUSSION Superior Liens paid on property tax bills. Using superior liens to assure loan repayment is desirable for several reasons. First, these liens are superior to all other liens and mortgages on the property with the exception of property tax. In the case of bankruptcy or foreclosure, the City will be repaid second, after only the county. The lender would be third. In addition, repayment may be scheduled for a short period of time. This will prevent legal challenges on issues including successor liability and gifts of public funds. There are two ways to set up a system in which the loan would be treated as a lien on property. The first is to create a contractual assessment pursuant to the Improvement Act of 1911, which was amended last year by AB 811 specifically to allow the creation of contractual assessments for energy retrofits. To create contractual assessments, which take the fonn of liens on affected property, Council must adopt a resolution initiating study of an AB 811 program and detennining that the program would be in the public interest. Next, the City will create a rep011 that ensures that the assessment is based on a specific benefit to the property and defines program specifics. The contents of the report are specifically enumerated in the amended Improvement Act. After the report is complete, Council must hold a hearing and adopt a second resolution establishing and approving the program. AB 811 contractual assessments take place only upon consent of the propel1y owner or owners. Additionally, AB 811 affinns that the lien created by this assessment would be superior to all other liens and mortgages on the property. The City, as assessment administrator, could require property appraisals and a credit review prior to lending. Cities are pennitted to issue bonds to support an AB 811 program, and program administration costs can be built into the loan amounts. A second way to create a loan repaid on the property tax bill is to create a Mello-Roos community facilities district. AB 811 Programs and Mello-Roos districts have four main commonalities: 1) both allow a lien to be placed against the property, 2) both are done with property owner consent, 3) both allow the lien to be secured with bonds or other financing, and 4) both ensure that the lien is positioned ahead of the mortgage in the event of foreclosure. Creating a Mello-Roos district, or special tax assessment district, is an option available only to charter cities such as Palo Alto. In 2007, Berkeley used a Mello-Roos-like fonnulation to create a solar loan program called BerkeleyFIRST. Because a Mello Roos district creates a tax, it does not have to be apportioned based on the exact benefit to the property. This means that less background justification will be required, though it is, of course, optional. To use this procedure, Palo Alto would first enact legislation allowing it to create a special tax assessment district and to fund the program from its electric utility funds. At creation, this district will be city-wide, but "empty" -property owners will choose to opt into it, thus avoiding Proposition 218 requirements for a city-wide vote. Once a property owner opts into the district, the energy retrofit will be installed and the City will assess a special tax on the affected property. This tax would be paid back to the electric utility via the yearly property tax bill. There are benefits to this option. While it may take more background research to fonn and staff time to administer, it is by far the most secure option, may be designed to suit the City's specific needs, and is suitable for residential customers, commercial customers, and even property CMR: 234:09 Page 3 of 8 owners with tenants. The staff time to coordinate between the County assessor, property owners, and contractors is not insignificant, however. The City of Berkeley has a full-time staff person assigned to its $1,500,000 pilot SolarFIRST program (in addition to working with bond counsel and consultants to administer the program). There are contractors who have assisted cities and counties in the development of this type of program, e.g. the City of Palm Desert and Sonoma County used the same consultant in setting up their AB 811 program. To lower the implementation costs of an AB 811 program the City could participate in a county-wide or even a statewide program. One such program that is currently being developed by Renewable Funding, a private investment firm, is the CaliforniaFIRST Statewide Program. Note Secured by Deed of Trustfrom the Property Owner: A note secured by deed of trust is a lien on the property and is paid on a billed basis. Repayment may also be required within a shorter period of time or upon sale. However, such a lien is last in priority after other liens. In other words, at foreclosure, this lien will be last to be paid back from any equity left in the property after other pre-existing mortgages and liens. This makes the property appraisal prior to the retrofit much more important. If the City does not do an extensive appraisal, it is more likely to lose money when homes are foreclosed. On the other hand, a formal appraisal increases the cost of making the loans in the first place. More research on this option could be completed; however, due to the fact that this lien would require similar up-front costs as with the superior liens and would be much riskier to the City, this option has not been researched extensively. On or Off-Bill Financing: On-bill financing incorporates 0% interest loans and short payment terms for customers, allowing easier payment of upfront costs to install efficiency measures. A drawback to this option is that the utility is exposed to default risks. The risk of default increases over time particularly for efficiency projects with long payback periods. Consumer lending laws and license requirements make lending funds for non-business customers for less than $5,000 a very arduous and expensive process. As in a lease, collection problems could also arise upon sale or foreclosure, making it important that adequate screening is done before approving a loan. Non- payment of the loan portion of the bill likely cannot justifY turning utilities off. One of the largest concerns about this method is that it is insecure for the City and