SB 17-ENERGY EFFICIENCY & POLICY: PUB. BLDGS  2:09:50 PM CHAIR COSTELLO announced the consideration of SENATE BILL NO. 17 "An Act relating to the retrofitting of certain public facilities and community facilities; relating to the performance of energy audits on schools and community facilities; relating to the duties of the Alaska Energy Authority and the Alaska Housing Finance Corporation; creating a rapid economic recovery office in the Alaska Industrial Development and Export Authority; and relating to the state energy policy and energy source reporting by state agencies." [CSSB 17(CRA) was before the committee.] 2:10:19 PM SENATOR TOM BEGICH, Alaska State Legislature, Juneau, Alaska, sponsor of SB 17 introduced the legislation paraphrasing the sponsor statement that read as follows: The State of Alaska is responsible for over $650 million in energy costs associated with close to 5,000 state owned public facilities. With significant economic headwinds visible on the horizon, reducing the state's energy costs through sound investments in clean energy not only makes good fiscal sense; it also fulfills a legislative promise of bringing renewable energy to Alaskan communities. In 2010, the Alaska State Legislature passed HB 306, which established a State goal of obtaining 50 percent of our State energy needs from renewable energy by 2025. With some of the highest energy costs in the nation, increasing the share of renewable electricity and heat will save the State money and help insulate costs from volatility in fuel pricing. Also, in 2010, the Alaska Sustainable Energy Act set forth a goal of retrofitting 25% of the state's buildings over 10,000 square feet for energy efficiency by 2020, successfully achieving that goal in 2014. Building on the successes of the Alaska Sustainable Energy Act, SB 17 extends the energy efficiency retrofit program to schools and community centers which are eligible for the Power Cost Equalization Program. This creates incentives to reform retrofits for buildings which receive State support for their energy bills, which will save the State, school districts, and communities' money. However, single retrofit projects may not be attractive or profitable to private retrofit enterprises. SB 17 also directs the Alaska Industrial Development and Export Authority (AIDEA) to establish a rapid economic recovery office to facilitate state energy policy and encourage private investment. This new office will review energy audits, identify retrofit and other clean energy projects to be bundled, marketing those projects to and engage with Department of Transportation and Public Facilities to contract with private investors. This will ensure the benefits of the state's energy policy, clean energy, and energy retrofitting will proliferate into rural communities, rather than just reaching the goal through one large Railbelt project. SB 17 will provide rapid economic recovery by bringing in new investment to support an Alaska based clean energy industry and reduce the challenges and barriers that may prevent private companies from investing in Alaska's infrastructure development. 2:14:42 PM LOKI TOBIN, Staff, Senator Begich, Juneau, Alaska, presented a PowerPoint as an overview of SB 17. She explained that the bill amends existing statute to extend the authority of the Department of Transportation and Public Facilities (DOTPF) to use energy performance contracting to help reduce energy costs in public facilities. The legislation will leverage state capacity and expertise to assist the Alaska Industrial Development and Export Association (AIDEA) in establishing an economic recovery office that will help to bundle, market, and support small projects and retrofits that may not be economically viable on their own. Additionally, she said SB 17 asserts an energy policy that will move the state toward the use of more renewable energy resources by 2026. MS. TOBIN reviewed the history of energy efficient policies leading to SB 17. She related that a goal of House Bill 306 [Chapter 82 SLA 2010] and the Alaska Sustainable Energy Act (AS 44.42.067) was for 25 percent of public facilities [10,000 square feet and larger] to be retrofitted to meet energy goals. The state achieved that goal in 2014. 2:16:01 PM MS. TOBIN pointed to the graphic on slide 4 that offers an overview of energy service performance contracting. Under SB 17, the Alaska Energy Authority (AEA) or DOT&PF will perform a public facility audit to identify retrofit projects that would result in energy cost savings. The agency would hire an energy service performance company (ESCO) to perform an investment grade audit to guarantee those savings. The agency then will identify a third party lender to fund the retrofit projects. The realized savings will repay the loan and potentially result in real time savings. MS. TOBINS reviewed the savings realized from energy retrofits bulleted on slide 5. She related that energy retrofits of more than 75 public facilities 10,000 square feet and larger have resulted in [more than $30 million] in real savings. SB 17 models New Mexico's program that authorized the New Mexico Finance Authority to bundle small projects to achieve economies of scale and take advantage of low interest rates and the tax- exempt bond market for financing. 