This document discusses on-bill repayment (OBR) programs for energy efficiency loans in California. It argues that OBR could increase energy efficiency project uptake by providing more convenient, low-cost financing. However, it notes that the term "OBR" was used to describe different concepts. It then analyzes how OBR programs with and without disconnection policies could impact loan volume, affordability, and ability to attract capital. While OBR may increase volume, it likely would not significantly impact affordability or capital attraction without a disconnection policy.

1.
After
a
week’s
discussion
of
On
Bill
Repayment
(OBR)
and
its
appropriateness
for
California,
we
offer
the
following
commentary
that,
we
hope,
will
be
useful.
We
apologize
for
its
length,
but
felt
it
was
important
to
lay
these
points
out
in
some
detail.
We
offer
two
over-­‐arching
points
first
and
then
discuss
several
critical
elements
of
OBR.
1. Terminology
is
tremendously
important
and
parties
were
not
always
talking
about
the
same
thing
when
they
used
words
like
“OBR.”
The
key
difference
was
the
some
parties
referred
to
OBR
meaning
only
a
repayment
mechanism.
Others
thought
of
OBR
as
including
a
repayment
mechanism
that
included
all
traditional
utility
means
to
collect
payment
(for
simplicity
sake
we
refer
to
this
as
disconnection
in
the
remainder
of
this
memo).
2. The
purpose
of
the
CPUC
workshop
was
to
explore
how
OBR
might
help
California
achieve
two
goals:
build
EE
loan
volume
and
increase
EE
project
comprehensiveness.
Discussion
Concept
and
Framework
The
following
logic
supports
the
use
of
OBR:
1.
Given
the
following
goal:
Increase
the
uptake
of
EE
(more
numerous
projects,
more
comprehensive
projects).
2.
A
method
to
increase
the
uptake
of
EE
is
to
provide
energy
users
w
convenient,
low
cost
EE
financing.
3.
A
method
to
provide
convenient
low-­‐cost
financing
is
to
make
EE
attractive
to
lenders.
4.
A
method
to
make
EE
attractive
to
lenders
is
to:
• Improve
the
credit
performance
of
borrowers
• Create
large
volumes
of
loans
5.
A
method
to
improve
credit
performance
and
to
build
loan
volume
is
to:
• Put
the
payment
on
the
bill
(which
gives
the
homeowner
and
the
lender
the
imprimatur/trustworthiness
of
the
utility)
• Allow
shut
off
(which
gives
the
lender
recourse)
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2.
• Provide
bill
neutrality
(because
borrowers
like
positive
cash
flow,
lenders
like
the
monetized
savings)
• Distribute
payments
to
lender
and
utility
proportionately
(because
lenders
don't
want
the
utility
to
get
preferential
repayment
and
lenders
don't
want
to
be
solely
responsible
for
shut-­‐off)
• Allow
the
loan
to
transfer
the
debt
to
the
next
owner/tenant
(because
lenders
don't
want
loans
to
prepay)
Fundamentally,
the
finance
mechanisms
need
to
(1)
build
volume
(2)
make
financing
more
affordable
and
(3)
attract
capital.
The
finance
mechanisms
described
below
are
compared
against
these
goals.
OBR
Absent
Disconnection
1. OBR
(absent
disconnection)
should
build
volume
because
it:
a. Is
an
easy
sale
for
contractors,
since
contractors
are
already
embedded
in
the
energy
efficiency
sales
process
–
the
energy
efficiency
“stream
of
commerce.”
b. Appears
easy
for
consumers
to
understand
their
bill
and
related
savings.
c. Places
the
utility
as
a
trusted
party
implicitly
behind
the
product
(the
imprimatur
of
the
utility,
mentioned
above).
d. Allows
for
some
entities
(Green
Campus
Partners
noted
this
in
the
commercial
sector)
to
more
easily
capture
and
monetize
energy
savings.
2. OBR
(absent
disconnection)
is
not
likely
to
have
a
significant
impact
on
affordability
because
it
is
unlikely
to
affect
either
term
or
rate.
That
said,
OBR
does
absorb
some
collection
costs
that
a
lender
would
have
to
incur
and
these
reduced
collection
costs
may
be
reflected
in
rates,
although
it
is
unclear
that
this
reduction
in
collection
costs
will
be
enough
to
materially
affect
rates.
