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Budget and Policy Post
February 15, 2018

The 2018-19 Budget

California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA)

CAEATFA is housed within the State Treasurer’s Office and operates a variety of programs that provide financial assistance—such as tax exemptions, loans, and bonds—largely to entities developing technologies intended to reduce air pollution and conserve energy. CAEATFA consists of five members: the State Treasurer (who serves as the chairperson), the State Controller, the Director of the Department of Finance (DOF), the Chairperson of the California Energy Commission, and the President of the California Public Utilities Commission (CPUC). The Governor’s budget provides $10.3 million for CAEATFA in 2018-19, a net increase of $4.5 million above the amount provided in the 2017-18 budget. This increase is almost entirely driven by a request for one-time reimbursement authority to continue administering the California Hub for Energy Efficiency Financing (CHEEF) pilots, as we discuss below.

CHEEF Pilots

Background. In 2013, CPUC authorized the investor-owned utilities (IOUs) to collect ratepayer funds that would be used to support new energy efficiency financing pilots. CPUC also selected CAEATFA as the administrator of the program. The pilots are intended to implement and evaluate strategies to encourage individuals and businesses to install energy efficiency technologies by reducing the risk to private lenders and reducing the upfront costs of energy efficiency retrofit projects. The pilots involve some combination of (1) credit enhancements to lenders—such as loan loss reserves that cover some losses if borrowers do not fully repay loans—and/or (2) the option for customers to repay their loans on their monthly utility bill (known as on-bill repayment, or OBR). Specifically, CAEATFA is developing four pilots that, with one exception, will be offered in all four major IOU territories:

  • Residential Energy Efficiency Loan Program. This pilot offers credit enhancements for loans to single‑family homes, as well as OBR in one IOU jurisdiction. The pilot began in 2016.

  • Small Business Program. This pilot will offer credit enhancements for loans to small businesses, as well as OBR. This pilot is expected to begin in the summer of 2018.

  • Affordable Multifamily Financing Program. This pilot will offer credit enhancements for loans to affordable housing properties, as well as OBR. The pilot is expected to begin in early 2019.

  • OBR for Commercial Buildings. This pilot will offer OBR—but no credit enhancements—for energy efficiency loans for large commercial buildings. This pilot is expected to launch in late 2019.

One of the main features of the CHEEF pilots is a new centralized information technology platform—or “hub”—to connect private lenders that provide the capital for the energy efficiency projects with utilities that collect monthly payments from ratepayers. A large share of CAEATFA’s costs are for contracts with entities that support this hub. This includes a Master Servicer that processes lender and loan enrollments, transfers funds, and helps manage data.

The Legislature initially provided CAEATFA with limited-term spending authority to administer the pilots in 2014-15 through 2016-17. Since then, the implementation dates of the pilots have been delayed several times and, as a result, their overall costs have increased. The delay and cost increases are largely because project activities—including developing the hub to connect lenders and IOUs, as well as coordinating with CPUC and various stakeholders—were more complex than initially expected. In early 2017, CPUC adopted a decision that made changes intended to streamline the program and authorized additional funding for CAEATFA’s administrative costs. It also specified that any pilots not launched by December 31, 2019 would be cancelled. Subsequently, the Legislature extended CAEATFA’s limited-term spending authority through 2017-18 to continue the pilots. Total estimated CAEATFA spending on administration activities for the pilots through 2017-18 is over $7 million.

Proposal. The Governor proposes $8.2 million in one-time reimbursement authority—$4.5 million more than provided in the 2017-18 budget—for CAEATFA to continue administering the CHEEF pilots. This amount is equal to the estimated CPUC-authorized ratepayer funds for the pilots that will remain unspent at the end of 2017-18. The proposal would give CAEATFA authority to spend the $8.2 million anytime through 2020-21. According to the administration, CAEATFA needs this budget flexibility because the timelines for implementing the pilots are still subject to uncertainty, thereby making it difficult to estimate costs in any specific year. For example, if a pilot implementation date is delayed, this could delay when CAEATFA’s incurs costs for various contracting services.

LAO Recommendation. We recommend the Legislature modify the one-time $8.2 million appropriation in 2018-19 by instead providing specific reimbursement authority over a three-year period as follows: $3.6 million in 2018-19, $3 million in 2019-20, and $1.6 million in 2020-21. These amounts are consistent with the estimated annual spending provided by CAEATFA. Taking this approach is consistent with the state’s typical approach to budgeting multiyear requests and more easily allows the Legislature to adjust the spending for these pilots should they not be implemented as planned or legislative priorities change. For example, if the Legislature determines that it wants to modify or eliminate the CHEEF pilots in the next couple of years, it could modify CAEATFA’s future budget authority accordingly.

In addition, we recommend that the Legislature add budget bill language that gives DOF the ability to increase annual CAEATFA spending authority (but not to exceed the full budget authority requested over the three years), with a 30-day notification to the Joint Legislative Budget Committee, if a change in the expected pilot timelines results in annual costs that exceed CAEATFA’s annual budget authority. In our view, it is reasonable to provide some flexibility because the timelines for implementing the pilots are still uncertain. For example, if pilot timelines change in a way that unexpectedly shifts costs from one year to another, implementation could be further delayed as CAEATFA requests an increase in spending authority through the annual budget process. The proposed budget bill language would balance CAEATFA’s desire for greater budget flexibility in light of uncertainty surrounding implementation timelines with the Legislature’s interest in maintaining oversight of projects that have been delayed multiple years already.