2:17:40 PM MS. TOBIN paraphrased the following sectional analysis for SB 17, version B. Section 1. Establishes legislative intent to outfit public buildings, facilities, and schools with new energy upgrades to ultimately reduce net energy costs by 2026. Section 2. Amends AS 18.56 by adding a section, AS 18.56.865, authorizing the Alaska Energy Authority (AEA) to conduct energy audits of public facilities upon request. Section 3. Amends AS 42.45.110 by adding a new subsection permitting owners of public facilities that use power cost equalization to allow the AEA, the Alaska Housing Finance Corporation, or the Department of Transportation and Public Facilities (DOT&PF) to perform energy audits and retrofits. Section 4. Amending AS 44.42.065 by adding public school buildings to the list of community facilities that the DOT&PF must perform energy audits for every 7 years. Section 5. Amends AS 44.42.06 by including the definition of public school as defined by AS 14.25.220, but not including a charter school as defined by AS 14.03.290. Section 6. Amends AS 44.42.065 by adding a new subsection which authorizes the DOT&PF to coordinate with the AEA to conduct energy audits by request. 2:19:28 PM Section 7. Amends the date under AS 44.42.067 to which DOT&PF shall retrofit at least 25% of all public facilities to no later than January 1, 2026. Section 8. Amends AS 44.42.067 to include education facilities as well as government and public use facilities in the definition of public facilities and reduces the square foot requirement to 5,000 for public use facilities. Section 9. Adds a new section under AS 44.83, AS 44.83.088 which directs the Alaska Industrial Development and Export Authority (AIDEA) to coordinate with DOT&PF for energy audits on public facilities that use power cost equalization as defined by AS 42.45.110(b). Directs AEA to perform these audits at least once every seven years. Allows the AEA to work with entities that own public facilities to identify sources of funding for audits or retrofits. Section 10. Amends AS 44.88 by inserting a new section, AS 44.88.179, which directs the AIDEA to establish a rapid economic recovery office to facilitate state energy policy and encourage private investment. Directs this new office of rapid economic recovery to review energy audits, identify energy retrofit projects to be bundled, market bundled projects, and engage with DOT&PF to support with the contracting of private investors. Section 11. Adds a new subsection under AS 44.99.115 which establishes a state energy policy target date of 2026 to have at least 50 percent of total energy used by the state to come from clean energy sources and authorizes the AEA to request periodic updates from state facilities on the estimated percent of total energy used obtained from renewable energy sources. This section also includes the previously used definitions of renewable energy, power cost equalization and a state-funded public facility which includes a public school building but excludes a charter school. 2:22:03 PM CHAIR COSTELLO asked if the facility must be involved with the Power Cost Equalization (PCE) program. SENATOR BEGICH answered no. The bill qualifies school district buildings of 5,000 square feet or larger and community or public buildings that are receiving PCE and are 5,000 square feet or larger. The existing statute identifies facilities of 10,000 square feet or larger. CHAIR COSTELLO asked if there was a reason for excluding charter schools from participation. SENATOR BEGICH explained that Legislative Legal Services opined that charter schools are excluded because the constitution prohibits the use of public funds for private institutions and charter schools may receive money from private entities. He noted that the same law excludes private schools from participation. CHAIR COSTELLO asked for confirmation that the public charter schools in Anchorage would not qualify for the program. SENATOR BEGICH restated his understanding that charter schools are able to receive private funds, which disqualifies them from participation in this program. He noted that the requirement for the building to be 5,000 square foot or larger would also be a limitation. He offered to get a memo from Legislative Legal Services confirming the foregoing and to look for creative solutions to legally include public charter schools if any meet the size limitation. CHAIR COSTELLO moved to invited testimony. 2:24:37 PM AMBER MCDONOUGH, Business Development Manager - Pacific Zone, Siemens Industry, Inc., Energy Performance & Services, Anchorage, Alaska, paraphrased her written testimony that read as follows: [Original punctuation provided.] 