There
could
be
servicing
savings
but
there
are
significant
interfacing
costs
which
will
likely
consume
the
savings.
3. OBR
(absent
disconnection)
may
have
a
positive
impact
on
the
ability
to
attract
capital
because
it
is
likely
to
build
volume.
Some
parties
suggested
that
even
if
disconnection
is
not
a
part
of
the
program,
that
many
customers
may
believe
potential
of
disconnection
still
exists,
and
take
the
risk
of
non-­‐
payment
more
seriously
than
another
kind
of
bill.
“People
pay
their
utility
bills”
was
a
common
theme.
That
said,
utilities
noted
correctly
that
although
people
generally
pay
their
utility
bills,
that
they
may
pay
those
bills
late;
PG&E
noted
a
22%
delinquency
rate.
Investors
will
price
in
this
delinquency
because
of
the
time
value
of
money.
And
although
investors
may
view
a
customer
operating
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3.
under
the
threat
of
disconnection
as,
ultimately,
more
likely
to
pay
the
bill,
the
fact
that
the
payment
arrives
late
will
add
to
the
rate.
Do
we
want
to
add
“cons”,
e.g.,
the
investor/funder
will
have
to
price
for
remittance
delays
and
the
credit/counterparty
risk
of
the
utility
(PG&E
did
file
for
BK)
OBR
With
Disconnection
1. OBR
with
disconnection
should
build
volume
for
the
same
reasons
cited
above.
2. OBR
has
potential
to
have
a
significant
impact
on
affordability
of
efficiency
(as
a
result
of
either
longer
terms
or
lower
rates).
However
the
extent
of
that
impact
is
uncertain.
a. In
order
to
assess
a
new
financial
product,
the
financial
industry
looks
to
history
of
comparable
financial
products.
To
the
extent
that
a
new
financial
product
can
look
a
great
deal
like
other
products,
financial
institutions
will
be
able
to
assess
its
quality
with
a
de
minimus
premium
for
it
being
a
new
product.
An
efficiency
finance
product
that
essentially
reflects
the
characteristics
of
other
utility
service
may
allow
financial
institutions
to
assess
this
new
product
on
the
basis
of
the
performance
of
the
existing
utility
ratepayer
pool.
b. Disconnection
is
not
in
and
of
itself
well
understood
as
a
security
mechanism
(or
a
proxy
for
collateral).
Financial
institutions
may
not
be
sure
how
to
value
it
in
the
beginning,
although
it
is
likely
that
they
would
give
it
some
credit
as
per
above;
that
credit
will
be
somewhat
discounted
because
of
the
uncertainty.
As
financial
institutions
look
more
closely
at
not
just
disconnection
policies,
but
also
disconnection
practices,
they
may
place
a
lower
value
on
disconnection
itself.
(i.e.
under
what
circumstances
are
customers
disconnected
and
how
reliable
is
disconnection
as
a
proxy
for
security?)
c. In
the
non-­‐residential
sector
there
were
some
questions
raised
as
to
the
value
of
disconnection,
for
instance
it
would
be
likely
that
the
business
would
already
be
in
a
lot
of
trouble
in
the
event
disconnection
occurred.
We
also
heard
that
many
businesses
that
would
be
likely
to
apply
for
a
loan
would
see
the
threat
of
disconnection
as
one
more
reason
to
be
"serious"
about
the
project
and
not
to
over-­‐commit.
In
a
sense,
the
threat
may
help
to
weed
out
the
poor
credits
from
the
beginning.
d. In
residential
customer
base,
there
appeared
to
be
a
fair
amount
of
agreement
that
disconnection
would
be
a
valuable
an
inexpensive
alternative
to
taking
a
collateral
interest.
Note
also
that
the
disconnection
threat
is
both
inexpensive
and
fast;
it
requires
no
additional
paper
filings
and
no
additional
research.
In
this
sense
it
is
very
different,
and
better
than,
a
typical
secured
loan
that
requires
title
search
and
appraisal
(with
associated
time
of
2-­‐3
weeks
and
cost)
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4.
e. Disconnection
for
failure
to
pay
a
third
party
(regardless
of
collection
mechanism)
appears
to
be
contrary
to
CA
statute
for
the
residential
sector.
3. OBR
with
disconnection
has
good
potential
to
attract
outside
capital
for
all
the
same
reasons
cited
above
that
could
lead
to
lower
rates
and
longer
terms
than
are
currently
available
for
financing
product.
