Glossary
Executive Summary
I. Introduction
II. Benefits of Energy Conservation
1. Emissions Reductions
2. Environmental Externalities
3. Financial Benefits
4. Cost of Capital
5. Low Energy Prices
6. Hedging Energy Price Risk
III. Barriers to Implementation
1. Capital Constraints
2. Bureaucratic Hurdles
3. Lack of Incentives
4. Information Constraints
5. Low Political Priority
6. Mission of Overseeing Agency
IV. Framework for Analysis
1. Environmental Impact
2. Amount of Cost Savings
3. Barriers
4. Implementability
5. Start up Costs
6. Ongoing Costs
7. Degree of state control
8. Capacity to expand financing
9. Coverage of energy conservation project types
10. Sustainability
V. Policy Options
1. GO Bond Financing: Public Procurement Process
2. ESCo Financing: Shared Savings Program
3. Utility Financing: Demand Side Management
4. Independent Financing: Clean State Revolving Fund
VI. Conclusions and Recommendations
A. Getting Incentives Right
1. Allow Retention
2. A&F Guarantees
3. Personal Incentives
B. Recommendations for Existing Programs
1. Encourage DSM at State Agencies
2. Move Shared Savings beyond "Pilot Phase"
3. Relax DCPO Oversight of Shared Savings
4. Avoid Public Procurement
Appendix A. Clean State Revolving Fund
1. Sharing CSRF Savings
2. CSRF Process
3. ESCos guarantee savings
4. Start with $4 million but allow expansion
5. Cross-subsidize other Clean State projects
Appendix B. Reinventing Government
1. The Budget and Clean State Barriers
2. Barriers to Budget Reform
Appendix C. Other Programs
1. New Jersey
2. New Hampshire
3. New York
4. Connecticut
5. Minnesota
6. Federal Government
7. Massachusetts DSM
8. Massachusetts ICP
9. Harvard and MIT
10. Summary of differences
Appendix D. Public Procurement Process
Appendix E. Shared Savings Process
Appendix F. The Budgetary Process
Appendix G. The Capital Spending Process
A&F Executive Office of Administration and Finance Bond Public debt is measured in "bonds" of $1,000 increments CAA Clean Air Act CSRF Clean State Revolving Fund CSI Clean State Initiative DCPO Division of Capital Planning and Operations DOER Division of Energy Resources DSB Design Selection Board (volunteer oversight committee) DSM Demand Side Management EOEA Executive Office of Environmental Affairs ERC Emission Reduction Credits for sulfur dioxide ESCo Energy Service Company (perform audits and installation) GO General Obligation bonds (on full faith & credit of the state) MWPAT Mass. Water Pollution Abatement Trust Fund (also known as the SRF) MWRA Massachusetts Water Resource Authority (Metro Boston's supplier) P2/RC Pollution Prevention / Resource Conservation RFP Request for Proposal SRF State Revolving Fund (finances water pollution abatement projects)
Since 1985, when energy conservation began in earnest, the Commonwealth has invested $35.2 million in approximately 125 large-scale energy conservation projects in state facilities. For each million dollars invested in projects completed since 1985, the Commonwealth receives following financial and environmental benefits:
In February 1993, Governor Weld issued the "Clean State Executive Order," to encourage pollution prevention and resource conservation within state government.[1] The executive order also established the Clean State Coordinating Council to address regulatory and policy impediments that prevent implementation of the Clean State Initiative. This report begins to identify and address those impediments. Specifically, it focuses on energy conservation projects in government facilities, one of the nine goals of the Clean State Initiative. This report details the benefits of energy conservation, identifies barriers that prevent the Commonwealth from achieving its energy efficiency goals,[2] analyzes current programs that addresses these barriers, and explores the creation of a revolving loan fund.
Many environmental programs have financial costs, but non-financial benefits. Often this acts as a barrier that prevents government from implementing environmental improvements. Even when the environmental benefits outweigh the financial costs, financial considerations often receive greater attention. Energy conservation, on the other hand, has both an environmental benefit and a positive financial return. Improving energy efficiency conserves natural resources, reduces air pollution, and lowers government spending. Chapter Two details the financial and environmental benefits of energy conservation practices.
Despite these benefits, several barriers still prevent government agencies from investing in cost-effective energy conservation measures. (1) Government agencies lack sufficient incentives to pursue energy conservation investments; (2) the bureaucratic process required for agencies to obtain project approval is complex and time consuming; (3) government agencies lack the financial resources required to invest in energy conservation projects; and (4) in some cases government agencies may be unaware of opportunities for energy conservation. As a result of these barriers, Massachusetts is missing out on opportunities to save both energy and money. Chapter Three discusses these barriers in detail.
In its September 1993 report, the Clean State Coordinating Council cited energy conservation as a priority of the Clean State Initiative;[3] and in the Massachusetts Energy Plan, the Division of Energy Resources has set the goal of making Massachusetts "the most energy efficient state in the nation."[4] The Clean State Initiative directs state government to lead through example. The Commonwealth can make state government buildings a model of energy efficiency for the private sector to emulate, and it can assist local governments to do the same in municipal facilities.
The Commonwealth has four available options for financing its energy efficiency goals: (1) Bond financing, (2) the Shared Savings Program, (3) Demand Side Management (DSM) and (4) creation of a revolving loan fund. Chapter Four develops a framework for analyzing each of these options, and Chapter Five applies each of these options to the analytical framework. This analysis leads to recommendations in Chapter Six. We recommend actions that the Commonwealth should take to overcome the barriers presented in Chapter Three.
Energy conservation projects have both financial and environmental benefits. The financial benefits alone make these projects attractive. But energy conservation also produces positive environmental externalities. The combined financial and environmental benefits justify devoting the Commonwealth's time, effort, and resources to energy conservation opportunities in Massachusetts.
The Commonwealth's energy expenses are not "budget busters." Total expenditures on energy in state-operated facilities amount to $90 million per year, or 0.6% of the budget. Annual savings from the Commonwealth's previous conservation efforts total $10.9 million, or less than 0.1% of the budget.[5] Nevertheless, energy conservation projects have positive net present values, and high rates of return.
Energy conservation also reduces air pollution, which reduces health risks and avoids pollution mitigation costs. The size of these benefits depends upon the fuel mix that would have been used to produce the Commonwealth's energy. First, we quantify the total economic benefits of energy conservation, both financial and environmental. Then, we discuss the factors which affect the size of these economic benefits.
On average, every million dollars of capital invested on energy conservation projects in Massachusetts since 1985 produces avoided costs of over $300,000. The average discounted payback period on these projects is about five years.
Energy conservation projects have consistently maintained a high rate of return. The DCPO Energy Team has overseen the investment of $35.2 million in about 125 energy conservation projects since 1985.[6] That investment has generated a gross savings of $10.9 million per year, for a rate of return of 30.9%. The average discounted payback period for these projects at the Commonwealth's current cost of capital is slightly over five years.[7] From a financial perspective, energy conservation projects are attractive investments.
On average, every million dollars of capital invested on energy conservation projects in Massachusetts reduces annual emissions of air pollutants by 5,300 tons of CO2, 34 tons of SO2, and 23 tons of NOx.
Energy conservation creates an environmental benefit by reducing emissions of air pollutants. Massachusetts' electricity is primarily generated by oil and natural gas.[8] Burning fossil fuels emits large amounts of airborne pollutants, primarily carbon dioxide, sulfur dioxide, and nitric oxides. Table 2.1 indicates Massachusetts' average emission reductions for each million dollars of capital invested between 1985 and 1993.
CO2 SO2 NOx Tons of annual reductions 185,600 tons 1,199 tons 809 tons Tons per million invested 5,270 tons/$M 34.1 tons/$M 23.0 tons/$M New reductions in FY93 60,800 tons 487 tons 170 tons Tons per million in FY93 7,670 tons/$M 61.5 tons/$M 21.5 tons/$M
"Tons of annual reductions" (the first row of Table 2.1) indicates the level of emissions that the Commonwealth avoids each year as a result of all energy conservation projects completed since 1985. For example, Massachusetts emits 1,200 tons less sulfur dioxide per year than would have been emitted had these projects not been implemented. Each year, more emission reductions accumulate, as more energy conservation projects are completed. The environmental benefits last for the life of the installed equipment. The last two rows of Table 2.1 indicate the avoided emissions for projects completed during fiscal year 1993, as well as the environmental effect of those projects.
The Commonwealth could sell some of its SO2 emission reductions under the Clean Air Act Acid Rain Program. The Commonwealth could "opt in" to the Acid Rain Program as a source of SO2 emission reductions, under the CAA Amendments of 1990. Emission reduction credits (ERCs) for SO2 currently sell on the Chicago Mercantile Exchange for about $200 per ton. Only emissions which originate from primary consumption are eligible for ERCs (electricity reductions are not eligible).[10]
On average, every million dollars of capital invested on energy conservation projects in Massachusetts generates $88,000 per year in external environmental benefits. This represents the value of the lower emissions of air pollutants in Finding 2.2.
In addition to the financial benefits of $309,000 per million invested, energy conservation projects add $88,000 per million in environmental benefits. The economic benefits of energy conservation projects (the sum of financial and environmental benefits) amount to $397,000 per million invested (see Table 2.2). Massachusetts' investment of $35.2 million has generated an economic rate of return of 39.7%.
CO2 SO2 NOx Total Annual external benefits $0.83 mil $1.98 mil $0.28 mil $3.08 mil Benefit per million invested $23,500/$M $56,200/$M $7,900/$M $88,000/$M Annual financial benefits $10.9 mil Benefit per million invested $309,000/$M Financial plus external benefits $10.9 mil Benefit per million invested $397,000/$M
Massachusetts state government should evaluate projects based on the economic benefits of energy conservation, not merely on the financial benefits. There is precedent for this practice in the Commonwealth. Specifically, the Massachusetts DPU cites "external economies or diseconomies (e.g., environmental attributes)" as a possible non-price criteria in evaluating energy resources.[12] Although we do not detail the environmental benefits of energy conservation any further in this report, an additional 8.8% savings should be added when considering the same savings in environmental economic terms.
