3. PAYS Pilot

In enacting AB 1613, the Legislature stated its intent to increase the efficiency of the state's use of natural gas by capturing unused waste heat and to support and facilitate both customer and utility-owned CHP systems. According to the statute, a PAYS pilot program should enable an eligible customer, namely a qualifying non-profit organization or government facility, to finance all of the upfront costs of a CHP system by repaying those costs over time through on-bill financing at the difference between what an eligible customer would have paid for electricity without a CHP system and the lower electricity bill that results from having CHP for a period of up to 10 years. (Section 2842.4(c).) The statute also mandates that "all costs of the [PAYS] program or financing mechanisms shall be borne solely by the combined heat and power generators that use the program or financing mechanism, and the Commission shall ensure that the costs of the program are not shifted to the other customers or classes of customer of the electric corporation." (Section 2842.4(e).)

In the original scoping memo in this proceeding, the Commission stated its intent to hold a workshop to address the following:

(1) Will the pay-as-you-save pilot program mean that the electrical corporations are functioning as lending institutions? If so, would the program be subject to state and federal lending laws?

(2) Can the on-bill financing program for energy efficiency programs serve as a model for the pay-as-you-save pilot program?

(3) Should electrical corporations that are unable to finance CHP projects be required to participate in the pilot program?

In a May 11, 2010 ruling, the Commission sought to refresh the record on the topic of a PAYS pilot. Parties were asked to comment on the questions specified in the scoping memo as well as current interest in development and implementation of a PAYS pilot, the potential pool of eligible customers for such a pilot, what other financing options might exist for eligible customers purchasing CHP facilities, and whether a workshop is necessary to consider issues surrounding a PAYS pilot.

Six parties responded to the ruling, all utilities. There were no comments from non-profit entities or potential government customers on the ruling. The utilities generally responded that they are not aware of any current interest in a PAYS pilot. PG&E notes that as a preliminary matter, market research should be conducted to identify potential customer interest in a PAYS pilot. PG&E also explains that if the Commission's Self-Generation Incentive Program (SGIP) is modified to provide incentives to CHP projects, SGIP could be a source of financing for projects up to 5 megawatts (MW). SCE questions whether a PAYS pilot would provide any significant advantages over the financing options that currently exist in the credit market.

The responding utilities with fewer customers in California, namely Mountain Utilities, PacifiCorp and Sierra Pacific, unanimously urge that any program not apply in their service territories. Mountain Utilities states it is not aware of any potential for CHP in the Kirkwood community that it serves, and it contends it has extremely limited resources to finance CHP projects. PacifiCorp states that only one CHP system currently exists in its territory, and the pool of potential eligible customers is extremely limited. Sierra Pacific opposes the adoption of a PAYS pilot in its territory, noting that it is unlikely any CHP systems will ever be developed in its unique service territory in the Lake Tahoe area.

With regard to the question of whether state and federal lending laws would apply to the utilities administering a PAYS pilot, both SCE and SDG&E/SoCalGas contend that if the utility uses ratepayer funds to finance CHP systems, it would most likely be considered a lending institution. According to both SCE and SDG&E/SoCalGas, this question previously arose during implementation of on-bill financing for energy efficiency programs in D.05-09-043. They report that in that proceeding, the California Department of Corporations (DOC) issued Release No. 60-FS which found the utilities would not be considered to be engaged in the business of financial lender or broker under certain narrow circumstances. To remain exempt from lending regulations, the DOC laid out specific requirements for lenders, the borrowers and the loans themselves. One of those requirements is that the loans have to impose no costs on the borrowers, i.e., they are provided free of interest, fees, late payment penalties and other charges. As SCE points out, the PAYS program described in AB 1613 precludes this no cost scenario because "all costs of the [PAYS] program or financing mechanisms shall be borne solely by the combined heat and power generators that use the program..." (2842.4(e).) SCE suggests that application of lending laws to the utility programs might be avoided if a third party finances the purchase and installation of a CHP system and the utility merely facilitates on-bill repayment of third party loans.

