Thoughts on Solar by Run on Sun's Founder & CEO, Jim Jenal

On Monday, December 7, a stakeholders’ meeting was held at MTA headquarters to discuss the status of LA County’s AB 811 energy improvements financing program.  (Check out earlier posts here and here about AB 811.)  The meeting was modestly attended and the MTA Boardroom was less than half full.  That was too bad because it is clear that more people need to hear about this important program - and the folks in charge need to hear more from the public this program is intended to serve.

Participation

Let’s start with the cities that were represented.  Here’s the list, based on reviewing the sign-in sheet:

Burbank, Claremont, Culver City, Diamond Bar, Glendale, La Canada Flintridge, La Puente, Lancaster, Long Beach, Los Angeles, Manhattan Beach, Monrovia, Norwalk, Palmdale, Pasadena (?), Rancho Palos Verdes, Redondo Beach, Santa Clarita, Santa Monica, Sierra Madre, and West Covina.

That is 21 of the 88 incorporated cities in LA County.  (To be sure, some of the missing cities are participating indirectly through regional government entities like the San Gabriel Valley Council of Governments - check out the SGV Energy Wise Partnership website - but direct participation is critical as this program progresses.)  So again, if your city is not on that list, you should contact your City Manager’s office to find out why not.

Program Timeline

As to the program itself, the County appears to have done a good job at seeking grant money from the State and the Feds to help offset program costs.  This is crucial since any administration costs that have to be borne by borrowers will make the program less affordable, and ultimately less successful.

Several key events must take place before the program can start funding projects - which hopefully will begin by July 2010.  Here are the major items upcoming:

Consenting Resolution

By next month, the County expects to circulate for comment a draft of the Consenting Resolution that will need to be adopted by the City Council of every city that desires to participate in the program.  Of course, we will post the draft to the Founder’s Blog as soon as it is available.

This is a key milestone since once the document is finalized, the cities will likely need to adopt it as presented without substantive amendments.  This is an important reason why the individual cities need to be on board now.  As we were repeatedly told during the meeting, things will start to move very quickly come January.

Board Hearing

The program is expected to come up for a vote by the LA County Board of Supervisors in February.  At this time it is not known whether there will be any formal opposition to the program but a strong showing of public support is always helpful in getting any program approved.

Validation Action

Once the Board approves the program, the County intends to file what is known as a validation action.  Sonoma county, which has already started its program, filed such an action, and here is their rationale:

Under state law, a public entity that issues bonds has a mechanism to file a “validation action” to prevent later challenges to those bonds. The public entity files a complaint in the local superior court; and notice of the action is published so that all members of the public are informed of the action. The public entity files a brief in support of its position that the bonds were lawfully authorized and issued. If there is no response to the action, a default judgment is entered. Whether or not a response is filed, the court will conduct a hearing to determine whether the public entity is entitled to judgment in its favor. A typical validation action takes approximately four months to complete.

LA County hopes to file their action by March (assuming Board approval in February), which, allowing for the four months that it took Sonoma, would put the County in a position to begin selling bonds in July.

Program Issues

Various committees that are working on the program gave reports and in so doing revealed some issues that could be troublesome.

Residential Only?

At least at the outset, it appears that this program will only be available to residential property owners.  There are some conflicting policy issues here.  On the one hand, there is little doubt that credit for home improvement projects is very tight and this program should make solar affordable for a much broader universe of home owners.  On the other hand, commercial solar power projects are much more cost effective due to the attendant economies of scale and thus more power would be produced per dollar of bonds sold.  While it may make sense for the project to start with residential properties only, it would be a mistake if it were not eventually expanded to the commercial market as well.

Credit Features

To make the bonds attractive to the market, certain credit features were identified as being necessary to the program’s design.  While there is no personal credit worthiness requirement, home owners must satisfy a variety of conditions, including: they must be current with their mortgage, the mortgage to property value ratio must be no greater than 80%, and the cost of the project cannot exceed 10% of the property’s value.  Collectively, it is hoped that these conditions will limit the risk of non-payment of the property tax assessments and minimize the administrative nightmare of foreclosure.

Cost

There is concern that the cost of the loans may be higher than anticipated (and certainly higher than hoped).  The costs for running the program must be paid for by a combination of grant monies (see above) and the interest spread between the rate charged to the home owner and the rate that must be paid to the bond holder.  The County believes that the current market rate for these bonds is approximately 7%, with a spread of 1-2%.  That means that the cost to the homeowner is likely to be in the 8-9% range - nowhere near the 5% that people were hoping to see.

One thing that could change this would be if the bonds could be sold as tax-exempt bonds.  Apparently there is legislation moving in Congress to allow for this - we will report on that when we learn more.

Payment Process

Perhaps the most troubling issue to arise during the meeting was the question of when payments would be disbursed.  According to the committee that reported on the issue, the present plan is to withhold all funds until the project is complete and fully approved.  That means that either the homeowner would need to front the payment to their installer (which pretty much defeats the entire purpose of the program) or more likely, the installer would need to front the entire cost of the project until some unspecified time after the project was completed.  This would put a substantial financial strain on small businesses that provide solar installation services - at a time when loans to small businesses are almost as hard to get as home improvement loans.

Fortunately, County staff were not as dismissive of this concern as was the committee member who presented the report.  We were informed that this issue will be addressed as the program moves forward.

Name?

Finally – what to call this ground breaking program?  Frankly, none of the names suggested had much zing.  If you have a great idea, please include it in the comments and we will pass them on.