Energy conservation projects since 1985 have accumulated an annual environmental benefit of $3.1 million, in addition to the annual financial benefit of $10.9 million (last column of Table 2.2). The environmental benefits accrue from the reduction in fuel consumption due to energy conservation (for our calculations, we use electricity consumption as a proxy measure of fuel consumption).[13] Each additional megawatt-hour of energy conserved will add $28 in external benefits,[14] in addition to the financial savings of $115.[15]
CO2 SO2 NOx (A) EPA emission estimates 1.1 lbs/kWh 4.0 gm/kWh 1.4 gm/kWh (B) DOE external cost estimates 0.68 ¢/lb 0.45 ¢/gm 0.18 ¢/gm (A/B) External benefit $7.48/MWh $17.90/MWh $2.53/MWh
Cost of capital affects the financial benefits of energy conservation projects. To promote energy efficiency, the Commonwealth should seek ways to lower its cost of capital.
Since the Commonwealth can issue tax-exempt debt to finance conservation projects, its cost of capital is low. The interest rates on the Commonwealth's recent general obligation (GO) bond issue ranged between 4% and 5% (for different maturity dates). Further, since the Commonwealth regularly issues large amounts of GO debt, its cost of issuance per bond is low. Therefore, it can evaluate energy conservation projects at a favorably low discount rate. As interest rates increase, the net present value of energy conservation projects diminishes.
To make energy conservation projects appear more attractive, the Commonwealth should take advantage of federal subsidies. Subsidies represent transfers between the federal and state governments; they do not increase social welfare, nor do they increase the benefits of conservation projects. Nevertheless, implementing energy conservation projects generates positive environmental externalities by improving air quality. Often that benefit extends beyond state borders. Although there is not necessarily a correlation between the size of the subsidy and the size of the environmental externality, a federal subsidy increases the return on a state's capital investment. This may change the state's decision criteria to allow the implementation of projects with longer payback periods.
The Commonwealth can encourage energy conservation projects in local government facilities by providing subsidized loans to municipalities. Chapter Five describes and evaluates the revolving loan fund concept for financing energy conservation in Massachusetts. The "Clean State Revolving Fund" would be partly capitalized with federal subsidies. The Commonwealth could use the CSRF to provide subsidized loans to municipalities for their energy conservation projects. As the CSRF increases its level of subsidy, energy conservation projects become more financially beneficial to municipalities, and discounted payback periods on these projects decrease. This would allow municipal participants to implement more projects that they otherwise would.
Low energy prices make conservation projects less financially attractive. But the Commonwealth should not set energy conservation policy based on current or "expected" prices because energy prices are volatile and unpredictable.
Real energy prices have been falling and are at a 15-year low. Figure 2.4 shows the real price of energy, which is currently at its lowest point since the last "oil price shock" in 1978.[17] Low energy prices reduce the financial benefits of energy conservation projects because as energy prices fall, the annual savings from conserved energy falls.
Energy prices are unpredictable. If energy prices were expected to rise, the Commonwealth would be wise to undertake more energy conservation projects. But energy prices are volatile and hard to forecast.[18] Economic theory predicts a slow rise in real energy prices over time. But Figure 2.4 demonstrates that energy prices do not follow economic theory, and Figure 2.5 shows that energy inflation is more volatile than general price inflation.
1960 1970 1980 1990
The unpredictability and volatility of energy prices creates budgeting risk for government. The Commonwealth can hedge this risk with energy price swaps.
Energy price swaps allow the public sector to manage its energy price risk exposure and to remove the uncertainty in budgeting energy expenses.[19] An energy price swap is a financial instrument, administered by an investment bank, which allows the Commonwealth to buy energy at a fixed price, regardless of the true "spot price." Speculative investors capitalize on the Commonwealth's energy price risk aversion. They make money if energy prices fall, and lose money if energy prices rise. Either way, the Commonwealth can purchase energy at a fixed negotiated fee.
1960 1970 1980 1990
If the Commonwealth decides to hedge its energy price risk, it could calculate the financial benefits of energy conservation projects with certainty. However, the reason to enter into these contracts is not to ensure that energy conservation projects hold their value, but rather because the Commonwealth may want to eliminate energy price uncertainty in budgeting its expenses.
Massachusetts is missing out on opportunities to save money and energy. Despite the benefits of energy conservation, several barriers prevent the Commonwealth from making cost-effective capital investments. (1) Government agencies lack sufficient incentives to pursue energy conservation investments; (2) the bureaucratic process required for agencies to obtain capital funding is complex and time consuming; (3) government agencies lack the financial resources required to invest in energy conservation projects; and (4) in some cases government agencies may be unaware of available cost saving technologies.
The budgetary and appropriations process removes incentives for government agencies to pursue opportunities for efficiency improvement. Under present budgeting practices, state agencies do not reap the financial rewards of their efforts. This significantly reduces an agency's profit incentive to pursue energy conservation.
Following the implementation of an energy conservation project, an agency's operating budget would begin to accrue savings. However, budgetary appropriations specify exactly how an agency may spend its money. Therefore, when savings accrue to an agency's energy expense account, the agency may not use its savings for other purposes without the approval of A&F and the Ways and Means Committees.[20] At any one time the Administration has specific spending priorities and the Legislature has its own. Given the many worthy public projects which the government cannot afford to fund, it is unlikely that A&F and the Legislature would allow the agency to retain and spend its savings.
The Budget Bureau's diligence in identifying retained revenues depends in large part upon the state's revenue projections and cash flow for that year. In a year of abundant tax revenues (usually resulting from an unexpectedly strong economy), the Budget Bureau might overlook surpluses in an agency's accounts. However, during an economic downturn or fiscal crisis, the Budget Bureau will actively search for unspent appropriations. A&F has the power to "reverse" unspent revenues during the current fiscal year, and to cut the agency's budget in the next cycle. This "use it or lose it" policy reduces the incentive for government agencies to identify and implement any cost-saving measure.
A&F's policy toward surplus reversion is critical to the agency's decision whether to implement energy conservation projects. Although A&F has considered the idea of allowing agencies to keep a portion of the savings, in practice that objective is hard to implement. A&F's promises are not wholly credible given the potential for shifts in the Administration's priorities. Further, neither house of the Legislature would look kindly on large sums of retained savings which could otherwise fund their priority initiatives. After conservation measures had been adopted, A&F and the Legislature would still have to balance programs which they consider important against the uses agencies would have for their retained savings. For these reasons, developing incentives for long term investment in state facilities presents a difficult challenge for state government.
The bureaucratic process required to obtain capital funding is complex and time consuming. This increases the cost of implementing energy efficiency projects and impedes conservation efforts. Whenever a state facility wants to make capital investments which exceed $100,000, it must seek assistance from DCPO. DCPO oversight guards against waste, fraud, and abuse in the procurement of government contracts. Further, DCPO is responsible for monitoring safety regulations in state facilities, and therefore, it must approve the soundness of any proposed capital project. The public procurement process, which applies to most capital improvements in state facilities, can take up to 45 months from the time when DCPO announces its intention to implement capital improvements, until project completion. (Figure 5.1 presents a flow chart of the public procurement process.[21] For a more detailed description see Appendix D.) The Shared Savings Program circumvents part of this bureaucratic burden due to special provisions written into its enabling legislation. (Figure 5.2 presents a flow chart of the Shared Savings Program. For a more detailed description see Appendix E.) The bureaucracy involved to implement capital improvements represents a cost to state agencies in terms of the time, effort, and resources required for project approval. These costs reduce the attractiveness of capital improvements and deter agencies from pursuing energy efficiency opportunities.
Energy conservation is a low political priority. It is not central to the mission of most government agencies, and as a result, they fail to receive sufficient funds for these projects. Energy conservation projects have up-front capital requirements that range from a few thousand dollars to a few million dollars. Some of these projects have payback periods of less than a year, while others have payback periods of over ten years.[22] In the absence of capital constraints, the Commonwealth could implement every energy conservation project that had a positive net present value, regardless of capital requirement or payback period. The Commonwealth does have limitations on its ability to issue debt, and the state's debt policy prohibits bonding for any energy efficiency project with a simple payback period of greater than five years. These limitations prevent the state from investing in energy conservation at a cost-effective level.
Energy efficiency projects increase capital spending, which violates the Weld Administration's debt management objectives. The Commonwealth is currently a high debt state. In 1993, the state's ratio of tax-supported debt to personal income ranked the fourth highest in the nation[23] and its per capita tax-supported debt ranked third highest.[24] Between fiscal years 1987 and 1989, annual capital spending in the state grew by 62% from approximately $600 million to $971 million.[25] To address this problem, the Commonwealth has taken two important debt management measures. In 1989, the Legislature imposed a limit on the amount of "direct"[26] bonds that the Commonwealth may have outstanding at any one time.[27] In August 1991, Governor Weld instituted a five year capital spending plan, which is updated every year. The plan also sets self-imposed limits on new debt issuance (as opposed to the Legislature's limit on total debt outstanding). As a result of its efforts, the Commonwealth received two separate upgrades in its GO bond rating during 1993. Maintaining a favorable credit rating remains a priority for the Weld Administration.
The Weld Administration would rather spend general obligation debt on Clean State Initiative projects with larger environmental impact and higher political appeal. Given the Commonwealth's legislative limits on outstanding debt, the Administration's limits on new debt issuance and the restrictions of the five year capital spending plan, general obligation bond financed projects must all compete for limited capital funds. Energy conservation, however, is not politically important enough to attract a substantial amount of these scarce funds. The Commonwealth has not capitalized DCPO's energy audit accounts since 1988,[28] and since 1985 it has only spent $5.2 million of bond revenues on energy efficiency investments.[29] Since capital requirements can be high and payback periods can extend beyond the election cycle, implementing energy conservation projects does not yield high political returns; the political appointee who undertakes higher debt today, may not be in office to enjoy the cost reductions of tomorrow.