The utilities also responded to the question of whether on-bill financing for energy efficiency programs can serve as a model for a PAYS pilot. SDG&E/SoCalGas contend that the energy efficiency on-bill financing program could serve as a model for a PAYS pilot, however several key issues would need to be addressed including on-going administrative costs, creditworthiness standards, and treatment of loan defaults. Both PG&E and SCE allege that energy efficiency on-bill financing is not an appropriate model for a PAYS pilot. According to SCE, the financing costs for CHP facilities are $1.2 to $1.5 million per MW, and a CHP facility could need financing up to $30 million. This dwarfs the financing provided through energy efficiency on-bill financing efforts which have a maximum financing cap of $250,000. In addition, CHP systems can take up to two years to construct, creating a significant lag time between when the money is loaned to a customer and when the project operations begin, creating the energy savings that are used for loan repayment. This exposes the utilities and ratepayers to project finance risks, and raises the costs of the program, which cannot be absorbed by non-participating customers according to AB 1613. PG&E points out that a PAYS pilot would have no up-front funding source, whereas energy efficiency financing is paid out of energy efficiency funds collected from ratepayers. Similar to SCE's concerns, PG&E notes that non-participating customers and the utilities would be at risk for the principal lent to the nonprofit customers to finance their CHP systems.

Based on the comments provided, we conclude that at this time, in this proceeding, we will not pursue development of a PAYS pilot for several reasons. First, it is unclear if there is customer interest for a PAYS financing program at present or if a PAYS pilot would provide more favorable financing than what potential customers could find in the market or through other incentive programs.5 No eligible customers or their representatives responded to the ruling where we attempted to ascertain current interest. Moreover, we find that Mountain Utilities, PacifiCorp and Sierra Pacific provide valid reasons that a PAYS pilot is not feasible or suited to the unique circumstances of their service territories.

Second, it appears a PAYS pilot may not fall within DOC lending law exemptions for utility programs. Information provided by SCE and SDG&E/SoCalGas suggests that because a PAYS pilot could involve financing for projects far greater than the $250,000 cap for energy efficiency financing and would require participating customers to bear all costs for the pilot, it would not fall within the requirements set forth by DOC that allow lending law exemptions for utility on-bill financing. This is an area that will require greater review and analysis before the Commission could establish a PAYS pilot. Since demand for on-bill financing for CHP systems is unclear, we will not explore this question at this time. Should parties desire the Commission to reconsider a PAYS pilot in the future, they should address the DOC criteria for lending law exemptions set forth in Release No. 60-FS and provide analysis of how a PAYS pilot might work within that framework.

Third, we agree with the utilities that in order to establish a PAYS pilot, there are several issues areas that require further consideration. Specifically, PG&E, SDG&E/SoCalGas, and SCE maintain that more information is needed on applicability of federal and state lending laws, the appropriate interest rate for loans, how utility lenders would deal with loan defaults, loan security, credit requirements, and cost recovery. SCE questions whether in the event of a default, it would take ownership of a CHP system. PG&E is concerned with the risks imposed on non-participating customers by a PAYS pilot. Likewise, SCE contends that since the nonprofit organizations and government facilities purchasing and installing CHP systems must bear all costs of the PAYS pilot, the utilities must perform a careful analysis of all likely costs of the pilot to ensure that other customers remain unaffected. We agree that all of these issues will require greater consideration by the Commission before a PAYS pilot can be established.

Another factor in our decision to not pursue a PAYS pilot at this time is our current review of SGIP eligibility in response to Senate Bill (SB) 412. In our Distributed Generation Rulemaking (R.) 10-05-004, we are considering modifying SGIP to provide up front incentives to CHP systems that meet certain criteria. SB 412 allows the Commission, in consultation with the California Air Resources Board, to determine eligible technologies for SGIP based on the requirement that they achieve reductions of greenhouse gas emissions. The Commission released a Staff Proposal on September 30, 2010 that proposed a variety of changes to the SGIP with regard to CHP systems.6 These proposed SGIP modifications will be considered by the Commission in R.10-05-004 in the near future. In addition, in D.09-12-042, we have adopted two standard contracts for purchase of excess electricity from eligible CHP systems by an electrical corporation under AB 1613. One contract is available to CHP systems up to 20 MW and a simplified contract is available to CHP systems that export no more than 5 MW. Together, modification to SGIP and the standard contracts available to CHP systems reduce the need for the PAYS pilot envisioned in AB 1613.

Nevertheless, we clarify that should interest arise for a PAYS pilot, and should other new facts and circumstances warrant reconsideration of today's decision, parties may petition to modify this order and provide information on those new facts or circumstances. Any such petition should address the following issues:

5 Available financing options include California Energy Commission loan programs and energy efficiency financing. (See http://www.energy.ca.gov.efficiency/financing/index.html#eligibility.)

6 See "ALJ's Ruling Requesting Comment on Staff Proposal Regarding Modifications to the SGIP," R.10-05-004, September 30, 2010.

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