HB 80-MUNI ENERGY IMPROVEMNT:ASSESSMNTS/BONDS  8:01:19 AM CO-CHAIR PARISH announced that the first order of business would be HOUSE BILL NO. 80, "An Act adopting the Municipal Property Assessed Clean Energy Act; authorizing municipalities to establish programs to impose assessments for energy improvements in regions designated by municipalities; imposing fees; and providing for an effective date." [Before the committee was CSHB 80(ENE).] 8:01:42 AM CO-CHAIR FANSLER moved to adopt CSHB 80(ENE) [as clarification that the committee would work from CSHB 80(ENE) rather than the original bill version]. No objection was stated. 8:02:16 AM REPRESENTATIVE ADAM WOOL, Alaska State Legislature, presented HB 80, as prime sponsor. He noted there are two related acronyms: commercial property assessed clean energy (C-PACE) and property assessed clean energy (PACE). He stated that under HB 80, individuals who own commercial property would be allowed to get a loan to improve the energy efficiency of a building or to make the exhaust cleaner. The funding could then be paid back through an assessed property tax. The borough or municipality in which the building is located would also have to agree to this funding mechanism. By allowing the building owner to pay back the interest over a longer period of time, the interest on the payments would be lower, he indicated; therefore, there would be a low default rate. Representative Wool noted that if the building is sold, then the loan would stay with the building. He said this factor would incentivize people to make improvements, "even if they don't plan on being at this location indefinitely." He summarized that the proposed legislation would incentivize low interest loans to improve energy efficiency in commercial buildings, using a borough or municipality with a tax system already in place as a way to pay back the loans. He said the proposed provision under HB 80 would be voluntary; HB 80 would put the mechanism in place that is currently in place in 33 other states. 8:04:59 AM REPRESENTATIVE TALERICO asked for confirmation that the program would be voluntary for municipalities. REPRESENTATIVE WOOL confirmed that is correct. He added that [HB 80] is supported by the Alaska Municipal League (AML) and several boroughs. 8:05:27 AM CO-CHAIR PARISH offered his understanding that a previous iteration of this legislation had passed the House. REPRESENTATIVE WOOL confirmed that in 2016, [during the Twenty- Ninth Alaska State Legislature], similar legislation had passed the House with a vote of 38-0 but did not get through the Senate. He indicated that HB 80 included the addition of language regarding clean energy. 8:06:12 AM SEAN SKALING, Assistant Executive Director/Energy Policy Director, Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), gave a PowerPoint presentation, titled "Commercial Property Assessed Clean Energy (C-PACE)." He directed attention to slide 2, which he said shows that C-PACE is a tool to take down barriers to commercial property owners in financing energy improvements to their buildings. He said, "The key is it's a voluntary repayment on the property tax bill." He directed attention to slide 3 and said he would walk the committee through a scenario of how the program would work for a particular building. He noted that Gene Therriault had wished to impart information prior to the PowerPoint. 8:07:50 AM GENE THERRIAULT, Energy Policy Assistant, Alaska Energy Authority/Alaska Industrial Development and Export Authority (AEA/AIDEA), Department of Commerce, Community & Economic Development (DCCED), indicated that the proposed repayment mechanism could give municipalities and utilities better access to funding sources. He relayed that in the past he served on a national board of energy officials across the nation, where he researched programs and funding sources other states used in relation to energy efficiency. He said he discovered a couple loan programs offered by the Rural Utility Service (RUS) - a subset of the United States Department of Agriculture and Rural Development (USDA). The first program is called the Energy Efficiency and Conservation Loan Program (EECLP), which he said gets about $250 million annually that is available nationwide for areas of the population that are RUS eligible. Those funds are underutilized, and RUS is interested in working with states to get more of those funds deployed. He said he checked the RUS Internet homepage in January 2017 to find out the current interest rate. He stated that under the EECLP program, for a municipality or utility that wants to access these funds and loan money out to a consumer for a 10-year period of time, the current interest rate is 2.07 percent, which he said is a relatively low-cost capital that can be accessed from RUS via a municipality or utility and made available to an end consumer. The municipality or utility could then add to that cost in order to cover administrative costs. 