State agencies cannot finance energy conservation projects on their own because legal restrictions prohibit an agency from shifting funds between operating and capital accounts. Projects that generate annual savings large enough to compensate for capital expenditures within one budgetary cycle could potentially be financed from out of an agency's appropriated operating revenue. For example, if it cost $900 to replace a facility's lighting system with energy efficient fixtures that would reduce the facility's utility bills by $1000 per year, then the agency could afford to pay for the capital improvements from its appropriated utility expenses within one budgetary cycle. By the end of the fiscal year, the agency would have a $100 surplus in its operating budget, as well as an improved lighting system. Unfortunately, it is illegal for an agency to spend appropriations from its operating budget on capital investments; shifting money among expense accounts represents a misappropriation of funds.[30]
State agencies cannot save money to pay for energy conservation projects by reducing their spending because the budgetary and appropriations process does not allow them to retain savings. By identifying areas of fiscal waste, an agency could reduce its spending to save the difference between appropriated and expended funds. Over several years, sufficient savings might accrue to finance an energy conservation project. However, as described above in the incentives barrier section, the Budget Bureau monitors the accounts of each state agency to identify surplus revenues. Usually, the Budget Bureau "reverses"[31] unexpended funds and A&F cuts the budget of any agency that it has overfunded.
Public facility managers may be unaware of conservation opportunities, available technology, and/or sources of funding. Since energy conservation is not central to the mission of most government agencies, and since these agencies often do not receive the financial rewards of their conservation efforts, there is little incentive for public facility managers to develop the technical expertise necessary to identify energy efficiency opportunities. Hiring engineering firms to perform energy audits can help to inform facility managers as to potential cost-saving measures. However, before a state agency can perform an energy audit, it must receive authorization by the Legislature; selection of a firm to perform the audit is subject to the public procurement process; and energy audits can be costly. The Commonwealth has not performed energy audits for several years at many state facilities.
Decentralization and diversity of facilities exacerbate the information barrier. Small public facilities have difficulty keeping informed as to available technology and sources of funding. Conversely, information constraints are less prevalent at large, centralized agencies. Government agencies can reduce information barriers by sharing their knowledge and experiences with one another. But this becomes very difficult when public facilities are decentralized and diverse; decentralization makes inter-facility communication difficult, and diversity of facilities makes information sharing less relevant. Successful energy conservation programs include education as part of their mission. For example, the Federal ICP program disseminates information through frequent mailings to potential program participants and announcements in industry periodicals. (For a detailed description of this program see Appendix C-7).
This chapter develops a framework for analyzing the energy conservation programs available to the Commonwealth. Below, we describe ten evaluative criteria in detail. Chapter Five applies these criteria to four policy options.
Energy conservation projects have fiscal benefits because they reduce the host facility's utility expenditures (see Chapter 2, Finding 2.1). The fiscal benefit which accrues to the Commonwealth, however, depends upon the amount of revenue returned to the General Fund. Essentially, this category measures the potential for each option to lower taxes, or to generate revenue for spending on new projects.
Specifically, we assess fiscal savings based on two criteria. (1) What portion of the savings accrues to the General Fund (versus how much accrues to outside entities)? and (2) How much total savings typically accrues to the General Fund under each program?
Identifiable barriers prevent the implementation of energy conservation projects (see Chapter Three for detailed discussion). This category measures the difficulty with which host facilities implement energy conservation projects under each program. We assess the barriers to implementation based on three criteria:
(1) Incentives to host facilities: How much does the host facility benefit directly from the energy savings? Are there incentives directed towards the host facility, to make up for the time and effort of pursuing energy conservation?
(2) Bureaucratic hurdles: How difficult is the process of implementation? How much time is spent on oversight and control functions, relative to substantive components of the process? How long is the delay between authorization and equipment installation?
(3) Capital constraints: How readily available is funding?
This category estimates how well each policy option will be received in the current political climate. For any energy conservation program to be implemented, it will need some combination of support from the Governor, A&F, EOEA, DCPO, and the Legislature.
We assess implementability based on two criteria. (1) Political viability: How likely are projects to get done under each policy option? (2) Political "attractiveness": Does the policy have a "high political profile" or strong public support?
We assess implementability based on two interrelated criteria. (1) Legislative Requirements: Does the option require legislative action to be implemented? (2) Institutional Hurdles: Does implementation fall within the repertoire of established government institutions or will it require new bureaucracy?
Once implemented, a policy has ongoing costs which are independent of its startup costs. We assess the ongoing costs based on three criteria: source of investment capital for each project; administrative costs; and risk that the equipment will not save energy.
(1) Source of capital: Does the Commonwealth have to cover capital costs? Does the Commonwealth receive subsidies? Does someone else pay entirely?
(2) Administrative and maintenance costs: How much time and effort are required on the part of the host facility and oversight agencies to administer the program? Are regular inspections of equipment or utility bills necessary? Is maintenance of the equipment the responsibility of the host facility?
(3) Risk of equipment inefficacy: Who assumes the risk of the equipment's not performing up to expectations? Conservation equipment might fail to perform not only because of poor installation or poor choice of equipment, but also because personnel may need training in its use.
The Commonwealth does not act based on profit motives, and is therefore subject to misspending if there are not sufficient controls. State control guards against corruption in awarding government contracts and ensures that the Commonwealth uses its money wisely. This category assesses the degree of control that the Commonwealth maintains in each program.
(1) Prevention of waste, fraud, and abuse: The usual means of controlling potential corruption is by oversight, certification, and registration requirements, and by independent agency involvement throughout the spending process. How much oversight and state involvement is there under each policy option?
(2) Control over Equipment Quality: Does the Commonwealth retain control over the quality of installed equipment? Are there incentives to purchase equipment that is cost-effective over its expected operating life? Do incentives reward the purchase of inexpensive equipment that may break down quickly, or generate smaller annual savings?
This criterion assesses the applicability of the policy option to other beneficiaries and for other environmental projects. While this report is concerned primarily with financing energy conservation projects at state agencies, the policy options explored here are potentially applicable to other projects and other sites as well.
(1) Municipal benefit: Does the policy option benefit only state facilities or could municipalities benefit from the policy option?
(2) Project Types: Could this option be used for financing a range of environmental programs that go beyond energy conservation? Other goals of the Clean State Initiative do not produce cost savings -- could the financing option be used for projects which have financial costs and environmental benefits?
This criterion assesses each program's capacity to implement a diversity of project types (large, small, highly profitable, capital intensive, etc.). How restrictive are the program's criteria for selection of projects?
Will energy conservation projects survive under this financing scheme? Can the program be easily abandoned following a change in administration or due to a shift in the Administration's spending priorities? How permanent is this option and what will ensure its longevity?
The Commonwealth has four financing options for implementing energy efficiency projects: (1) Bond financing, (2) the Shared Savings Program, (3) the creation of a revolving loan fund, and (4) Demand Side Management. This chapter describes each of these options and applies them to the criteria of our framework outlined in Chapter Four. We describe each option in greater detail, for those unfamiliar with the programs, in appendices: Appendix D for Bond Financing and the public procurement process; Appendix E for the Shared Savings Program process; Appendix A for suggestions for setting up the Clean State Revolving Fund; and Appendix C-6 for Demand Side Management's incentive system and economic implications.
The Commonwealth has reduced its reliance on bond financing for energy conservation projects in recent years. Bond financing allows the Commonwealth to issue general obligation debt to pay for any approved capital project within state government. But since 1985, the Commonwealth has spent only $5.2 million of bond revenue on energy efficiency in state facilities. The Legislature last authorized $2 million in bond funds for energy conservation projects in 1988, and DCPO has yet to utilize these funds. When financing capital projects with bond revenues, the Commonwealth bears the full cost of installing equipment, the full burden of maintaining that equipment, and the full risk of that equipment's failing to produce expected fiscal savings. However, the Commonwealth captures all of the savings that accrue from its capital investments.
Bond financed energy conservation projects "crowd out" other potential bond financed projects. As discussed in Chapter Three, the Commonwealth is limited in its ability to issue GO debt. An issuer's credit rating, its ability and legal authority to collect tax revenues, the interest rate, and the political environment all determine how much GO debt any one issuer can borrow. Given this limitation, financing energy conservation projects with bond revenue precludes the implementation of programs that would otherwise receive funding. Considering the Weld Administration's goals of reducing new debt issuance within the Commonwealth, bond financing has few advantages. ¥PPP¥ chart, 3.1 goes here Public Procurement Process diagram
The Shared Savings Program addresses some of the barriers that prevent government agencies from implementing cost-effective energy conservation projects, but it has drawbacks. The Shared Savings Program overcomes capital constraints and reduces bureaucratic hurdles. However, under the Shared Savings Program agencies still lack financial incentives to pursue energy efficiency; the Commonwealth does not capture the full savings from its capital improvements; and many types of facilities are not considered for project implementation. The Shared Savings Program is still officially only in a pilot phase.