entails risk of nonpayment and of implementation, which results from an inexperienced entity trying to become a lender and high up front program implementation costs over a relatively small base of participants. Program implementation costs consist of utility billing system conversion cost and ongoing program administration cost. At Southern Gas Company (SGC) and San Diego-Gas & Electric (SDG&E), both subsidiaries ofSempra Energy, the conversion costs were relatively high and the process time consuming. At SDG&E, the billing IT conversion took one year and cost around $400,000. The program has been in place since 2006, and there are 3 full time employees currently administering the program. To date, there have been 120 projects funded, and an average of one application is filed per week. At SCG, the IT utility bill conversion project cost about $120,000. The program has also been in place since 2006, and one and one-half full-time employees are required to administer the program. This program has only nine customer projects funded. These utilities were not comfortable giving out information about the exact number of defaults, but CP AU staff members were led to believe that default rates are relatively low, and the utilities expect a one to five percent default rate. CMR: 234:09 Page 4 of8 To implement an on-bill financing program for the City, staff working on the SAP utility billing system conversion estimated the cost will be $500,000. Billing system upgrades typically involve a fixed number of programming hours regardless of the number of customer accounts. Therefore, the cost for system upgrade on a per customer basis is much higher in smaller utilities. Staff estimates that an implementation of an on-bill financing program would take at least 24 months. Off bill financing is used by the Sacramento Municipal Utility District (SMUD). It helps to provide funding for efficiency projects without changing the utility's billing program. To avoid the issues related to utility billing systems and much of the risk with lending to tenants, SMUD lends only to property owners and sends the bills through a separate system in the same envelope as the utility bill. To further reduce utility risk, SMUD has a limit of $10,000 per loan, charges the customers interest and an application fee to cover the costs of the program, and has credit requirements for any customer who wishes to enroll in the program. Information is not yet available on exact numbers of customers involved or in the numbers of defaults, but SMUD staff have told CPA U staff that loan applications are not high. Within the state of California, there are stringent legal, licensing and reporting requirements to consumer loan providers. Some of these requirements come from the Truth in Lending Act, the Equal Credit Opportunity Act, the California Code of Regulations and the California Finance Lender's Law. Consumer loans are any loans for residential use or any commercial loan of less than $5,000. These requirements are so onerous that the two utilities in California providing on- bill financing, SGC and SDG&E, have chosen not to include this type of loan for residential customers or for commercial customers seeking less than $5,000 in their program. Even for commercial loans, there are lengthy and costly licensing requirements. This begins with completing the license application with the State Department of Corporations (http://www.corp.ca.gov/forms/pdf/1422CFLLF.pd.t). To avoid some of the restrictions and cost of the license (which is based on total business sales, not a percentage of the lending operation), SGC and SDG&E obtained an official exemption from the Department of Corporations for these areas. This exemption process took six months. CPAU staff was advised by Sempra staff that it is unknown whether this exemption would be available for publicly owned utilities, as part of the justification from the Department of Corporations for the exemption was that a state body (the California Public Utilities Commission) would be over-seeing the program. Once this exemption was in effect, the utilities still had to follow general guidelines with extensive reporting and compliance requirements as listed below: o Licensees are subject to periodic regulatory examinations that the licensee must pay for. o Licensees must pay an annual assessment each year. o Licensees must file an Annual Report by March 15th each year. o Licensees are subject to statutory books and record requirements. o Licensees are responsible for compliance with all applicable laws and regulations. o Licensees must maintain a $25,000 surety bond at all times. Typically, applicants must receive a loan approval from the utility prior to installation of any equipment. The installation property must have an active, connected electric account with the utility and, preferably, no record of missed or late payments. The equipment to be installed must meet all the efficiency requirements as a rebated item. To determine the amount of the loan, the utility will evaluate the simple period of the installation. loan CMR: 234:09 Page 5 of 8 periods are limited to three to five years. Equipment for which a loan is received must have a payback that is shorter than the loan period. If this method is ultimately selected, it should be coupled with an unsecured promissory note and the loan capped at a pre-determined amount to minimize the risk of non-payment. Staff has not completed a thorough legal review of this option due to its complexity and will need to conduct a more thorough review should the Council direct staff to pursue this option. Contracting with a Lending Agency: Since the purpose of a lending agency is to provide loans, several utilities with whom CPAU staff spoke have developed this option. The City of Palo Alto itself, in late 1999 (CMR 447:99), contracted with the Palo Alto Community Federal Credit Union to provide home energy efficiency improvement loans with City subsidized loan rates. This contract was completed after a Request for Proposals response from the Credit Union to provide loans during a two year program life to customers who wished to install efficiency measures. This program was mostly used by residential customers. In particular, residents who owned "Eichler" homes found this a low-cost way to