8:10:49 AM MR. THERRIAULT indicated that within EECLP regulation is an expressed interest in finding the means of helping to ensure that the default rates on the loans are low. He said the PACE mechanism is one that helps to lower the default rate, because the repayment is being done through an existing relationship between the borough or city and the property owner. Each year, if the municipality levies a property tax, it sends a bill to the commercial property owner, who in turns pays the taxes and any assessments on the property. The way the PACE mechanism works is that the property owner is deciding to pay back the loan through a voluntary assessment that appears on the tax bill. The local government has all the collection powers that it has to collect its general taxes and any assessments to make sure the PACE loan repayment gets made. He said because of the strength of that repayment mechanism, the default rates on PACE loans nationwide are relatively low at less than 1 percent, which means they are low-risk. He added, "And that is what helps you get access to the low-cost capital." MR. THERRIAULT stated that in the regulations for EECLP there is specific reference to an "on-bill repayment mechanism" or other financial recruitment mechanisms as may be approved by RUS. He said when AEA began to look at what it would need to do to implement PACE in the state of Alaska, it corresponded with RUS and got a letter in response saying [RUS] understood the PACE mechanism deployed in many other states as one that would lower the rates of default and be "attractive to access the EECLP funds." 8:13:02 AM MR. THERRIAULT stated that the second program is called the Rural Energy Savings Program (RESP). It is one that was on the federal books for quite a while but did not receive federal funding until 2016, when the total amount available was about $50 million nationwide. He indicated that there are attractive components to the RESP fund. For example, for the borrowing entity - a utility or municipality working with a utility - the interest rate that comes with these funds is zero. The borrowing entity can then add on up to a 3 percent interest rate to cover the local administrative cost. He said the regulations for RESP also speak to mechanisms that ensure that default rates on the loans are low. He indicated the use of "on bill" financing is allowed, as long as the requirement does not prohibit the use of any additional repayment mechanism that has been demonstrated to have appropriate risk mitigation features. He said the PACE mechanism helps to reduce the rates of default. MR. THERRIAULT said, "If the state of Alaska actually puts the PACE mechanism into place, it doesn't guarantee that utilities will have access to it, but these pools of money - when you look into the regulations - specifically point out that they're looking for mechanisms that help to lower the rate of default; and that PACE mechanism is one such mechanism." He stated that he wanted the committee to be aware that there are some potential non-general fund (GF) sources of money that may be accessed with certain mechanisms in place. 8:15:41 AM REPRESENTATIVE SADDLER asked Mr. Therriault to clarify his working relationship with AIDEA and AEA. MR. THERRIAULT answered that he is a temporary employee with AIDEA, but because of the sister relationship between AIDEA and AEA, he is able to work on issues for both entities. 8:16:35 AM MR. SKALING returned to the PowerPoint presentation, to slide 3, titled "C-PACE Scenario." The slide shows a commercial building that went through AEA's commercial energy audit program some years ago. He described a typical example: there is a building with high energy bills, which is hurting the profitability of the business housed therein; the building owner is interested in becoming more energy efficient; and the owner hires an energy auditor, whose audit shows line by line what can be done to make the building more efficient, possibly including the use of renewable energy sources. He said in general the improvement recommendations related to PACE are ones that "can pay for themselves over their lifetime, at least." An audit may show a possible savings of 30 percent annually, with an average six- year pay-back period. The improvement will last between 8 to 20-plus years. Mr. Skaling said the building owner would then go to a bank for a loan, and the bank may offer a four-year payback term with an interest rate that the building owner may not like. Another factor in the scenario is that the building owner has been thinking about selling his/her building in a couple years and moving to a larger space. He said ultimately the hypothesized building owner decides not to go forward with the energy improvement, because the bank term and six-year payback period are not in alignment with each other; therefore, on day one, when the owner starts saving 30 percent, he/she will be paying back more than the energy savings, when he/she wants to start reaping the energy savings. Also, because of the possible move, the building owner is not sure he/she will get back the value from the building. The building will be more appealing because of the energy improvements, but other factors are in