Implementing Shared Savings projects cost the Commonwealth nothing up front because ESCos satisfy all capital costs. The Commonwealth's only cost is the time spent negotiating the contract and monitoring the installation of equipment. Under the Shared Savings Program, DCPO hires
The Commonwealth pays nothing to an ESCo if expected energy savings do not accrue. In return for the Commonwealth's pledge to share savings, ESCos "guarantee" that their capital improvement will generate reductions in energy costs. A typical contract lasts seven to ten years, during which time the ESCo is paid a predetermined percentage of the energy savings generated (usually between 60%-80%). The savings are calculated based on a negotiated formula which controls for previous energy usage, degree days, hours of operation, and other factors that impact energy cost. A typical contract limits the ESCo to a profit margin of 20% above the cost of installation; if the "cap" is reached, the contract terminates early and the host facility makes no further payments to the ESCo. ¥SSP¥ (Shared Savings Process diagram) fig 3-2 goes here
DSM programs overcome most of the barriers to energy conservation projects at state facilities. Capital constraints are removed, because utilities provide equipment at their own expense. Bureaucratic hurdles are low, because the state facility participating in DSM does not provide any funds of its own, and hence is not subject to public procurement restrictions. Incentives at state facilities are provided by getting new equipment, which often provides a better working environment. Information constraints are minimized because utilities themselves solicit customers for DSM projects, and provide customers with a choice of contractors to implement the conservation measures.
DSM programs have been implemented since the mid-1980s, for both private customers and for state facilities. DSM programs provide about $160 million annually in capital for Massachusetts overall, of which about $2.1 million annually goes to state facilities.[32] DSM programs apply strictly to electricity usage, since electric utilities provide the services. DSM cannot be used for achieving Clean State goals other than energy conservation, nor even for energy conservation measures other than lowering electricity consumption (such as heating systems).
Utilities have an incentive to implement energy conservation measures in order to reduce peak demand, and to maintain a good public image.[33] The purpose of DSM, from the utility's perspective, is not to avoid plant construction -- in Massachusetts, there is currently excess capacity, and a new plant will not be needed for at least ten years. The purpose of DSM is also not to reduce electricity consumption -- utilities earn their revenue from increasing consumption, and reducing consumption is a side-effect of reducing peak demand. Nevertheless, DSM projects reduce electricity usage and hence fulfill the energy conservation goal of the Clean State Initiative.
The more seed money that CSRF receives, the more projects it can implement. The Clean State Revolving Fund would receive its initial seed money from a combination of federal grants and state matching funds. Title 1 of the Federal Energy Policy Act of 1992 provides for a $1 million federal grant (to be matched by $3 million in state funds) for the creation of a revolving fund, explicitly for energy conservation projects.[34] Currently, the federal Department of Energy has budgeted $11 million to capitalize revolving loan funds nationwide. The Congress has not yet appropriated these funds. Although the federal government will only contribute $1 million to the CSRF, the Commonwealth may choose to invest more than $3 million. The CSRF could supplement the Shared Savings program by financing smaller or less profitable energy conservation projects in the Commonwealth, which ESCos typically do not pursue.
The Clean State Revolving Fund could assist both state and municipal facilities to implement energy conservation. Although the Clean State Executive Order does not specifically mention environmental projects outside of state government, assisting municipalities throughout the state to realize their energy conservation goals is well within the spirit of the Clean State Order. As long as its enabling legislation provides the appropriate authorization, the Clean State Revolving Fund could lend money to many types of government entities, including any "town, city, district, commission, agency, authority, board or other instrumentality of the Commonwealth."[35]
With leveraged loans, the Commonwealth receives $8 for every $3 it invests in the CSRF. For every $3 that the Commonwealth invests in the Clean State Revolving Fund (up to $3 million) the federal government contributes $1. Through leveraged bond financing, the CSRF can double that $4 to attract $8 in bond revenue. Therefore, with a $3 million investment CSRF can attract $8 million in leveraged loans.[36] To issue leveraged loans, the CSRF must establish a 50% debt reserve fund. The reserve fund would provide a measure of financial security to bond holders. If program participants were to default on their debt service obligations, the CSRF would have money on hand to repay the bondholders' investment.
The debt service reserve fund allows CSRF to offer program participants loans at highly subsidized rates. The CSRF can invest the debt service reserve fund and earn investment income on that account. If the CSRF were to borrow $8 million at 6% interest, and were to invest its original $4 million at a similar rate, then it could earn half of its interest obligation from the investment income on its debt service fund.[37,38] In turn, revolving funds pass this benefit on to program participants in the form of subsidized loans. Often revolving funds lend money to program participants at one-half of the interest rate that each participant would have paid if it were to issue bonds on its own.39 By subsidizing loans, the CSRF would provide greater incentives for public facilities to pursue energy conservation opportunities.
Shared Savings Program: strong impact. Environmental impact is not central to the Shared Savings Program's mission. ESCos are profit motivated, thus they implement projects that have the highest financial reward, not necessarily the highest environmental impact. Nevertheless, DCPO oversight maintains a level of environmental conscientiousness. The Commonwealth has implemented $11.5 million worth of energy efficiency projects through Shared Savings since 1985.
Clean State Revolving Fund: potential for high impact. The CSRF would not be strictly profit motivated, and therefore could base project decisions on both net present value and environmental benefits. As a result, CSRF could implement some projects with low financial return and high environmental impact. CSRF's environmental benefits will depend on the amount of seed money it receives. More money means more projects, which means more emission reductions.
DSM: highest impact. Utility companies that offer DSM services seek to reduce system-wide energy consumption in order to smooth out peak demand. Improving the energy efficiency is the means to that end, and therefore, environmental benefits are not part of DSM's mission. Nevertheless, DSM accounted for $18.5 million in investment -- more energy capital investment than Shared Savings and bond funding combined.
Shared Savings Program: moderate portion. Host facilities share savings with ESCos when financing projects. Typically ESCos receive 60%-80% of savings. The General Fund's portion of these savings depends upon the Budget Bureau's diligence in identifying retained revenues.
Clean State Revolving Fund: moderate portion. The Clean State Revolving Fund and the General Fund will share savings from energy conservation. Program participants pay debt service to re-capitalize the CSRF. Remaining savings revert to the General Fund.
DSM: high portion. Host facilities capture all savings. The General Fund's portion of these savings depends upon the Budget Bureau's diligence in identifying retained revenues.
Shared Savings Program: strong potential. ESCos tend to seek out projects with large savings potential and the state finances many projects by this method.
Clean State Revolving Fund: strong potential. The CSRF's level of capitalization will determine its total savings potential. The more money it has, the more projects it can implement and the more savings it can produce.
DSM: highest potential. Since 1985, DSM has accumulated $5.8 million in annual reductions in utility expenses, by implementing environmental projects in state facilities. Net savings to the Commonwealth from DSM reflects its favorable total savings potential.
Shared Savings Program: not a constraint. ESCos provide all investment capital.
Clean State Revolving Fund: potentially not a constraint. CSRF overcomes capital constraints to the extent that the Commonwealth provides sufficient seed money.
DSM: not a constraint. Utility companies provide all investment capital.
Shared Savings Program: some constraints. This program circumvents many bureaucratic requirements through legislative provisions in the pilot program's enabling act.
Clean State Revolving Fund: potential for some constraints. For CSRF to be effective, the Commonwealth should set it up in the same manner as the Shared Savings Program. CSRF should be exempted from most of the public procurement process.
DSM: few constraints. State agencies require DCPO oversight to ensure the safety of capital improvements.
Shared Savings Program: moderate constraint. Since A&F is not involved in financing projects under shared savings, they will be less aware of expected savings. Further, this program makes efforts to allow host facilities to retain the state's portion of savings for the length of the contract. Nothing prevents A&F from reversing revenues, however.
Clean State Revolving Fund: potentially a moderate constraint. The Commonwealth should implement CSRF with a provision that provides for financial incentives.
DSM: moderate constraint. DSM projects under $100,000 do not require DCPO oversight and therefore an agency could implement DSM measures without the Administration's knowledge. Nevertheless, no provisions of DSM guarantee that host facilities will be allowed to keep savings.
Shared Savings Program: strong political viability and high political attractiveness. The Legislature established Shared Savings as a pilot program in 1984. DCPO has relied heavily on the program since its creation. The fact that ESCos pay all capital costs strikes a positive cord in political arenas. The public/private enterprise concept enhances Shared Savings' appeal, and furthers the Weld Administration's privatization goals. Shared Savings has strong political support, but the Legislature still has not made it into a permanent program.
Clean State Revolving Fund: good political viability and high political attractiveness. The state's revolving fund for water pollution abatement projects (MWPAT) has enjoyed strong success, and therefore, CSRF might attract similar political support. The Federal matching funds provide an incentive for the state to implement CSRF. Leveraged loans make CSRF even more attractive.
DSM: high political viability, but low political attractiveness. Implementation of DSM is not a problem, since it is in effect throughout the Commonwealth. But DSM has neither a high political profile and nor a strong political appeal, because it is outside of the public eye and the political arena.
Shared Savings Program: low startup costs. The Shared Savings Program is still officially in the pilot phase. The Legislature either has to renew the pilot program each year, or could enact Shared Savings as a permanent program. No new institutional capacity would be required to make Shared Savings permanent.
Clean State Revolving Fund: high startup costs. To establish this fund would require entirely new legislation. Institutional capacity to administrate the fund would have to be created. CSRF would need seed money to finance projects.
DSM: no startup costs. No legislative action needed; no institutional hurdles exist.
Shared Savings Program: low ongoing costs. ESCos cover all capital investments under the Shared Savings Program. Depending on the contract, either the ESCo or the Commonwealth may retain ownership of the equipment at the contract's termination. ESCos also maintain and repair equipment for the term of the contract. ESCos bear the risk of equipment failure. The only costs that the Commonwealth incurs are oversight and transaction costs.
Clean State Revolving Fund: moderate ongoing costs. The Clean State Revolving Fund would require initial seed money. But once it received capital, the CSRF could revolve funds over many years to fund several projects. The Commonwealth would not have to recapitalize CSRF for each conservation project. Just as with bond financing, however, the Commonwealth would bear the full cost of maintenance, and the full risk of equipment inefficacy.
DSM: low ongoing costs. Under DSM, utility companies pay for capital investments. Host facilities still bear the cost of maintaining the new equipment, and bear the risk of equipment failure. However, the utility has a strong incentive to install equipment that will reduce consumption for many years. Maintenance cost and equipment failure risk should be low under DSM.