OBR
with
the
Payment
Obligation
Tied
to
the
Meter
1. Tying
to
payment
obligation
to
the
meter
may
have
greatest
value
in
increasing
volume
for
the
rental/leased
space
market.
a. For
further
marketability
it
may
be
important
to
require
that
projects
tied
to
the
meter
and
in
the
rental
market
also
be
projected
as
cash
flow
neutral
or
cash
flow
positive
projects.
2. The
impact
of
tying
a
payment
to
the
meter
on
affordability
is
unclear.
a. In
and
of
itself
(i.e.
Absent
a
cash
neutral/cash
positive
requirement
–
discussed
below)
it
could
have
a
positive
impact
on
affordability
as
a
result
of
extended
amortization
periods.
It
is
likely
that
payments
tied
to
the
meter
would
increase
rates,
because
rates
for
longer-­‐term
notes
are
typically
higher
than
short-­‐term
notes.
Further,
to
the
extent
that
tying
a
payment
to
the
meter
would
require
additional
underwriting,
transaction
costs
could
increase.
3. Tying
a
payment
to
the
meter
could
have
a
negative
impact
on
availability
of
capital.
a. Capital
tends
to
be
easily
available
for
terms
of
3-­‐5
years,
often
available
for
7
years,
and
sometimes
available
for
10
years
or
longer
–
at
least
for
a
traditional
unsecured
financial
product.
Because
tying
a
payment
to
the
meter
creates
an
uncertain
repayment
structure
(how
to
address
changes
of
occupancy
and
resultant
changed
credit
profile,
for
instance),
large-­‐scale
capital
sources
may
not
be
available.
b. However,
it
may
be
quite
possible
to
develop
a
pilot
program
for
a
specific
market
sector
(e.g.
rental
markets)
using
either
ratepayer
capital
and/or
non-­‐traditional
capital
sources.
Further,
it
may
be
possible
to
structure
a
product
with
greater
recourse
to
the
utility
balance
sheet
for
this
product.
c. Because
OBR
tied-­‐to-­‐the-­‐meter
increases
the
perceived
risk
of
non-­‐
payment
any
method
of
reducing
that
risk
will
be
helpful
in
attracting
outside
capital.
Therefore,
OBR
tied-­‐to-­‐the-­‐meter
will
likely
be
most
successful
if
it
is
also
tied
to
a
threat
of
disconnection.
Bill
Neutrality
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5.
1. Bill
neutrality/positive
requirements
could
be
attractive
to
customers
and
would
seem
at
first
glance,
therefore,
to
build
volume.
a. However
a
requirement
for
bill
neutrality
would
likely
be
detrimental
to
building
volume
(effectively
eliminating
many
HVAC
and
emergency
replacement
projects
that
tend
to
dominate
most
efficiency
retrofits),
and
would
likely
discourage
more
comprehensive
retrofits.
2. Bill
neutrality/positive
projects
will
increase
affordability
but
for
a
limited
number
of
projects—but,
again,
only
possible
for
certain
project
types
that
will
tend
to
be
less
comprehensive
retrofits.
One
way
to
increase
affordability
of
the
most
comprehensive
projects
is
to
extend
the
term
of
the
financing
from
the
fairly
typical
36-­‐60
months
to
120
or
even
180
months.
This
longer
term
amortizes
principal
over
an
extended
period,
thus
reducing
monthly
payments
and
enabling
energy
savings
to
approach
or
exceed
principal
and
interest
charges.
The
challenge
with
this
strategy
is
that
capital
providers
view
long
terms
as
higher
risk
than
short
terms.
As
a
result
capital
providers
will
be
unlikely
to
proffer
long
terms,
absent
significant
credit
enhancements
(see
below).
3. Bill
neutrality/positive
requirements
are
likely
to
have
two
countervailing
effects.
a. they
could
decrease
overall
attractiveness
of
a
project
to
capital
markets
because
it
restricts
the
number
of
projects
that
qualify,
thus
reducing
overall
volume.
b. they
could
make
some
projects
more
attractive
to
capital
providers
that
incorporate
the
effect
of
a
reduction
in
utility
bills
on
the
ability
to
pay
debt
service.
As
a
rule,
most
consumer
lenders
do
not
incorporate
the
reduced
energy
bills
in
to
underwriting.
