Waiting for Prop 39

Proposition 39, which passed on the November 2012 ballot, has garnered a lot of interest for its provision to funnel about $500,000,000 a year into energy conservation projects for public education over each of the next five years.  Unfortunately, the enthusiasm has gotten a little ahead of implementation – which looks like it will take a while.

Prop 39 essentially applies to out-of-state businesses the same income tax rules as are applicable to in-state business.  This is projected to raise about $1.1 billion per year in state revenue.  That money is supposed to be split into two pots: one going to help meet Prop 98 funding guarantees for local education and the other half specifically into energy conservation projects for local educational agencies.  Money for schools is a good thing, but how it actually gets to schools and colleges matters and the implementation of Prop 39 is still a work in progress.

There are two separate and distinct bills in the legislature, one in each chamber: Assembly Bill 39 and Senate Bill 39.  They are in the early stages of committee review and debate, with AB 39 in the Natural Resources Committee and SB 39 in the Education Committee.  Various groups, particularly differing industry groups, are lobbying for different allocations of the funds.  Solar companies want the funds to go into renewable energy generation.  Manufacturers of equipment, like heating ventilation and air conditioning or energy management systems, are lobbying for the funds to be allocated in their direction.  Which is better is a function of a particular agency’s circumstances, which should be the driving consideration.  Additionally, AB 39 would place regulatory and implementation authority in the State Energy Resources Conservation and Development Commission, while SB 39 would grant that authority to the Office of Public School Construction.  All of this illustrates that there will be considerable wrangling in the legislature, over considerable time, as to how Prop 39 energy conservation funds will be allocated.

In his budget proposal, Governor Brown included all of the Prop 39 revenue to meet the Prop 98 funding guaranty.  The budget proposal is not a bill, and is not set out to the same level of detail as a budget and appropriations bill.  Nonetheless, this characterization of the energy conservation funds (which cannot go to general fund expenditures) as counting against the State’s Prop 98 obligation is troubling.  This may lead to disputes with the legislature and school advocates, and may lead to related budget battles which would further delay implementation of Prop 39.

In the meantime, we want to provide an outline of the current status of funding for public education energy conservation projects.

The first key factor is the procurement and financing model.  There are many models being considered in order to overcome the hurdle that most public education agencies face: finding the up-front capital to invest in energy conservation projects that save money over many years.

There are essentially two models for solar projects: direct purchase, where the educational agency buys and owns the project, and power purchase agreements (PPA), where the purveyor owns the facility and sells the energy to the educational agency. The direct purchase model has a better savings curve, but requires up-front capital investment.  The PPA requires no initial capital investment, but saves less money over time.  Because of that lower savings curve, and because PPA’s are long-term agreements, with unusual risks and obligations, local educational agencies are sometimes uncomfortable with such arrangements.  As a result, we have seen more financing arrangements packaged by the solar vendors with a financing model where payments on the capital improvement loan are made only as a portion of the energy savings realized.  This presents a third financing model, with less financial exposure than the traditional method’s direct purchase, but more savings than a PPA.

For energy conservation projects, such as installing efficient lighting or HVAC systems, the new model (packaging financing in which payments on the capital improvement loan are made only as a portion of the savings realized) is becoming more prevalent as other sources of facilities funds become harder to find.  Without this model, funding of energy conservation improvements competes with use of the same debt financing for every other facilities need.  When investigating potential energy conservation projects, be sure to include a request for funding options from the vendors that match the savings financing model.

These new models still require careful risk management.  For example, how the constitutional debt limit relates to any financing depends on the structure of the debt obligation: is the debt a present obligation, can debt payments be accelerated, or do payment obligations only accrue over time?  Can the arrangement be terminated for lack of funds or debt limitations?  How are incentives allocated?  These are all questions that should be carefully considered and addressed.

While incentives like the California Solar Initiative are dwindling (almost exhausted in many cases), some are still available and must be incorporated into the funding model.

Among sources of financing assistance and incentives, the Investor Owned Utilities (Pacific Gas & Electric, Southern California Edison, San Diego Gas & Electric) offer actual on-bill financing for energy efficiency (but not renewable energy) projects, subject to different requirements and limitations.  Those utilities are under pressure to reduce consumption as well as meet Renewable Portfolio Standards requirements – generating more and more energy from renewable sources until 33% of their energy is from renewable sources by 2020.  Each Investor Owned Utility offers a range of assistance with energy conservation and renewable energy projects, each of which can make the difference when penciling out a financing model for energy efficiency.

When Prop 39 is finally implemented, it should bring much needed money to public educational agencies to help finance money-saving renewable energy projects.  Since this may take some time, it makes sense to investigate cost effective energy conservation measures and how they can be favorably financed.  We urge schools and colleges to begin investigating and planning for energy conservation projects so they will be ready to get in line for Prop 39 funds.  The public works policy imperative in recent years has been to favor “shovel-ready” projects.  By planning ahead, public education agencies can be best positioned to get their share of Prop 39 money and to use it as part of an integrated energy conservation strategy that provides the most bang for the buck.

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