Shared Savings Program: moderate control. Shared Savings circumvents much of the public procurement process, and therefore does not guard against corruption as much as bond funding does. However, the process still includes appropriate safety measures. DCPO shares control over equipment choice with ESCos. Since ESCos pay for and maintain the installed equipment, they have the incentive to choose equipment with high cost savings and low maintenance costs. Since Shared Savings contracts bind ESCos for 7-10 years, ESCos do not have a profit incentive to choose equipment with operating lives longer than the contracts. However, that timespan is often adequate to ensure long term quality.
Clean State Revolving Fund: moderate control. CSRF's enabling legislation could subject CSRF to the same procurement process as the Shared Savings Program. Doing so would give up some control against corruption. CSRF would retain full control over equipment choice, given that it pays for all capital improvements.
DSM: low control. Waste, fraud, and abuse is not relevant to DSM. Utility companies provide free capital equipment to the Commonwealth. The state does not need control over choosing which firm installs the equipment because public funds are not used to compensate that firm. The state does retain its oversight role to ensure safety. The state shares control over equipment choice with the utility.
Shared Savings Program: little capacity to expand. The Shared Savings Program exempts municipalities from Proposition 2-1/2. Shared Savings addresses water conservation projects in addition to energy conservation projects, but it does not address other CSI goals.
Clean State Revolving Fund: strong capacity to expand. The Clean State revolving fund could easily expand to assist municipalities in financing energy conservation. If the CSRF receives federal funds, it would be partially restricted in the type of projects that it addresses. The revolving fund concept could, however, be used to finance many types of environmental projects in Massachusetts.
DSM: mixed capacity to expand. DSM applies to both state and municipal buildings. However, DSM only applies to electricity conservation projects and as a potential model for water conservation projects.
Shared Savings Program: some diversity. Generally, ESCos seek projects with high utility expenses and large saving opportunities. Many smaller projects, or projects in remotely located facilities do not receive the attention of ESCos.
Clean State Revolving Fund: potential for high diversity. CSRF's goal would be to implement many projects and to balance environmental concerns with financial concerns. It would not have a strict profit mission. Therefore, it could potentially finance a wide array of projects.
DSM: moderately restrictive. some diversity. Utility companies will implement the projects that return the largest energy savings per dollar invested, but only in electricity conservation projects.
Shared Savings Program: good sustainability. The Legislature has consistently renewed the Shared Savings program since its creation as a pilot program in 1984. As a pilot program it could be dissolved relatively easily, but Shared Savings has enjoyed strong political support and its dissolution is unlikely.
Clean State Revolving Fund: high sustainability. If the Legislature were to create CSRF, and if CSRF were to receive federal matching funds, it would achieve a high level of sustainability.
DSM: highly sustainable. Utility companies have a strong profit incentive to continue DSM programs over time. A utility would abandon its DSM program only if excess capacity became very large. Given Massachusetts' growing energy needs, this is unlikely to happen. ¥EEF-Smy¥ goes here, figure 5-1 Framework moons summary diagram ¥EEF-Dtl¥ goes here, figure 5-2
This chapter presents specific action-oriented recommendations that the Commonwealth should implement to achieve its energy conservation goals. These recommendations address the barriers that prevent state agencies from pursuing energy efficiency projects.
The Shared Savings Program's enabling legislation exempts Shared Savings projects from the traditional public procurement process. Since Shared Savings' enactment, energy conservation service procurement has proceeded smoothly. The requirements on energy conservation projects under other programs should also be relaxed.
If CSRF administrators determine that substantial demand for energy conservation financing exists among municipalities, the Commonwealth should increase CSRF's level of capitalization. CSRF could then also offer leveraged pool loans for municipal projects throughout the state.
By establishing CSRF, the Commonwealth could receive $1 million in federal money.[40] In addition, the state would capture all resulting savings from the projects financed by the CSRF. Part of CSRF's savings would revert back to the CSRF to recapitalize the fund, and the remainder of savings would flow to the General Fund.
CSRF conservation efforts initially should complement, not replace the Shared Savings Program. However, if CSRF consistently outperforms the Shared Savings Program and demonstrates the capacity to replace ESCo financing, the Commonwealth should dissolve Shared Savings and focus resources on CSRF. Conversely, if CSRF fails to perform well, the Commonwealth should dissolve the revolving fund, and expand Shared Savings to permanent status. The analytical framework presented in Chapter Four could be used to evaluate and compare the performance of these projects once sufficient data exists.
The Commonwealth has taken advantage of the revolving loan fund concept since 1989, when it established the Massachusetts Water Pollution Abatement Trust Fund, (known as the MWPAT, the State Revolving Fund, or the SRF). The MWPAT provides funding exclusively for wastewater treatment projects within the Commonwealth. The enabling legislation authorizes the State Revolving Fund to loan money to any "town, city, district, commission, agency, authority, board or other instrumentality of the Commonwealth or of any of its political subdivisions, which is responsible for the ownership or operation of a water pollution abatement project."[43] Simply put, the MWPAT may loan money to many kinds of entities within both state and local government. In recent years, over seventy government entities have benefited from MWPAT loans. Similarly, the Clean State Revolving Fund could provide loans to municipal borrowers. Although the Clean State Executive Order does not specifically mention environmental projects outside of state government, assisting municipalities throughout the state to realize their energy conservation goals is well within the spirit of the Clean State Order.
Until the CSRF can evaluate the Commonwealth's total borrowing needs, and unless the CSRF receives a substantial amount seed-money, it should focus on issuing direct loans to state agencies. As the fund's equity grows (or if the Commonwealth were to infuse more capital into CSRF's equity funds), the CSRF could begin to expand its client base to municipal borrowers. Additional equity allows the CSRF to finance more projects. Substantial equity (around $20 million) begins to make leveraged loans economically viable. Below we discuss both direct and leveraged loans.
Direct Loans - Direct loans occur when a revolving fund loans money from out of its capital accounts, directly to a program participant. When one borrower repays its obligation, the fund can issue a subsequent loan to an additional borrower. A revolving fund's level of capitalization limits the number of projects that it can undertake when it chooses to issue direct loans. In other words, because loans come directly from its seed-money, CSRF could only loan as much money as it had to lend. Depending on the projected capital requirements of a program's participants, the fund administrators could choose to subsidize loans, to break even on its loans, or to generate operating profits. This decision will determine the number of future projects that CSRF will be able to undertake.
Below, Table G-1 graphically displays the flow of funds under direct loans. The CSRF would receive its initial seed-money from a combination of state and federal matching grants. Once capitalized, the fund could issue loans to state agencies for energy conservation projects. The state agency would hire a contractor (through DCPO) and would pay the contractor to install cost-saving equipment. As surplus revenues accumulated in the agency's budget, A&F could capture savings through reversion and cutting the agency's budget. (See Recommendation 1, for ways that the Commonwealth should share savings with agencies.) A portion of A&F's share of the savings would revert to the General Fund, while the remainder would go back to the CSRF as debt service repayment.
Leveraged Loans - Leveraged loans allow revolving funds to double their money. To issue leveraged loans, the CSRF must establish a 50% debt reserve fund. If, for example, CSRF were to receive $20 million in initial seed money, it could deposit this money in its reserve fund, and subsequently borrow $40 million on the municipal bond market. The reserve fund would provide a measure of financial security to bond holders. Meanwhile, the CSRF can invest the debt service fund and earn investment income on that account. If the CSRF were to borrow $40 million at 6% interest, and were to invest its original $20 million at a similar rate, then it could earn half of its interest obligation from the investment income on its debt service fund.[44,45] In turn, revolving funds pass this benefit on to program participants in the form of subsidized loans. Often revolving funds loan money to program participants at one-half of the interest rate that each participant would have paid if it were to issue bonds on its own.[46] By subsidizing loans, the CSRF would provide greater incentives for public facilities to pursue energy conservation opportunities.
Leveraged loans may take two forms: Stand alone loans and pooled loans. Stand alone loans are bond financed loans made on behalf of one, and only one borrower. In December 1993, for example, the MWPAT issued $86 million in bonds exclusively to finance MWRA capital investments. Stand alone loans are useful when a particular borrower has large capital needs (as is the case with the MWRA), or when the borrower's credit rating differs significantly from the credit rating of other program participants. Pooled loans occur when a revolving fund wants to raise money for many small projects at one time. It would not make sense for a revolving fund to issue $1 million in bonds on behalf of a single borrower. Ceteris paribus, large debt issues can attract lower interest rates and lower investment banking fees per bond than small issues. Therefore, the more projects a revolving fund finances in any one bond issue, the more debt it requires, and the lower is its average cost of borrowing. A revolving loan program can bundle many projects, and issue bonds to finance a pooled loan. From this pool of bond revenue, the revolving fund can appropriate funds according to each borrower's needs.
The MWPAT issues revenue bonds, and the CSRF could be established to do the same. Energy conservation projects in the Commonwealth could be financed through revenue bonds if these bonds could be linked to an identifiable revenue source. For municipal participants in the MWPAT revolving loan program, revenue bonds are secured by a pledge from each municipality to repay debt service on their loans. The revenues behind that pledge are be secured by three sources: (1) municipal water bills; (2) municipal taxing power; and (3) the MWPAT'S local aid intercept powers.[47] The CSRF could also issue revenue bonds for leveraged pool loans, as long as municipal borrowers pledged to repay their debt obligations. Payment could originate from general taxes, or a specific revenue stream, and granting the CSRF local aid intercept power would increase the security of its bonds.