1. Greetings Madam Chair and members of the committee, for the record, my name is Amber McDonough. I am based in Anchorage and am representing Siemens Industry, Inc. I appreciate the opportunity to provide testimony on SB-17 at the invitation of Senator Begich's Office. 2. Background Info: a. I'm an Account Executive for Siemens Industry Inc., Energy & Performance Services; I've been with Siemens 22 years and supported their energy service company (ESCO) business in AK for 13 years. During this time we have implemented approx. $40M of energy saving performance contracts (ESPC) in Alaska. b. An ESCO is a company like Siemens that develops and implements ESPC work. This includes energy efficiency projects as well as distributed energy solutions including renewable power, energy storage and microgrids. c. An ESPC is at its core a procurement vehicle to fund facility & infrastructure improvements whose savings pay for themselves over time; ESPCs are designed to be budget neutral where the costs of design, development, construction, financing, and the savings guarantee are all funded by energy & operational savings. d. Guaranteed annual savings are confirmed each year using a formal Measurement & Verification (M&V) Program performed by the ESCO. Should verified savings not be met the ESCO will pay the difference to their clients payout rates are historically less than 1% of all savings guaranteed. 2:26:20 PM CHAIR COSTELLO asked if she had experience with this type of financing in any other state. MS. MCDONOUGH replied she represents Siemens' business in Alaska, Hawaii, and Guam and she is part of the Pacific group that handles this type of service on the coast from California to Alaska. Siemens Industry provides ESCO services nationally and internationally. MS. MCDONOUGH continued her testimony: 3. I reviewed and testified on this bill in February and was happy to see some of my suggestions incorporated, especially regarding the type of high- level preliminary audits (ASHRAE Level 1) prescribed by this bill. This will allow energy savings opportunities to be qualified and quantified prior to engaging the services of an ESCO or incurring the costs of more detailed "investment grade" audits needed to secure bank funding. 2:28:21 PM 4. I have three comments on the current version of SB- 17: a. Sec 3 & 9 of the bill seem to limit the beneficiaries of this legislation to schools and facilities that served by utilities that receive power cost equalization (PCE) payments; Would the committee consider opening services up to all communities and public buildings regardless of their PCE status? MS. MCDONOUGH noted that Senator Begich clarified that the bill includes but does not require PCE participation. b. Sec. 7. AS 44.42.067(a) is amended to read: (a) Not later than January 1, 2026 [JANUARY 1, 2020], the department shall work with other state agencies to retrofit at least 25 percent of all public facilities, starting with those it determines are the least energy efficient, if the department determines that retrofitting the public facilities will result in a net savings in energy costs to the state within 15 years after completion of the retrofits for a public facility and if funding for the retrofits is available. This is a big "if". Bundling loans or authorizing a single bond sale which all community facilities could tap into would address the problem of trying to secure private investors for rural communities and rural education attendance area (REAA) schools; This has been a challenge due to their lack of tax base and revenue sources needed guarantee their ability to repay any debt on their own. If the project bundling is truly intended to create one larger agreement between the State of AK and the financier this would be a big help. For example: I recently investigated viability of providing a supplemental financing for a City of Galena microgrid project, but traditional ESPC lenders felt the community was too small and the lending risk too great to participate. c. Sec. 10. AS 44.88 is amended by adding a new section to read: Sec. 44.88.179. Rapid economic recovery office. (a) The authority shall create a rapid economic recovery office to facilitate the state energy policy described in AS 44.99.115(b) and encourage private investment in energy upgrades at state facilities and public schools. What's the best way to do that efficiently? Lately the biggest challenge seems to be perceived risk, even with the more common ESPC projects for state agencies. For example during a typical ESPC development for a state agency process: i. The technical viability of Agency ESPC projects are jointly developed by the DOT&PF Energy Office Project Managers, the Agency Facility Managers and the ESCO, but each agency's financial Administrative Services Director (ASD) director must ultimately rd agree to sign off on 3 party loan. [Current State ESPC financing requires 4 signatures in the OMB approval process: DOT&PF Project Manager, client department leader (Agency ASD or Commissioner), Dept. of Revenue, and OMB Director] ii. The individual Agency Finance Director must be educated on how ESPC works and accept the metrics of the ESCO's savings guarantee. However, beyond that that they must also weigh the risk of whether or not the State will continue to fund their facility's utility budget at the same level for the term of the repayment period. iii. This has sometimes been a tough sell with the Finance Director putting the go/no go decision responsibility back on the Facility Manager who may then hesitate to approve the much needed upgrades. 