fund efficiency measures. Over $2.2 million was loaned to residents during the program's life. Staff is currently confirming the credit union's interest in reinitiating such a program. Because banks and credit unions are set up to fill customer loans, many of the utility's administrative issues, such as licensure, restrictions on consumer lending, changes to the utility billing system, or credit requirements, are removed in this option. The utility's cost will be limited to a part-time staff person to assist customers in completing the loan application and any amount the utility wishes to "pay down" the interest rate for customers' loans. This option does have a higher transaction cost for customers, however, as customers must work with both utility and lending agency staff to complete the transaction. Alameda's collaborative program with a local bank offers business customers low-interest loans for approved electric technologies, including energy-efficient lighting and charging equipment for electric vehicles. Several outside agencies, most particularly the Electric and Gas Industries Association (EGIA) also provide a service of utility sponsored financing for residential efficiency and renewable (solar electric and hot water heating) projects. Whether working with a bank, credit union, or agency such as EGIA, the utility assists the customer in developing the project and loan applications and "buys-down" the interest rate. The bank will have pre-developed guidelines for appropriate lending limits and credit requirements and may work with the utility to expand its typical credit requirements. Given the risks and costs involved with the different financing program options, staff recommends that City Council direct staff to contract with a lending agency to provide energy efficiency loans as a short term solution. In parallel, City Council would direct staff to undertake a thorough legal and administrative review of one or both of the following programs: (i) an on- bill or off-bill financing program; (ii) a municipal financing program that would allow property owners to repay energy efficiency loans through superior liens on property tax bills. An off-bill financing program could begin within a year, while an on-bill program is expected to take at least 24 months. The timing of a municipal financing program would depend on whether or not the City participates in a regional or statewide program; such a program will likely take at least 12 months before an official launch. CMR: 234:09 Page 6 of8 RESOURCE IMPACT Any of the options discussed in this staff report would have resource impacts on the City. A table summarizing the most important impacts is shown below: Program Upfront Staffing Operations Legal Financing Total Cost Risk (1 Name Capital Estimate for Estimate for Review Estimate to 5, with for 3 Year 3 Year 5 being Lending Program Program highest) One full-time Superior professional Consultant- Lien on $1,500,000 -salary and Estimated at Outside $1,925,000 1 Property benefits--$50,000 per counsel: Tax $75,000 per year $50,000 year One full-time Outside counsel: Note professional Consultant-$25,000 Secured $1,500,000 -salary and Estimated at plus In-$1,900,000 4* by Deed benefits--$50,000 per house of Trust $75,000 per year counsel: year $10,000 Billing One full-time System--Costs to professional $500,000 In-house Buy- On-Bill $1,500,000 -salary and one time counsel: Down $2,435,000 5* Financing benefits--Marketing, $10,000 Interest- $75,000 per Processing, Estimated year etc.--$50,000 at $50,000 per year One full-time Costs to professional Billing In-house Buy- Off-Bill $1,500,000 -salary and processmg--counsel: Down $1,960,000 5* Financing benefits--$75,000 per $10,000 Interest- $75,000 per year Estimated year at $50,000 One-half full-Costs to Contract time Buy-professional In-house with Down Financing $0 -salary and Minimal counsel: Interest-$165,000 1 benefits--$10,000 Agency $35,000 per Estimated at $50,000 year * Some risk can be reduced by program design. Note: all costs are annual for the three year duration of a pilot program except for upfront capital infusion of the program and modifications to the billing system, which are presumed to be one- time. CMR: 234:09 Page 7 of 8 Staff will look at ways to keep risks at a reasonable level for other rate payers. Risk reduction methods, including starting with a shorter-term, such as three years, limiting/capping the numbers of customers or dollars invested, and limiting loans to a time period less than the lifetime of the equipment being installed will help to reduce credit risk. In addition, limiting the program to customers who have not had a late payment and who have been utility customers for at least two years can be used as terms to pre-qualify applicants. Final risk reduction steps will be included when the programs have completed legal and management review and are ready to launch. Funding for this proposed pilot project could come from the Calaveras Reserve and/or Public Benefits funding (if sufficient funds are available in that area without eliminating other efficiency programs). Staff will further review these funding options and return with a complete proposal to implement a program as directed by Council. POLICY IMPLICA TI ONS Implementing any of these options would demonstrate the City of Palo Alto's policy to encourage energy efficiency installations and to assist customers in their attempts to use electricity and natural gas more effectively. Approval of staff's recommendations to implement a Customer Energy Efficiency Financing Program would support the City Council Priority Number Three, "Environmental Protection." ENVIRONMENTAL REVIEW The provision of these services do not constitute a project pursuant to Section 21065 of the California Public Resources Code, thus no environmental review under CEQA is required. ATTACHMENT None. PREPARED BY: DEPARTMENT APPROVAL: CITY MANAGER APPROVAL: CMR: 234:09 JOYCE KINNEAR, Utility Marketing Services Manager CHRISTINE TAM, Resource Planner AMY BARTELL, Deputy City Attorney KARL V AN ORSDOL, Manager, Energy Risk TOM AUZENNE, Assistant Director, Utilities JANE RA TCHYE, Assistant Director, Utilities JOE SACCIO, Deputy Director, Administrative Services L 'C::.~~'JL'LJ Director of Administrative Services Page 8 of 8