Issuing leveraged loans to state agencies presents a slightly more complicated picture. State agencies do not have the legal authority borrow debt, nor to promise the repayment of debt service. They could not guarantee that their budget would include a line item for debt service in order to pay back a revolving fund loan. While the MWPAT has not lent money to a state agency for a wastewater treatment project in the past, it does receive financial aid (referred to as "contract assistance") from the Commonwealth. The MWPAT's enabling legislation authorizes the Secretary of the Executive Office of Administration and Finance to sign a contractual obligation, compelling the Commonwealth to make specified payments to MWPAT, for the purpose of subsidizing loans made to certain municipal borrowers. "Pursuant to the Commonwealth Assistance Contract and the Enabling Act, the Commonwealth has agreed to provide Contract Assistance Payments to the Trust to reduce the Scheduled Loan Repayments otherwise payable by certain Borrowers.... If the Commonwealth should fail to provide the Contract Assistance Payments... the Trust will diligently enforce the provisions of the Commonwealth Assistance Contract...and will pursue all remedies available under such contract."[48]
Similarly, the CSRF's enabling legislation could authorize the Secretary of A&F to enter into "appropriation backed contracts." An appropriation backed contract would serve as a legal obligation on the part of the Commonwealth to appropriate the repayment of debt service on behalf of state agencies participating in pool loans. The appropriation would appear on an agency's budget as a "fixed expense," not subject to budget cuts or revenue reversion. Further, the Commonwealth would have an added incentive to make sure that it repays its obligations to the CSRF. If the CSRF were established with some amount of federal money, the CSRF would be compelled to use its funds for their intended purpose. If the Commonwealth were to disregard its obligation to repay loans to the revolving fund, it may become difficult for the Commonwealth to receive federal grants for other purposes in the future. The federal requirement on use of funds adds a measure of security to the revolving fund, and helps to ensure that the program cannot be dissolved due to shifting spending priorities of the Administration, or following the election of a new governor.
Although the contract backed appropriation would constitute a legal obligation of the Commonwealth, it should not adversely affect the Commonwealth's general obligation credit. First of all, contract backed obligations are not a pledge of the full faith and credit of the Commonwealth. Therefore, contract backed obligations are less secure than a GO pledge, but do not significantly impact the GO credit. Secondly, compared to the Commonwealth's current outstanding debt of $7.3 billion, several million dollars in contract backed appropriations is insignificant. Finally, when implementing energy conservation projects, the Commonwealth's expected utility expenses decline, which should more than offset the increase in debt obligation. Appropriation backed contracts would not be legally binding without a two-thirds vote of the Legislature. Alternatively, the Commonwealth could offer its full faith and credit to secure repayment. This would impact the Commonwealth's GO credit rating, however, and would also require two-thirds vote of the Legislature.
The viability of revenue bond financing depends upon whether A&F can be authorized to enter into appropriation backed contracts, whether contracted engineering firms can cost-effectively guarantee savings, and whether potential bond investors will buy into the idea.
Our framework and terminology for this section will be that of "Reinventing Government."[50] Governor Weld is cited as saying that this book "will be required reading in the Weld Administration," and that he will deliver "entrepreneurial government" which focuses on "results, not rules."[51] One of the main themes of "reinvention" is that decision-making about budget expenditures should be decentralized, and that budgets should avoid line-item expenditures which limit rational decisions by agencies. This concluding section will apply that theme to Clean State goals.
(1) Capital expenditures are a separate line-item from operating expenses, which means that installing energy conservation equipment may not be done with funds allocated for electricity bills, even if the new equipment would reduce the electricity bills. An agency wishing to install energy-saving equipment must request capital funds as a separate budget item. Commonly, the new equipment has a payback period within the period of the current budget,[52,53,54] (e.g., installing new lighting which costs $2,000 but saves $3,000 in electricity costs in its first year). But even if that is so, agencies are not permitted to transfer funds from their line item for utility expenses for use on capital equipment. The result is that cost-effective conservation practices are often not implemented if they require purchasing capital equipment.[55]
If capital equipment were allowed to be purchased under the budget item of utility expenses, agencies could implement cost-saving (via energy-saving) capital improvements without prior budgetary approval. Conservation projects which would repay the cost of capital equipment in the same year would be undertaken by agencies within a general budget item of "heating and lighting expenses, repair, and capital equipment," for example. If repairs or new equipment would save money (and energy), then the agencies would do so, and could then use the saved money on other expenses. Making new "general budget items" would require legislative action to redefine the budget line items.
(2) Capital expenditures are permitted by a time-consuming process. DCPO performs an audit (in conjunction with a private ESCo), and the Legislature and A&F approve and allocate the necessary funds. The process typically takes two years from initiation of the paperwork until installation of the equipment actually begins. The long delay is wasteful in itself, (since the energy savings would have begun two years sooner without the delay), but more importantly, a long lag time discourages agencies from undertaking the process at all. DCPO does a good job with installing energy-efficient and water-efficient equipment, but with their limited resources, they cannot perform more than a few projects at any one time: the waiting list is long and the time in process is longer.[56,57,58]
One solution is to expand the staff and funding for DCPO's audit programs.[59] That would likely address the problem of the long waiting list and long lag time, but it does not address the underlying problem of a lack of incentive for agencies to initiate projects on their own and to seek energy-saving projects themselves. For the expansion of the DCPO audit program to be successful, there must be an accompanying political motivation applied to each agency, to make up for the lack of economic motivation. That is, DCPO must continue to have strong political support in order to continue with subsequent projects. Right now, the political support comes from the Clean State Initiative, but when Clean State becomes less current (or when the Weld Administration becomes history), that political support will fade.
The alternative solution is to address the underlying disincentives, so that economic motivation replaces political motivation as the driving force for implementing conservation projects. The budgetary considerations involved are discussed in section (4) below -- agencies would keep the savings generated by conservation programs. The more general consideration is that agencies would become responsible for making their own decisions on conservation projects. Given an economic incentive, agencies would implement cost-saving conservation projects as soon as the present value of such projects became positive (i.e., as soon as the long-term benefits outweighed the short-term costs). DCPO cannot be expected to audit every agency every year, regardless of its expansion, since many projects are too small for a centralized agency to handle.[60] A decentralized decision-making process would allow agencies to act on their own initiative, so that lag times and delays would be minimized, since the agencies would stand to gain by acting quickly.
(3) Section (1) discussed conservation projects with payback periods in the same fiscal period. Projects with one-year paybacks can be addressed by allowing transfers from operating expenses to capital expenditures, but projects with multi-year paybacks need more. To account for multi-year payback periods, multi-year financing methods are needed. These include: A) Amortization of costs (capital depreciation over the expected lifetime of the capital equipment), as is commonly done in business practice; B) Receiving funds from the "Clean State Revolving Fund" proposed above, or some other independent source of funding; or C) Instituting on-budget financing of individual projects.
The "reinventing" solution is to make any of those multi-year financing solutions available to agencies at their discretion. That is, instead of requiring A&F approval to receive and pay back CSRF loans, or instead of legislating a line-item increase for a project, the agency itself would decide when a project was worthwhile, and would adjust its internal allocation of resources accordingly. A source of capital funding would still be necessary, since for a multi-year project, an agency presumably could not shift sufficient resources to finance the project. If agencies were allowed to arrange their own financing, through any method in the above list, they would then have to concern themselves only with shifting sufficient resources to cover one year's worth of repayments, and would be in the same situation as in section (2). That is, economic motivation would be the driving force for multi-year payback projects as well.
(4) If the payback period for a conservation project is more than a year, agencies are further discouraged from undertaking the improvements, because they must lobby for the additional funding, and then, if the capital expenditures are successful at reducing their operating expenditures, their budget is reduced in subsequent budget cycles. That is, the agency which must expend the effort and initiative to undertake conservation measures does not reap the benefits of their efforts.
The "reinventing" solution is an "Expenditure Control Budget." The Legislature would decide on an overall budget for building operation, and would then let the agencies do with the funds as they see fit. If they save money, they keep it to spend on other projects -- i.e., unspent money is not returned at the end of the year. Some programs split the savings: if an agency reduces their budget, the agency retains 50% and returns 50% of their unspent allocations.
Keeping unspent allocations would apply to subsequent years as well. Agencies assume that any savings achieved, even if the agency could keep the savings in the current year, would be cut from their budget the next year, or at best at the next "budget crunch."[61] Institutional practices would have to change in order to address this barrier. Specifically, the Legislature could not vote on individual line items, so that the savings on one line item would be at the agency's discretion to transfer elsewhere. The Legislature would control only the overall budget of each agency, not the particular spending within the agency. In tight budget years, the Legislature could still cut agency budgets, but would not explicitly cut the savings which the agency had previously generated.
In order to expect rational economic behavior from agencies, they must be subject to the real costs of their energy and water use. That is, each agency would have to be charged for its resource usage, a system referred to as "utility charge-backs." The same logic applies to "rent charge-backs," so that agencies could rationally decide how much space to occupy based on the real costs of the space. Agencies which are located in communal buildings with communal utility payments might need some physical changes, such as separate utility meters -- those changes will not be discussed in this memo.
The current means of promoting energy conservation, DCPO-sponsored audits, could be expanded without "reinventing" anything. A&F has recommended that and has begun implementing it.[62] Increasing DCPO's capacity (Recommendation 3.3 above) would still entail externally-applied political motivation (as discussed in Section (2)). That is, political leadership is required for both the bureaucratic solution and the "reinventing" solution. The distinction is that the bureaucratic solution requires political leadership on an ongoing basis, and the "reinventing" solution requires political leadership to change the institutional practices. Changing the institutional practice, once successful, is more likely to survive future political battles because it would have to be actively changed back, rather than just passively cut.
Changing institutional practices has high political costs. The countering benefits are that decentralized decision-making results in more efficient outcomes. For the Clean State Initiative, that means more energy conservation and more water conservation with reduced costs to the taxpayer.