However,
this
effect
may
be
more
valuable
in
commercial
lending
–
where
paybacks
are
shorter
and
lenders
tend
to
spend
more
time
underwriting
and
analyzing
each
individual
loan.
4. See
above
section:
the
rental
sector
may
be
most
appropriate
for
a
bill-­‐
neutrality
requirement
if
the
payment
obligation
transfers
with
the
meter.
Pari
Passu
Pari
Passu
payment
allocation
refers
to
allocation
of
a
consumer’s
payment
to
different
obligors,
when
that
payment
is
made
through
a
single
bill
–
as
would
be
the
case
when
the
utility
bill
is
used
to
collect
energy
and
finance-­‐related
charges.
It
is
particularly
relevant
in
the
case
of
a
partial
payment
that
must
be
allocated
to
the
utility
and
to
the
investor.
A
pari
passu
structure
is
one
in
which
any
payment
is
paid
proportionally
to
the
utility
and
the
investor.
Investors
prefer
a
pari-­‐passu
structure
to
one
in
which
energy
bills
are
paid
before
any
investors.
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6.
1. Pari
passu
will
in
general
not
have
a
material
effect
on
volume
or
comprehensiveness
of
retrofits
since
it
is
largely
invisible
to
the
customer.
2. Pari
passu
structures
will
decrease
the
cost
of
capital
because
investors
will
not
be
required
to
price
the
uncertainty
of
repayment
in
the
event
of
a
partial
payment.
3. Pari
passu
structures
will
increase
availability
of
capital
because
investors
will
be
more
willing
to
provide
capital
when
they
can
better
predict
the
flow
of
that
capital
in
the
case
of
partial
payments.
Operational
Issues
It
will
be
important,
no
matter
what
type
of
OBR
structure
that
Commission
elects
to
pursue,
to
be
aware
of
relevant
lending
laws
–
TILA,
holder
in
due
course,
etc.
Credit
Enhancements
Credit
enhancements
can
shore
up
any
weakness
that
a
financial
institution
perceives
in
these
structures.
Credit
enhancements
and
OBR
are
not
mutually
exclusive,
and
in
fact
a
credit
enhancement
can
be
used
to
bridge
the
knowledge,
confidence
gap
as
financial
institutions
assess
the
value
of
OBR
and
other
mechanisms
described
above.
In
a
sense,
credit
enhancements
can
layer
on
to
any
of
the
above
mechanisms
and
could,
over
time,
be
phased
out
as
the
above
mechanisms
gain
a
foothold.
Broadly,
there
are
three
types
of
credit
enhancements
here:
1. An
interest
rate
buydown
(IRB)
that
simply
reduces
interest
rates
by
paying
a
financial
institution
for
the
difference
between
market
and
target
rates.
Although
not
always
viewed
strictly
as
a
credit
enhancement,
this
mechanism
can
nonetheless
make
loan
payments
more
affordable
to
more
people
or
reduce
rates
for
new
financial
products.
A
rate
buydown
therefore
provides
them
rates
(or
terms)
only
available
to
borrowers
with
a
better
credit
profile.
2. A
loan
loss
reserve
(LLR)
that
sets
money
aside
in
a
special
account
to
cover
potential
losses.
An
LLR
is
a
loss
sharing
mechanism
and
is
not
a
guarantee.
3. Balance
sheet
support
uses
the
utility
balance
sheet
to
support
a
loan
portfolio.
It
is
likely
the
least
expensive
type
of
credit
enhancement
because
it
does
not
require
that
actual
cash
be
set
aside
that
exceeds
expected
losses.
Instead,
it
is
a
promise
from
a
creditworthy
entity
to
pay
for
some
amount
of
projected
losses.
The
financial
institution
prices
the
financial
product
on
the
basis
of
the
strength
of
the
underlying
balance
sheet.
In
the
case
of
a
utility
balance
sheet
support,
that
pricing
would
be
based
on
the
utility
bond
rating.
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7.
Each
of
the
above
credit
support
mechanisms
could
be
used,
sometimes
in
combination
with
one
another
to
achieve
the
following
(note
that
the
specific
broad
goal
of
volume,
affordability
or
capital
attraction
is
listed
after
each):
1. Achieve
bill
neutrality
(building
volume
and
attracting
capital
to
specific
markets):
a. Achieving
bill
neutrality
will,
for
many
customers,
only
be
feasible
by
a
combination
of
low
rates
but
(more
importantly)
long
terms.
