Setting the pace for energy efficiency: the rise, fall, and (potential) return of property assessed clean energy.

• Author: Hoops, Jeffrey

1. Introduction

   This Note discusses an innovative form of legislation known as "Property Assessed Clean Energy", or PACE. PACE allows property owners to receive funding from their municipality for the purpose of energy efficiency improvements. (1) This money is recovered by the municipality in the form of a special assessment that runs with the property, amortized over a period of ten to twenty years. (2) This financing mechanism has two key advantages that make it an effective tool for encouraging homeowners to make their homes more energy efficient. First, there is no dauntingly high initial net capital outlay required on the part of the property owner. (3) Second, since the assessment runs with the property, (4) property owners pay only for the benefit they derive from the energy efficiency improvements, and no more, in the event that they move before full cost recovery is made by the municipality. (5) As these are the two most cited barriers to implementing energy efficiency improvements, (6) PACE has the potential to spur a wave of energy efficiency retrofits throughout the country. Indeed, until recently, this scenario appeared likely as state after state enacted PACE legislation. (7)

   In the summer of 2010, Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency ("FHFA") (8) moved to quash residential PACE. (9)

   Specifically, the FHFA believes that PACE creates unacceptable risk for lenders in general and its regulated entities in particular because most PACE legislation gives PACE assessment liens priority over pre-existing mortgages in the event of homeowner default. (10) Thus, citing "safety and soundness concerns," the FHFA directed Fannie Mae and Freddie Mac to refrain from purchasing mortgages secured by properties encumbered by PACE liens. (11) As Fannie Mae and Freddie Mac own or guarantee over half of all residential mortgages in the United States, (12) this action effectively killed residential PACE programs throughout the country. (13) However, as discussed in detail below, this action arguably violated both the Administrative Procedure Act ("APA") and the National Environmental Policy Act ("NEPA"). (14)

   This Note will both address this recent conflict in detail and propose possible solutions. Part II of this Note will provide a detailed overview of PACE and its recent history. Part III will then examine the recent actions of Fannie Mae, Freddie Mac, and the FHFA in a critical light, arguing that these entities' actions are ultimately counterproductive. Part IV of this Note will then discuss potential solutions to the conflict, including both legislative and judicial resolutions. Finally, Part V will discuss the future of PACE.

   PACE is a promising, common-sense program that could enable homeowners to do their part to combat climate change and reduce the United States' dependence on fossil fuels. The actions of Fannie Mae, Freddie Mac, and the FHFA in shutting down PACE exhibited rash, reactionary decision-making. This Note will make the case that PACE legislation can be structured so that lenders and loan servicers do not take on undue risk, while still providing homeowners with the means to reduce the energy consumption footprint of their homes.

2. An Overview of PACE and its Recent History

   Concerns about climate change and future energy shortfalls have spurred energy conservation and efficiency initiatives at a rate not seen since the 1970s oil-shortage crisis. (15) Both private and state actors are moving to facilitate, encourage, and in some cases, require energy conservation measures. (16) while lasting and long-term solutions to climate change and future energy shortfalls will likely entail a major overhaul of the global energy economy, simpler and more easily implemented steps can be taken in the short-term to ease this transition. Specifically, energy efficiency measures, often described as the "low-hanging fruit" of potential energy conservation efforts, can offer dramatic results in terms of reducing energy use and greenhouse gas emissions ("GHG") through the application of commonly available technology and techniques. (17)

   Simple home energy efficiency retrofits can help homeowners significantly reduce their utility bills while at the same time reducing GHG emissions and energy use. (18) Energy efficiency initiatives can also serve to stimulate the economy through the creation of "green" jobs. (19) However, many homeowners are reluctant to take such measures due to the requisite initial net capital outlay and the relatively long period of time required to recoup this cost. (20) Some homeowners are unable to afford these upfront costs, while others may be unwilling to make this long-term investment if they believe they may sell the property before their energy efficiency investments result in a net gain. Policymakers in all levels of government can do much to incentivize homeowners to nevertheless take the plunge and retrofit their homes for increased energy efficiency. while a wide variety of such policies and laws have been enacted throughout the united States, (21) this Note will focus on PACE and its implementation throughout the country.