Most goals of the Clean State Initiative cost money -- conservation saves money. Energy conservation is a money-saving practice, and the economic incentive to save money should result in practices which keep up with efficient technology. That the energy efficiency of state facilities do not compare well with the efficiency of private buildings indicates that there are barriers to economically rational practices. That is, if the barriers are removed, state facilities will become as efficient as private facilities, without any further political incentives, without any further legislative or executive action, and without any further funding of any kind.
The primary barriers to energy efficiency are financial and bureaucratic. State agencies do not practice conservation because they do not have access to capital and other resources necessary to achieve efficiency -- that's the financial barrier. State agencies also do not practice conservation because they are subject to rules which disallow them from following economic incentives -- that's the bureaucratic barrier. This report discusses means of addressing the financial barriers. If financing were available for conservation projects, state agencies would implement them, given an internal environmental motivation or an external political motivation. "Reinventing" is necessary to remove the bureaucratic barriers: the budget would have to allow agencies to spend their funds as they see fit, and to keep any savings that they generate. If the bureaucratic barriers are removed, economic motivation would combine with both environmental motivation and political motivation in achieving Clean State goals.
The New Jersey system focuses on Demand Side Management (DSM); utility companies contract with ESCos to reduce energy consumption so that the utilities can avoid building new plants. New Hampshire instituted in 1993 a Shared Savings Program for retrofitting existing buildings; NH had previously focused on energy measures in new state facility construction. New York state has a well-developed energy conservation program, including an "Environmental Facilities Corporation" to finance projects. Connecticut has a DSM program which mandates that utilities service state facilities. The White House announced in March 1994 a new plan for energy efficiency and water conservation at federal facilities, including innovative financing via DSM and performance contracting. There are two multi-state programs promoting energy conservation. We will discuss the incentives and implications of DSM programs, which operates extensively in Massachusetts. The Institutional Conservation Program (ICP) is a federal grant program which finances energy conservation measures at schools and hospitals, both public and private.
New Jersey utilities actively pursue limiting the growth in demand. Under the state's Energy Conservation Standard Offer Program,[63] utilities may pay customers who reduce their energy usage. The regulations apply to both private and public facilities, and have been done at both. The state sets up the regulations which govern the utilities (since they are state-regulated), and approves the measurement methods in accordance with state standards. The utilities design projects at the customer facilities (via ESCos or energy engineering firms), and choose the projects themselves. After the project is completed, utilities send checks directly to the facility. Hence, energy savings is split between the host facility which reduces its energy usage (by reducing their energy bills, and by receiving utility payments) and the utility rate payers (by avoiding the cost of building new plants).
The state oversight is limited to ensuring accurate measurement. There is no direct state involvement after approval of the project, i.e., the utility and the host facility review energy usage and schedule payments without state oversight. The state defines "Approved Measurement Protocols," which differ by type of project. Common projects, such as lighting replacement, may use pre-approved protocols from previous projects. If no existing protocols are applicable, the utility and the state collaborate to define a new protocol, which is negotiated between the utility, the host facility, and the ESCo performing the work. The protocols include recovering for damages for missing target deadlines.
ESCos often recruit a host facility themselves, and then apply to the utility for approval and a contract. This system of ESCo initiation, common for the private sector, does not apply to state facilities, where competitive bidding is required. Typical ESCo criteria for selecting which facilities to recruit are that the host facility have a minimum of 200 KWh usage during the prime period, in order to generate enough savings to make the project worthwhile. ESCos are not certified (i.e., there is no Office of Contractor Certification as in Massachusetts). The state recommends screening, as with any business contract, but offers no approval of particular companies. Host facilities may perform the work themselves (i.e., act as their own ESCo), although most hire ESCos, with whom they then split their utility payments. The ESCo deals typically last 10 years.
With regard to state facilities,[64] the State Office of Energy (SOE, part of the Board of Regulatory Commissioners, which is the public utilities commission) acts as the intermediary for all state buildings. The host facility itself hires an ESCo to perform an audit, and based on the audit results, applies for funds from SOE. Host facilities may also contract for audits through the state's Central Contracting Unit. That process involves the Division of Building and Construction (DBC, part of the Treasury Department). The DBC sends out projects to bid, rates the engineers, and awards the project, subject to SOE review and approval. The process takes about four years when done through the DBC, about the same time as the Massachusetts public procurement process.
The New Jersey regulations allow the feasibility study (audit) and design to be done in one step, since the audit process must essentially design a project also. The audit/design phase and engineering phase may be done by the same contractor. The Massachusetts public procurement process requires that the audit phase and the design phase be done by separate contractors. Conditions which favor a consolidated audit plus design phase are that the host facility is a large or very inefficient energy user, and hence has little question as to eligibility.
The New Jersey equivalent of the Massachusetts Shared Savings Program is set up for separate design and engineering phases. ESCos provide services to the state, as a performance contract. ESCos focus on DSM more than they do on shared savings directly. Because of the utility involvement, shared savings are divided three ways, between the host facility, the ESCo, and the utility.
With regards to financing, New Jersey issued a $50 million Bond in the early 1980s to fund physical improvements for cost-effective energy conservation. The bond was intended to be allocated as $3 million for energy audits of state facilities, and $47 million for funding capital improvement projects. The bond fund is still active today, since fewer projects than expected were implemented, due to decreasing energy costs. The State Office of Energy has moved three times since the bond issuance, which has hindered the program as well.
The state's position on the Energy Conservation Program is that New Jersey should take advantage of DSM programs, since they work well in the private sector. The major problem with the state's using DSM is that "there are too many hands in the pie," according to SOE Reviewer Frank Parrotti. The SOE, the DBC, and the host facility must all collaborate, subject to review by the Attorney General's office. Developing an RFP is not a strong barrier to the program's success, but the standard RFP does not reflect utility's specific needs under DSM. Also, there aren't enough people knowledgeable enough about the program to make it work well. The primary benefit to the state is reduction of risk. The state has approved projects where the ESCo keeps all of the energy savings, in exchange for guaranteed reduction of risk.
In the early 1980s, there was little data collection, poor metering, and the data collected answered the wrong questions, according to SOE reviewer Frank Parrotti. He says that the program is hard to justify to the Legislature, based on its results.
The inactivity until last year was a result of the bankruptcy of PSNH, which has recently been resolved. NH has a DSM program (also run under DPW), which has also been inactive for state buildings, for the same reason. PSNH did operate some DSM projects while in receivership, but none with the state. The state has operated an ICP program (see ICP section below) for schools and hospitals.[66] Now that the bankruptcy is resolved, PSNH has scheduled a 5.5% per year increase in electricity prices, which has inspired the new state programs (oil, gas, and propane prices are expected to rise at 3%-4% per year, also). Manchester Technical College was recently retrofitted with energy-efficient lighting, in the first joint government-utility project in many years. NH DPW did the work itself, as part of a larger renovation project.
The new pilot Shared Savings Program advertised its first RFP in July 1993, for two buildings of the initial project's twelve. The twelve buildings constitute 65% of the office space used by the state government. The buildings were chosen because they are all managed under one agency, but the project is intended as a model for future agency-driven projects. The twelve buildings were bid as one project to avoid "cream skimming." The buildings include the State House and other historic buildings, in which historical amenities must remain undisturbed, raising the costs of installation. However, because many of the buildings are old and have not been upgraded for a long time, the savings generated is expected to be high. For the twelve buildings, the capital cost is estimated at $5.5 to $5.8 million (the first two cost $1.5 million), and the conservation measures will generate $6.3 million in savings (guaranteed by the ESCo) over the contract period of seven years.
Six ESCos responded to the RFP with bids, and Johnson Controls was selected (they and Honeywell are NH's largest ESCos). The selection process was under the advice and consent of a legislatively appointed committee. The contract pays Johnson back its capital costs plus $1, plus an appropriate return on capital. Under NH law, only energy savings can be used to pay back conservation improvements (even though these improvements include components other than energy conservation). Johnson is paid 100% of the energy savings generated, for seven years, beginning two months after project completion (the 7-year payback is also determined by law). Johnson guarantees a fixed amount of savings per year, and hence assumes all of the risk.
Executive Order 132 establishes the Energy Conservation Program with a goal of 20% energy reduction in state facilities by the year 2000. State agencies will submit annual plans of their progress towards that goal. Preliminary audits established baselines for energy consumption, based on age of the facilities and so on. The Office of General Services (procurement department) has set energy efficiency requirements for equipment purchases. The Executive Order also calls for streamlining the process of implementing energy conservation projects, and for expanding financing options.
The NY State Energy Office provides technical advice to assist state agencies in compliance with the Energy Conservation Program.[68] The Office of General Services provides standard contracts with specifications for energy efficiency for both design of new construction as well as for retrofits. The Division of the Budget assists with the Annual Plans and with identifying potential projects. State agencies themselves are charged with meeting the 20% goal.
The criteria for selecting projects is that they have a positive net present value and a simple payback period of five years or less. "The intent of reducing energy consumption is to conserve fuel and save money."[69] The program has so far accumulated $28.5 million in avoided costs since the base year of 1988-89, a 3.6% reduction.
Turning our attention, the Environmental Facilities Corporation was established in 1989 to address water pollution control via a State Revolving Fund (SRF).[71] The Fund provides low-interest loans to municipalities, based on bond issuances. The SRF allows the state to make $12 in loans for every $1 in State funds that New York contributes to the program, by leveraged loans and a federal subsidization "seed." We recommend that the New York Environmental Facilities Corporation's State Revolving Fund be the model for administering the Massachusetts Clean State Revolving Fund, as discussed in Appendix A.
The program has been in full operation for three years, since enabling legislation in 1990. In its first year, utilities spent $4.4 million on capital improvements, $4.0 million in the second year, and $4.4 million in the third year. The criteria for selecting projects is that they have a ten-year maximum payback. Of the projects completed, the average payback period is three years. Other than the payback criterion, facility selection is negotiated mutually between the utility and the state.