play, such as what the market is like and whether a new buyer will recognize the value of those improvements. He said it may be years before these cost effective improvements are implemented. Mr. Skaling summarized, "So, the main sticking points here are that short loan term and that they might be moving soon and they might not make their money back. So, PACE addresses those two things in particular, and they also impact the interest rate." 8:20:15 AM MR. SKALING directed attention to slide 4, titled "How C-PACE Works." He said PACE is a voluntary program that has built in protections. For example, if a building owner decides to use the program, the bank that holds the lien on the building has to approve the loan. He related that 79 percent of the respondents that went through the commercial energy audit program several years ago reported that the main reason for not moving forward with the improvements was because of a lack of financing. He said there were approximately 180 commercial energy audits conducted, and quite a bit of work did result from them. He emphasized that banks and other lending institutions are now more comfortable with [loans relating to] energy savings, because there is a structure in place: a real energy audit will be conducted; there will be real energy savings; so there is less risk, which helps the banks spread out the terms to a longer period of time. He further explained that because [a building owner] pays back the loan voluntarily on his/her tax assessment, "the payment sticks with the building." He explained, "So, if you do move out of the building, the benefits that you've built into the building stay with the building, and the payments for those stay in the building." He offered a scenario describing the takeover of payments from the exiting building owner to the incoming one. 8:22:52 AM REPRESENTATIVE SADDLER asked what qualifications or standards may exist in relation to the auditors. MR. SKALING answered that typically there are standards applied. He said Alaska has used energy raters at various levels; for commercial buildings, the state typically specifies [the American Society of Heating, Refrigerating and Air-Conditioning Engineers] (ASHRAE) Level II, which comes with a set of requirements. In response to follow-up questions from Representative Saddler, he said there is a pool of qualified auditors in the state, and he surmised they may have more work if the proposed legislation is passed. He estimated there may be 5 to 10 [auditors] for the entire state. 8:25:15 AM MR. SKALING returned to the PowerPoint presentation, to slides 5 and 6, titled "C-PACE Eligible Improvements." Slide 5 lists items eligible for energy efficiency improvements, including heating, air conditioning, lights, pumps, controls, and "anything that will end up saving money" by modernizing buildings to more current standards. He said AEA has discovered that energy efficiency improvements are "some of the lowest hanging fruit" and "most available improvements that can be made," thus, there is a lot of opportunity in terms of both heating and electric energy efficiency. Slide 6 lists alternative energy improvements that could be made under C-PACE: air-source heat pumps; solar, if economical; biomass, such as wood heat; and fuel switching to improve efficiency and air quality. 8:26:48 AM CO-CHAIR FANSLER asked if "wind and any other winterization projects" would be included as eligible energy improvements. MR. SKALING answered, "Yes and no." He indicated that in terms of weather efficiency, [eligible improvements] would include air sealing and traditional insulation, such as for windows and doors. He said "wind" could be eligible, but he said it is not AEA's experience that "wind, on a building scale, which would have to be attached to the building, would be economical." He added, "You'd typically want to have a larger scale wind, and in a windy place - not necessarily just wherever the building is situated - so, it's conceivable, although highly, highly unlikely, I would say, because of the economics." 8:27:53 AM REPRESENTATIVE SADDLER asked if fuel switching may include folks in the Interior switching from heating oil to natural gas as a fuel source. MR. SKALING responded that's correct, particularly where there is either air quality improvement or cost savings or reduction in fuel use - "any of those are written into the bill as potentially qualifying." In response to follow-up questions, he said the energy auditors typically will itemize each action they could envision for the building in question, including the cost of the measure, the energy savings, the dollar savings, and even the air emission savings, which he said is not difficult to calculate once the fuel savings is known. REPRESENTATIVE SADDLER referred to the phrase "operating as intended" [found on page 8, line 3, of CSHB 80(ENE)], and he asked, "Does that include achieving the projected emission reduction?" MR. SKALING offered his understanding that it is the intent of that language to ensure that measures are installed that actually achieve that which is