Credit
enhancements
could
be
provided
for
the
markets
that
are
most
in
need
of
bill
neutrality,
such
as
rental
markets
or
mid-­‐income
customers,
especially
in
multi-­‐family
properties.
2. Reaching
deeper
into
credit
buckets:
a. Credit
enhancements
can
be
risk-­‐adjusted,
with
larger
credit
enhancements
set
aside
to
cover
losses
from
loans
made
to
lower
credit
individuals
or
other
hard-­‐to-­‐reach
markets.
3. Providing
temporary
rate
discounts
(building
volume):
a. An
interest
rate
buydown
for
a
specified
period
of
time
could
be
used
to
offer
a
“no-­‐no”
product
–
no
interest
no
payments
for
6-­‐12
months.
Some
contractors
use
these
products
now
as
an
enticement
to
customers.
4. Overcome
in
ability
to
provide
pari-­‐pasu
payment
allocation
structure
(attracting
capital
and
affordability):
a. To
the
extent
that
financial
institutions
will
price
the
risk
that
they
are
unable
to
be
assured
of
a
pari-­‐passu
repayment
and
to
the
extent
that
the
Commission
does
not
grant
pari-­‐passu
repayment,
then
a
credit
enhancement
could
be
established
to
compensate
for
that
risk.
5. General
rate
reduction
or
term
increases
(volume,
affordability,
attracting
capital):
a. Credit
enhancements
have
been
used
in
numerous
other
states,
including
for
local
governments
in
California,
to
attract
participation
of
financial
institutions,
simply
because
the
product
is
new.
Note
that
the
credit
enhancement
structure
will
vary
depending
on
the
type
of
capital
that
it
is
trying
to
attract.
As
a
rule:
i. Institutions
investing
depositor
capital
(especially
credit
unions
and
some
community
banks)
will
likely
be
most
responsive
to
a
credit
enhancement,
and
will
respond
to
credit
enhancements
in
the
range
of
10-­‐20%.
ii. Capital
markets
have
a
broader
array
of
uses
for
their
capital
and
absent
OBR
with
disconnection
(which
they
will
often
view
Denver+Boston 7
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8.
as
a
substitute
for
security/credit
enhancement)
may
require
a
credit
enhancement
approaching
30%.
Conclusions
Perhaps
the
best
way
to
summarize
is
to
review
(a)
what
we
know
we
know
and
(b)
what
we
think
we
know
but
really
don’t
know
for
sure.
1. What
we
know
we
know
a. OBR
in
any
form
will
help
to
build
volume.
b. Volume
will
attract
capital
and
create
competition
to
supply
capital.
c. More
capital
will
eventually
reduce
the
cost
of
capital.
d. But
that
will
take
time.
e. Pari-­‐passu
structures
are
much
more
attractive
to
financial
institutions
than
non-­‐pari-­‐passu
structures.
f. Bill
neutrality
requirements
will
generally
reduce
the
number
of
eligible
projects
and
decrease
volume
–
absent
credit
enhancements.
g. Credit
enhancements
could
help
to
bridge
this
gap
in
time
and
the
uncertainty
over
pari
passu.
However,
collecting
the
data
to
demonstrate
the
gradually
decreasing
need
for
credit
enhancements
would
be
critical.
Strong
credit
enhancement
structures
can
be
developed
to
enable
long-­‐term
capital
to
come
to
the
table
to
enable
long
amortization
periods
and
transfers
with
the
meter,
and
provide
for
a
broad
array
of
projects
to
qualify
even
in
the
face
of
bill-­‐
neutrality
requirements.
2.
What
we
think
we
know
but
really
don’t
quite
know
for
sure
a. OBR
with
disconnection
threat
will
reduce
the
cost
of
capital
and
will
attract
capital.
b. OBR
with
disconnection
will
therefore
also
increase
volume.
c. Financial
institutions
may
be
able
to
live
with
non
pari-­‐passu
structures,
but
will
price
that
additional
uncertainty
in
to
their
financial
offering.
d. To
the
extent
that
financial
institutions
are
uncertain
of
the
value
of
disconnection,
credit
enhancements
can
help
to
bridge
that
uncertainty
gap.
e. Those
credit
enhancements
will
be
smaller
(perhaps
significantly
so)
than
would
be
required
in
the
absence
of
a
threat
of
disconnection.
Denver+Boston 8
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