   PACE is a popular and innovative solution to obstacles preventing the widespread implementation of energy efficiency measures. originating in California in 2007, (22)PACE is a form of legislation that allows municipalities to create special assessment districts for the purpose of financing homeowners' upfront costs for energy efficiency improvements. (23) Many states already have statutes in place that allow municipalities to create assessment districts for the purpose of improving local infrastructure. (24) under such a statute, for example, a city may issue bonds for the purpose of financing sewer lines in a given area. The bonds are repaid through property assessments by property owners who benefit from the improvement. (25) PACE legislation typically expands the language of this type of statute to include energy efficiency improvements within its ambit. (26) The legislation also generally provides that local governments may prescribe the types of energy efficiency improvements that the municipality will be willing to finance, (27) as well as underwriting standards for the program. (28) Finally, in the vast majority of states that have enacted PACE programs, PACE legislation provides that a first priority lien will be placed on the property in the event of default or delinquency on the part of the homeowner in paying the special assessment. (29)

   In a typical PACE scenario, a municipality first sells bonds to raise starting capital for energy efficiency project financing. (30) Then, a homeowner seeking to finance energy efficiency improvements to her home applies to the city for the financing. (31) Assuming the applicant shows that she will be able to pay the special assessment by meeting designated underwriting criteria, the municipality then finances approved energy efficiency projects. (32) The municipality recovers this cost and pays back the bonds by placing a special assessment on the property for a period of time equal to or less than the lifetime of the energy efficiency improvements made to the property, typically no more than twenty years. (33)

   PACE legislation allows property owners to reap the benefits of energy efficiency improvements while minimizing or eliminating the usual barriers to implementation. (34) Since the municipality provides the initial funding, there is no initial outlay of capital on the part of the homeowner. (35) And since the special assessment attaches to and runs with the property rather than the homeowner, a homeowner is not penalized if she moves before the energy efficiency investments result in an overall net gain; instead, the homeowner merely pays for the benefit she derives and no more. (36) The next owner of the property continues to enjoy the benefits of energy efficiency while paying their proportionate share of the costs, depending on how long they own the property. (37) Moreover, PACE programs are generally designed so that the homeowners' savings in the form of utility bill reductions will be greater than the amount the homeowners pay the city through the special assessment; that is, the Savings-to-Investment ratio is greater than one. (38) PACE programs therefore make energy efficiency improvements a winning proposition for both homeowners and municipalities.

   Berkeley, California, was the first municipality to institute a PACE program in 2007. (39) in 2008 California became the first state to enable municipalities to implement PACE programs more easily by passing A.B. 811. (40) The program has enjoyed great success in California, with at least seven local governments instituting a PACE program. (41) Initial feedback from these programs indicates that homeowner demand for PACE funding is high, (42) and the programs may be helping to spur job growth. (43)

   Based on this remarkable initial success in California, PACE began spreading across the nation. (44) The federal government quickly took note of the potential of the program for both encouraging energy conservation as well as stimulating the economy. In October 2009 the Vice President's Middle Class Task Force and the White House Council on Environmental Quality ("CEQ") released a report entitled "Recovery Through Retrofit" explicitly endorsing PACE legislation. (45) This report both recommended that additional funding be made available for PACE programs through the American Recovery and Reinvestment Act ("ARRA") (46) and enunciated working principles for energy efficiency programs like PACE. (47) In May 2010 the Department of Energy ("DOE") took heed of the Vice President's report; the DOE issued best practice guidelines for PACE implementation (48) and made additional grant funding available to states through ARRA. More significantly, twenty-five more states and the District of Columbia have enacted PACE legislation within...