intended in the original energy audit that recommended them. 8:29:47 AM MR. SKALING directed attention to slide 7, titled "Cash Floor from Energy Improvements." He noted that the green portion of the graph on slide 7 shows the [post-improvement energy] cost - both electric and heat. He said at a certain point in time there is a drop in that cost, which reflects where the energy efficiency and other improvements were made, and that represents an approximate, average 30 percent decline seen with commercial energy audits. He continued, "And now, since this loan has PACE legislation, the financial institutions are able to offer a longer loan repayment period, such that the loan repayment is less than the energy cost savings; so, ... the building owner is cash flow positive from day one, when the energy efficiency improvements are made." He said that is one of the keys to the proposed legislation. 8:30:51 AM REPRESENTATIVE RAUSCHER asked if it is the intent of the energy auditor to help design or just approve the type of energy that would be used to achieve the desired savings. MR. SKALING answered that a typical energy audit will include a recommendation of the type of replacement energy equipment to use and a range of savings that could be achieved by the building owner. If the building owner chose to install equipment that is less efficient, a follow-up audit would detect that and update the cost savings. He said municipalities would be able to set their own programs, and "this sets the ... guidelines and the process so that an energy audit does have to happen." He mentioned the comfort level of the bank and indicated that [that comfort level] results from the specifics of what [energy efficient measures will be made]. REPRESENTATIVE RAUSCHER said he was trying to understand the 30 percent and how the assurances are made that "the loan is worth their time" and "the program is worth ... what we're trying to accomplish here." 8:33:44 AM REPRESENTATIVE SADDLER asked for confirmation that under HB 80 the property owner would be responsible for paying for the audit; there is no intent to "fold in the cost of that audit into the financing." MR. SKALING answered that the financing - "any of the fees associated with doing this work" - may be folded into that loan. 8:34:22 AM MR. SKALING continued to slide 8, titled "PACE: How Loan is Repaid." He directed attention to the box in the middle of the flow chart that represents the property owner. He said the property owner gets the loan from the investor and pays back the loan through a voluntary assessment on the property tax, which is paid to the city or local government, which then pays back the investor. This method provides extra assurance to the investors that the investment will be paid back and the default rates will be lower than typical default rates. MR. SKALING turned to slide 9, titled "33 States Enabled PACE." He said the slide shows which states have enabled PACE legislation. He commented on the rapid development of the program. He said the program in Alaska is modeled after that in Texas, a state with over one dozen communities running PACE programs. 8:35:54 AM REPRESENTATIVE RAUSCHER asked whether statistics are available showing a success rate of the program or any [failures]. MR. SKALING answered that there are statistics, and the main one of which he is aware is the default rate of less than 1 percent, which he described as "one of the greatest successes of the program overall." He deferred to Mr. Therriault for further statistics. 8:36:57 AM MR. THERRIAULT offered that "PACE Nation" would have examples of the various buildings that have been upgraded under its program and the savings that were achieved. He echoed that the default rate is low, specifically for the C-PACE programs. He noted that C-PACE did not get started until 2008 and did not gain momentum until the last four to five years; therefore, the information pertaining to success rates is relatively new. 8:37:57 AM MR. SKALING, in response to a follow-up question from Representative Rauscher, related that public, residential, and commercial buildings that utilize the PACE program all tend to gravitate to a 30 percent savings. 8:39:11 AM MR. SKALING returned to the PowerPoint presentation, to slide 10, titled "Time to Add Alaska to the Map." He said the slide simply purports that it is time to add Alaska to the map, because there is no cost to the state and the program is voluntary. He directed attention to slide 11, titled, "C-PACE is a Win-Win-Win." He said property owners would pay lower utility bills; their properties would be improved; and their work environment could result in increased productivity from employees. Lenders would be making new loans, with less risk and a consistent, statewide process. Contractors and vendors would be busier, as they are hired to make the improvements, and there would be more local hire, with contractors keeping up with new technology and advancements in energy efficiency. He added that there would also be other benefits, including to tenants of the buildings, to communities, and to the quality of air. MR. SKALING drew attention to slide 12, titled "Easy Win for Alaska." He reminded committee members that similar legislation had been fully vetted during a previous legislature and had gained strong support. Further, he reiterated that the program would be voluntary, with no cost to the state, and would help local economies. He explained that rather than spending money on fuel "that quickly leaves the community," hiring people locally would save money in the long term, and "that money from that business can be circulating in the community for much longer." 