Republican Texas Bows to Berkeley in Backing Energy Finance Plan

(Bloomberg) — Jim Keffer is Republican state lawmaker in
Texas with a permit to carry a concealed weapon and doubts about
whether human activity is causing global warming.

Cisco DeVries is the former aide to the mayor of Berkeley,
California, whose home has solar panels on the roof and a Nissan
Leaf in the driveway. He calls fighting climate change the
defining issue of this generation.

But the Texas recipient of the “champion of free
enterprise” award and the California self-described “policy
entrepreneur” share one thing: They’re both promoting a new
financing mechanism that aims to break the partisan deadlock
over renewable power and energy efficiency.

“There were some raised eyebrows,” Keffer, chairman of
the Texas House’s Natural Resources Committee, said of his
authorship of the measure authorizing the funding scheme in
Texas. “But it’s a no-brainer. Anything we can do to conserve
resources and upgrade our infrastructure is a good idea.”

Keffer and DeVries are united behind the plan, touted by
Scientific American as an idea that could change the world, that
is spreading to states beyond red Texas and blue California. The
Property Assessed Clean Energy, or PACE, lets property owners
put the cost of energy upgrades on a property tax bill and pay
it off over several years at a low interest rate. The repayment
is their responsibility at no cost to other taxpayers and can be
passed on if the property is sold.

‘Huge Opportunity’

“Chairman Keffer sees this is as a huge opportunity for
economic development and jobs,” said Charlene Heydinger,
executive director of Keeping PACE in Texas, a nonprofit group.
“Cisco is more on the environmental side. It’s the same goal,
different focus.”

Sewers and buried power lines have been paid for with these
municipal tax assessments for decades; proponents argue that
extending them to include solar panels, efficient water heaters
or insulation is a way to conserve power without government
rules or subsidies.

“It has no mandates, no subsidies, states’ rights and
local control,” said PACE proponent Jeff Tannenbaum, the
founder and president of Fir Tree Partners, a New York-based
investment firm with $13 billion in assets. “It speaks to the
Tea Party platform, as well as the Democratic Party’s program of
job creation.”

Housing Agency

One group that hasn’t gotten the message is federal
regulators, and they almost killed the idea. In 2010 housing
regulators ruled that government-backed Fannie Mae and Freddie
Mac couldn’t invest in mortgages with homes that have a PACE
assessment. With that statement, an idea that was lauded became
just another fancy plan run aground in Washington.

In recent months, a new strategy has emerged that
Tannenbaum calls its 2.0 version. And, while green California is
essentially thumbing its nose at Washington and continuing with
these projects for homeowners, PACE is now expanding in Texas,
Ohio, Arkansas, Michigan and Florida as a way to fund bigger
commercial projects. Its popularity in these Republican-led
states has shocked even its pioneer.

“When Texas passed a PACE law, I knew this was not just a
crazy Berkeley idea,” said DeVries, 41. “We got support across
the political spectrum. Whether or not someone agrees with my
position on climate is irrelevant.”

DeVries was working for Berkeley’s mayor in 2006, helping a
group of residents use a special assessment to pay for burying
electrical lines, when the idea came to him: Why not do the same
for rooftop solar panels?

Energy Savings

Under PACE, an owner or a contractor applies to the
government office that runs the program to finance their
project. A locality would borrow the money or issue debt for a
group of projects. The property owner gets the benefit of a
government-backed lower rate and longer term, and can pay off
the cost with savings from lower heating or electrical bills.

Some bigger projects can have a 20-year payback, almost
three times normal commercial terms, said David Gabrielson,
executive director of PACE Now, a Pleasantville, New York-based
group promoting the concept.

Because repayment is on the tax bill, the lender gets a
lien on the property that’s senior to the mortgage, a better
guarantee of repayment than a home improvement or commercial
loan. They also aren’t wiped out in a foreclosure. And, as a
property assessment, it can be transferred to a new owner.

Big Buildings

Once Berkeley started its program, “this thing went
viral,” DeVries said. Tannenbaum went to the White House soon
after President Barack Obama’s election to discuss steps the
U.S. could take to cut dependence on foreign oil and science
adviser John Holdren sent him to DeVries’ nascent experiment.
Tannenbaum coined the acronym and now helps fund the advocacy
group PACE Now.

The White House included $150 million in its 2009 economic
stimulus to help local governments set up PACE districts.

Except it hasn’t changed the world — yet.

In July 2010, just as many PACE programs were kicking in,
the Federal Housing Finance Agency, which oversees mortgage
giants Fannie Mae and Freddie Mac, said PACE assessments pre-empted mortgages, and created significant risks for lenders and
the two government-sponsored entities.

“PACE loans threaten to move existing Fannie Mae and
Freddie Mac mortgages to a second lien position and increase the
risk of loss to the enterprises and, by extension, to
taxpayers,” the agency said in reiterating its position in
December.

Fannie Mae

That statement had impact because of the size of the
government-backed lenders: Fannie Mae and Freddie Mac together
own or guarantee 59 percent of new mortgages, according to FHFA.

With that warning from FHFA, PACE programs for homeowners
ground to a halt in most of the nation.

In California, Governor Jerry Brown was so incensed that he
sued to reverse the decision. He lost, but residential financing
began to pick up again over the past two years, as two companies
with local contracts ramped up their programs.

Commercial owners are big enough that they can contact
their lender and get them to sign off a PACE financing, which
could be impractical for millions of homeowners.

In Ohio, where Republican Governor John Kasich signed a
measure to freeze a renewable-energy mandate last year, $35
million of PACE projects in the Cincinnati area are up for
review this year, said Andy Holzhauser, the chief executive of
the Greater Cincinnati Energy Alliance.

Kentucky, home to climate-change skeptic and Senate
Republican leader Mitch McConnell, finalized PACE legislation
this month.

“Efficiency’s the one energy issue on which even the
Friends of Coal and tree-huggers can agree,” Jonathan Miller, a
former state Treasurer pushing the PACE program, wrote in the
Louisville Courier-Journal.

Texas Governor Rick Perry, who calls the Environmental
Protection Agency’s carbon plan a “direct assault” on energy
providers, signed the state measure that Keffer, 62, sponsored
to greenlight PACE for commercial buildings. The program
includes financing for solar rooftops, but also focuses on
efficiency upgrades and water conservation, a huge worry in the
drought-plagued state. That’s a new twist on the program.

To contact the reporter on this story:
Mark Drajem in Washington at
mdrajem@bloomberg.net

To contact the editors responsible for this story:
Jon Morgan at
jmorgan97@bloomberg.net
Steve Geimann

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