On-Bill Financing Programs
Overview and Key Considerations for Program Design
Open Questions to Watch
Exploration of on-bill programs at utilities and with their regulators must include a range of issues other than the strictly operational challenges. The following points are frequently part of the discussion and will require attention and care in program design and implementation.
1. Cost Effectiveness
A utility's fundamental purpose in operating or supporting an on-bill program is to enable more customers to implement energy efficiency measures. Since utilities have many possible efficiency programs, it is important to assess the cost of obtaining efficiency through various programs in order to allocate resources effectively. The cost of operating a program and the efficiency produced are central inputs and should be addressed periodically. These values can be difficult to estimate in advance, although information from other programs can be instructive. Important other variables will include the customer and property types targeted, the amount of the utility or other contribution to reduce finance charges, and the value of market transformation encouraged through the participation of lenders.
2. Consumer Finance Charges
Some advocates argue that the finance charges for on-bill loans will be materially lower than those for traditional sources of credit because of the attributes of on-bill loans that might reduce delinquencies and defaults. Above, this paper argued that those advantages could be used to extend credit to customers who would not otherwise be eligible for conventional loans. Two additional points bear consideration when assessing this question:
- First, reduction in finance charges will take time to materialize after loan performance is proven by actual programs.
- Finance charges are composed of many lender expenses in addition to the costs associated with delinquencies and defaults. Other inputs include at least the cost of loan origination for the lender, the cost of capital for the lender, and cost of loan related services such as obtaining energy audits to assess the energy savings associated with the loan. Even if loan performance of the class of loans is substantially better, it can be expected to have a limited impact on the total customer finance charges.
3. "Stay With the Meter"
New York's on-bill program, implemented in 2012 for residential customers, includes a feature described as "stay with the meter," and the California Public Utility Commission has explored a similar feature for utility on-bill programs. This means that the owner of a house or building, after obtaining an on-bill loan, may sell the property and not pay¬off the on-bill loan. The owner would have no continuing liability for the unpaid loan balance after property sale (except for monthly payments missed prior to the sale). Instead, the unpaid loan balance would be automatically "assumed by" (or assigned to) the new property owner when he or she obtains utility service. The new utility customer would be obligated to make the remaining payments or risk losing utility service. Some also call this a "tariff based" loan.
Advocates argue the "stay with the meter" feature will add value for the lender because in the event of delinquency or default the lender could expect to recover some or all of any unpaid loan balance at the time the home is sold or in regular monthly payments made by the next property owner, who is likely to need utility service to occupy or use the property. Even in the event of bankruptcy of the borrower or foreclosure of the primary-lien mortgage, the subsequent property owner would be expected to repay the unpaid loan balance on the on-bill loan. In contrast, the holder of a subordinate-lien loan is typically wiped-out in bankruptcy and left with an unsecured claim against the borrower after a home sale for less than the amount of the primary mortgage or after foreclosure.
While the ability to recover unpaid balance following a foreclosure or sale of the home can be viewed as a benefit to the on-bill lender, it raises substantial and difficult questions for the holder of the primary mortgage and other participants in the mortgage transaction, for both residential and commercial properties.
Results from on-bill programs with a "stay with the meter" feature will be useful to help utilities and other stakeholders understand and address the questions raised in the residential and commercial property sectors. Until meaningful results are available, it is important for any utility considering a "stay with the meter" feature to work closely with the real estate finance industry in program design so that any on-bill loan will dovetail with other real estate financing functions and interests.21 Since the fundamental goal of on-bill programs is to enable property owners to invest in efficiency improvements, it is important to assure that owners may obtain financing in the program without jeopardizing their interests under conventional mortgages or at time of property sale.
4. Borrower Ability to Pay
The "bill neutrality" test means the expected reduction in energy expenses after the efficiency improvements is modeled by an energy auditor, and the modeled reduction in expenses must equal or exceed the on-bill loan payments. If the energy estimate is correct, the customer's net cash flow will improve after the taking the loan, all other things equal.
The value of bill neutrality should be seen most powerfully across a portfolio of loans. A program with a bill neutrality requirement should produce a portfolio with considerably better credit risk profile than a pool of traditional loans with similar credit metrics (e.g., credit score, loan amount, property type) because in traditional loans, the new loan payment increases the overall debt load of the borrower.
On an individual basis, however, caution is warranted. The energy expense estimate is based on averages and assumptions about the house or building, past usage patterns, rate structure, and many other factors. A given customer implementing efficiency measures may have higher savings or lower savings depending on many variables. Moreover, reducing the uncertainty of any energy audit increases the cost of the audit, which is part of the cost of the loan program.
Bill neutrality requirements do not mean that every individual customer will have lower total payments after a funded efficiency project, and it is not a substitute for testing the customer's ability to pay the loan.22 An on-bill program must still determine how to assess the borrower's ability to pay. This concern is especially important in the residential sector.
Some advocates argue this risk can be addressed by discounting the expected savings. That is, a project would meet a bill neutrality test after reducing the estimated energy savings by 20 percent. While this approach will reduce the likelihood an individual will experience an increase in total expenses after the improvements, it works to reduce the number of eligible projects.
5. Labels: "Debt" or "Tariff"?
Determining whether monthly on-bill payments are debt, a utility charge, or another kind of obligation for the customer might have important consequences to certain customers. The question is relevant, for example, to a company with an obligation under a financing agreement that would be triggered by undertaking a new debt obligation.
This determination will likely be based upon the nature of the obligation itself and whether it has the attributes of debt, not by whether the utility or others label it a loan payment, debt, service charge, or tariff. The determination might also vary depending on the customer type, the terms of the on-bill program, and the terms of any agreement between the building owner and other vendors involved.
last revised 7/10/2013
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