8:41:25 AM REPRESENTATIVE SADDLER asked for clarification regarding the flow chart on slide 8. MR. SKALING responded that the ECLA and REST programs would provide the capital typically to the city or local government for those entities to "re-loan as a pool." He said it is conceivable that investors could use that money, too, depending on the rules of the program; however, the money would have to go to an eligible borrower, which he said he does not think could include a commercial lending institution. In response to a follow-up question, he said another option could be for a local government to amass its own pool of money through bonding or through "this federal source," and then the relationship essentially would be between the property owner and the city, which would be both lending the money and receiving money back through taxed bills. The other investment option, he said, would be "any sort of financial institution that's separate from the [municipality]." He concluded, "A [municipality] may also use an investor or some sort of financial institution to manage that cash; these are all things that the ... city and investors could figure out as the ... money pool became available." 8:43:40 AM REPRESENTATIVE RAUSCHER asked for the definition of a home rule municipality. MR. THERRIAULT answered it is one that is given the power to establish its own rules. In response to a follow-up question, he said, "In the front part of the bill here, I think we're giving this power to first -- well, home rule boroughs, first- and second-class." He suggested there were other members of the committee who could offer more details. 8:44:32 AM REPRESENTATIVE TALERICO proffered that a home rule borough can do anything that is not prohibited by law under Alaska statute. 8:44:51 AM REPRESENTATIVE WESTLAKE said, "The implications for at least one municipality are good and the implications for the state are even better should this come through." 8:45:25 AM CO-CHAIR PARISH opened public testimony on HB 80. 8:45:53 AM BRITTANY SMART, Special Assistant, Mayor's Office, Fairbanks North Star Borough, testified in support of HB 80. She said while the Mayor's Office understands that the proposed financing measure can be used by commercial entities to provide energy efficiency to their facilities, it is most interested in the implications of HB 80 in improving natural gas conversions and air quality. 8:46:52 AM CO-CHAIR PARISH, after ascertaining that there was no one else who wished to testify, closed public testimony on HB 80. 8:47:15 AM The committee took an at-ease from 8:47 a.m. to 8:50 a.m. 8:50:15 AM REPRESENTATIVE TALERICO augmented his prior remark concerning home rule authority by offering his understanding that the proposed legislation would add a tool in the Title 29 tool box that would apply to first- and second-class boroughs; it would add to the existing taxing and planning authority "the ability to participate in these programs." He said he is not an expert, but was a home rule mayor for ten years; therefore, he indicated he is not as familiar with first- and second-class borough systems. 8:51:40 AM REPRESENTATIVE SADDLER said he understands the goal is "making sure a municipality cannot hold somebody hostage by not issuing a permit, license, or other authorization" if [that individual] "has not chosen to take part in this process." Notwithstanding that, he said the aforementioned language on page 10, lines 7- 13, of CSHB 80(ENE) "sounds like it's making a specific reference to a person entering a written contract." He asked for clarification for the record that the language is specifying that a municipality could not "make issuance of any permit contingent on any person participating in the program." He added, "It's not just a written contract aspect; it's participate in the PACE program at all." 8:52:32 AM REPRESENTATIVE WOOL offered that his understanding of lines 7- 13, on page 7, is that a person could not be compelled to enter a written contract. In response to a follow-up comment by Representative Saddler, Representative Wool confirmed, "It's voluntary on both ends." 8:54:05 AM CO-CHAIR FANSLER moved to report CSHB 80(ENE) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 80(ENE) was reported out of the House Community and Regional Affairs Standing Committee. 8:54:32 AM The committee took an at-ease from 8:54 a.m. to 9:01 a.m. 9:01:34 AM CO-CHAIR PARISH noted that CSHB 80(ENE) had been reported out of committee with an attached zero fiscal note.