2:31:30 PM iv. One solution would be for this bill to provide authorization for State OMB to secure a large bond (say $200M) or set aside a state-wide appropriation budget to fund these future improvements. This would achieve structural efficiencies such as: 1. Paper work reduction fewer individual loan contracts and legal fees would be required for each ESPC project; perhaps AIDEA/AEA could manage smaller in-state intra-agency or public community loans from the larger pot of secured funding? 2. Lower anticipated interest rates - one rd larger transaction with a 3 party lender would result in better value than lots of smaller loans with entities of varying credit ratings. 3. Lower perceived risk this funding would provide a backstop the State's current ESPC program as well as give public Finance Directors, School Superintendents, and Facility Mangers in these smaller PCE communities the confidence they need to tap into these programs. This would also mitigate the individual organization's repayment risk for private lenders. 2:32:52 PM CHAIR COSTELLO asked the sponsor if he would like to respond to the testimony. 2:33:02 PM SENATOR BEGICH answered yes. He said his office talked about what to do with risk. He noted that a Governor's bill that the committee heard last week has a section about building bonding capacity. Conversations on how to combine the approaches are ongoing. With regard to the "if" clause in bill Section 7, he said that can be fixed. He said the previous committee of referral raised the question about the PCE requirement and he agrees that the provision needs clarification. He said he did not believe the bill prohibits any public or community school buildings larger than 5,000 square feet. The intention is to include PCE funded community buildings because of the direct state-funding connection. He believes that Ms. McDonough was focused on ensuring there are enough projects to bundle to make the financing cost effective. He voiced support for that concept and noted that some of the concepts in SB 17 are addressed more broadly in the Governor's energy independence bill. He offered to work with the committee to mesh the concepts. CHAIR COSTELLO thanked the sponsor and Ms. McDonough. 2:35:12 PM CHRISTOPHER HODGIN, Energy Program Manager, Statewide Public Facilities, Division of Facility Services, Department of Transportation & Public Facilities, Anchorage, Alaska, stated that he did not have prepared testimony but he was available to answer questions. 2:35:30 PM CHAIR COSTELLO asked if the administration had a position on SB 17. MR. HODGIN replied the administration supports the concepts discussed in the legislation. 2:36:17 PM CHAIR COSTELLO opened public testimony on SB 17; finding none, she closed public testimony. CHAIR COSTELLO stated her intention to hold SB 17 for further consideration. She asked the sponsor if he had any closing comments. SENATOR BEGICH highlighted that Sydney Lindeman provided written testimony and copies were in the packets. He said he looks forward to working with the committee staff, and the administration to move the concepts forward in a well-crafted bill. SENATOR MICCICHE asked if he talked to AEA about absorbing positions without a fiscal note on the plan. He noted that his support for the bill might hinge on the response. CHAIR COSTELLO asked Mr. Thayer to respond to Senator Micciche. 2:38:15 PM CURTIS THAYER, Executive Director, Alaska Energy Authority, Anchorage, Alaska, advised that AEA's fiscal note identified two new range 16 to 18 analysist positions to monitor the PCE communities in addition to the work in rural Alaska. He said he understands Senator Micciche's position; he too does not want to grow government but in this instance, AEA would need the positions to complete the audits called for in the bill. SENATOR BEGICH said he looks at it as an investment that will save money over time like putting new windows in a building. He noted that the state saved $40 million in the last decade under the existing law for buildings 10,000 square foot or greater. That is a quantifiable savings and he anticipates similar levels of savings with SB 17. The ESCOs guarantee that. He said he looks forward to working with the committee staff and the administration to identify the appropriate process to potentially save tens of millions of dollars more than the cost of the legislation in the long run. [CHAIR COSTELLO held SB 17 in committee.]