On-Bill Repayment in California: Two Steps Forward, One Step Back

This commentary originally appeared on EDF’s California Dream 2.0 Blog

Last week, the California Public Utilities Commission (“CPUC”) issued a proposed decision with the final implementation rules to create the nation’s first On-Bill Repayment (“OBR”) program for commercial properties.  If properly constructed, the program is expected to allow building owners to finance clean energy retrofits with third party capital and repay the obligation through their utility bills.

The good news is the CPUC’s proposed decision contains the vast majority of the program elements necessary to create a flourishing financing market for energy efficiency and renewable projects.  The CPUC ordered robust disclosure to tenants and property owners of any OBR obligation in place, required a centralized program administrator to reduce expenses for market participants, required an equitable share of partial payments between the utility and the lender and agreed that nonpayment of an OBR obligation will result in the same collection procedures from the utility as nonpayment of an electricity charge.

Unfortunately, constructing a successful financing program is much like building a boat.  A boat with 90% of its hull in place will not travel very far.  The proposed decision appears to also have a potentially fatal flaw.  The CPUC has required all subsequent owners and tenants of a property to provide consent to ‘accepting’ the OBR obligation, but does not specifically state what will happen if the consent is not given.

OBR can work for lenders when it significantly reduces risk and simplifies the underwriting decision.  ‘If the lights are still on, then the lender is getting paid’ is a simple rule that will provide significant comfort to ratings agencies and credit committees.  Downtown office buildings and suburban shopping malls are foreclosed on a regular basis, but in almost all cases the lights stay on.  If an OBR obligation is sure to be paid — even after a foreclosure — the availability of investment and cost of financing will improve dramatically.

On the other hand, if repayment is somehow dependent on the next owner and tenant providing consent, then the bank will have a new and unknown underwriting risk.  Furthermore, the bank will likely assume that, given a choice, most new owners would choose not to provide consent.

Based on numerous conversations with financial institutions, EDF believes an OBR program that allows future tenants or landlords to change the nature of the OBR obligations will not generate any meaningful interest from lenders and investors.

Fortunately, the CPUC still has time to get it right.  EDF will be working closely with several financial institutions and project developers to make sure that the CPUC clarifies that a lack of consent will not affect the nature of the OBR obligation.

Assuming we get a good OBR program in place, there is a large group of project developers, lenders, ESCOs, solar investors and other vendors that are expected to participate in the program.  The CPUC proposed decision indicates an effective date near the beginning of 2014.