Connecticut is currently supplementing that program with a new four-year program in which the state pays for half the cost of the capital improvements and the utility pays for the other half. The state will use all bond funds for their half, and utilities may finance their half by increasing their rate base as before.
In terms of responsibility for the energy conservation measures, the utilities act as "general contractors" for the entire process. The utility selects engineering firms for audit, design, and installation of equipment. They are "biased" toward in-state firms, but there are no rules requiring so. There is no "low-bid" requirement, nor any other bidding requirements, for the engineering firms, since the utilities choose as they see fit.
The state's involvement is via the Department of Public Works (DPW) as technical advisor, and the Department of Energy as reviewer. The State Energy Office, under the Policy Development and Planning Division, maintains regular contact with host facilities, and performs field inspections of installed measures.
Connecticut's biggest problems with their program has been that the utilities are reluctant to cooperate with the program. The two major utilities in Connecticut are United Illuminating (in the south and east of the state), and Northeast Utilities, a division of Connecticut Light and Power (in the rest of the state). The incentive for the utilities to participate is the same as that for DSM programs -- utilities can reduce their peak demand. Northeast, however, is currently operating with "tremendous over-capacity," and hence would prefer to increase demand for the foreseeable future. As a result, Northeast has offered host facilities energy conservation measures with "no co-generation riders" -- i.e., facilities get free energy improvements if they agree to use power only from Northeast. Northeast wants the same arrangement with state facilities, and the state wants the opportunity for co-generation.[73] Northeast went "on strike" against the whole program, because they felt that it was inappropriate to pay state sales tax on their purchases for installation at state facilities. Connecticut and Northeast have spent "a year of wrangling" on these issues.
United Illuminating does not have an over-capacity problem, so they have participated more readily in the program. United concurred that the sales tax was inappropriate, but just didn't pay it, rather than attempt to negotiate its removal. Connecticut is considering using United as the general contractor within Northeast's territories, if the problems with Northeast cannot be resolved.
Financing for the installation of the conservation measures will use a variety of "innovative" mechanisms, including utility DSM programs, shared savings contracts, and performance contracts (¤401). The Office of Management and Budget (OMB) will host a workshop for agencies regarding financing, and will act to eliminate "unnecessary regulatory and procedural barriers" that slow implementation (¤402-3). The Department of Energy (DOE) will provide ongoing technical assistance regarding available technologies, lists of qualified water and energy service companies, sample contracts, and guidance manuals (¤501).
The federal Executive Order addresses many of the barriers discussed in this report. It explores incentives to builders, in the form of "award fees," for exceeding new construction efficiency guidelines, and for incentives to employees, both monetary and honorary, for exceptional performance (¤501(h) and ¤504). The federal plan addresses budgetary retention to create agency incentives. Starting in fiscal year 1995, agencies may retain utility rebates and incentives from conservation efforts (¤502). The retention is subject to OMB guidelines and legal limitations, but has been provided for by earlier legislation.[75] The federal plan also addresses bureaucratic hurdles by seeking regular input on overcoming "impediments." Finally, the federal plan addresses information constraints by providing for assistance on financing issues (by OMB) and technical issues (by DOE). Furthermore, DOE will identify efficient technologies which are "feasible but not yet available on the open market," for purposes of creating a market for advanced technologies (¤507(b)).
However, the federal Executive Order has some shortcomings. By mandating a fixed percentage for every facility, Clinton's plan mandates high costs. Older facilities can more readily reduce their energy consumption, since they have more room for improvement, especially if the facility had not been upgraded before 1985. That is, facility managers are rewarded for having energy-inefficient buildings, or for having been lax in the early 1980s.
The "showcase" concept is interesting, but why isn't the technology used in the showcases used in the other buildings? If the showcase technology is superior, it should be the technology of choice. Presumably the federal plan intends the showcases to fulfill a "leadership" role, or to achieve "technology forcing" by creating a market for innovative technologies.
DSM is based on a reluctance to increase short term capacity. Besides the financial cost of building a new plant, there is also a high political cost and other hidden costs (such as lawsuits, regulatory delays, and so on). In the long term, utilities want to increase capacity, since they can then sell more electricity. The costs of building a new plant is ultimately charged to the ratepayers, since regulators allow amortizing construction costs once new plants come on line.
Specifically, utilities have an incentive to implement DSM projects because they want to reduce peak demand. Utilities do not want to reduce the overall quantity of electricity used -- selling electricity to meet demand is their business and their obligation -- but utilities do want to reduce peak demand. Peak demand occurs daily in the morning (pre-business hours) and in the evening (post-business hours), and seasonally (highest in summer). To meet peak demand, utilities turn on additional generation capacity (such as diesel motors), which are not as fuel-efficient as the generators used for base demand (such as large oil plants). The marginal cost of the additional capacity is higher than the marginal cost of the base capacity, and utilities may not charge customers for the difference (because utility pricing is based on the average cost of electricity generation, and not based on the time of day when electricity is used).
The highest profit for utilities would accrue from "filling in the valleys" -- increasing base demand and limiting peak demand. Ideally, utilities would like to see total electricity usage grow (since that is the source of their income) with a flat demand schedule (since peak demand is the most expensive to produce). Utilities want to reduce kilowatt usage (the measure of demand), but want to increase kilowatt-hours of usage (the measure of electricity consumption). DSM programs actually address kilowatt-hour usage, since utilities have no realistic means of addressing peak demand directly. Utilities do focus on activities which are components of peak demand, whenever possible. Since air conditioners are the bulk of summer demand (the peak season), utilities have a strong incentive to supply efficient air conditioners. Some DSM programs supply radio-controlled "cycling" air conditioners, which the utilities cycle on and off during peak periods to minimize the electrical needs.
To fully understand utility's incentives for DSM, we must describe the regulated price system in which utilities operate. Utilities may charge their customers for any prudently incurred expenses. That is, utilities want to maximize expenses which will be approved by regulators, if those expenses will generate even just a slight profit. DSM expenses will always be approved, since energy efficiency programs are good public relations and are politically popular. Therefore, utilities are assured of being reimbursed for all of their expenses incurred in DSM programs, by being allowed to incorporate the expenses into their rate structure at the next rate increase. Utilities appear to be spending their own funds on DSM programs, but in reality, they are spending funds which will ultimately be paid for by ratepayers. Utilities participate whole-heartedly in DSM programs because they get to achieve their objective (reducing peak demand, and generating good publicity) by spending other people's money.
The regulated price system is also the source of utility's desire to reduce peak demand. Rates are set periodically (at "rate hearings" where the utilities negotiate with the regulatory agencies), and are set at a fixed price until the next rate hearing. Any electricity which can be generated for less than that fixed price is profit to the utility. Any electricity which is generated at greater than that price cuts directly into utility profits. Utilities use "base demand" generators for non-peak periods -- large plants, with high fixed costs and low marginal costs. Utilities can meet base demand at a marginal cost considerably lower than the fixed price which they are allowed to charge customers. Utilities use "peak demand" generators for peak periods -- small generators, cheap to build but expensive to operate. The higher marginal cost of peak generation is incorporated into the rate structure. So, if utilities can use less of the high marginal cost peak generation, and more of the low marginal cost base generation, their actual average price is less than the regulated price they charge customers. That is the basis for utility's desire to reduce peak demand, and to participate in DSM programs at all.
When utilities have a large over-capacity, they can meet all demand with low marginal cost base generators. That situation is occurring in Connecticut with Northeast Utilities -- refer to Section C-4 above. Northeast's over-capacity means they lose their incentive to reduce peak demand, since they never use high marginal cost peak generators. Therefore, Northeast does not want to participate in DSM programs, and Connecticut is engaged in an arduous struggle to force their participation.
If utility's rates were set retroactively, based on the actual generation expenses incurred during the last period, then utilities would lose their incentive to participate in DSM programs. The regulatory pricing process sets prices for the next period, based on the last period's expenses. If utilities can reduce expenses in the next period to lower than the last period, they profit. Retroactive pricing would eliminate that profit, and remove the incentives for DSM.
Despite the incentive structure which does not focus directly on energy conservation, the result of DSM is to reduce electricity consumption at sites which receive DSM equipment. We should not view DSM programs as a source of free capital, however. Ratepayers end up paying for all of the equipment installed in DSM programs. When using DSM equipment at state facilities, the Commonwealth is ultimately charging utility ratepayers for the cost of equipment. In economic terms, DSM is a transfer payment from ratepayers to the recipient of DSM equipment. When that recipient is the state, DSM is the same as a tax. In a sense, therefore, DSM programs at state facilities are a hidden tax on ratepayers. From the Commonwealth's perspective, raising "taxes" via DSM programs are much more politically acceptable than raising actual taxes. In our evaluation chart (refer to Figure 5.3 and Figure 5.4), DSM is the overwhelming "winner" across many criteria, because our evaluation focuses on the interests of the state as a financial entity. From the perspective of the economy as a whole, DSM is not as favorable as our evaluation charts indicate.
ICP grants can amount can be up to $80,000 per institution, in Massachusetts (other states set different grant amounts, and Massachusetts' limit is not strictly maintained). 50% of the grant is from the state and 50% is from the federal government. In cases of "hardship," the federal grant will provide up to 90% of the capital costs. Massachusetts does not allow state facilities to request "hardship" funds. Massachusetts funds a little under $1 million per year in ICP projects, and the total federal matching grant is about $1 million (averaging in the "hardship" cases makes the average federal grant over 50%). In the 16 years of the program's existence, ICP grants have funded a total of $27 million in energy conservation capital improvements. The total includes state facilities, municipal facilities, and private institutions as well.
The selection criteria for ICP is that the project have a two to ten year simple payback period. Projects with shorter payback periods are disallowed because the ICP process itself takes longer than two years. ICP applicants may include "life-cycle costing," which counts all operating and capital costs over the expected lifetime of the equipment, in order to calculate paybacks. Massachusetts disallows the use of life-cycle costing, because the analysis costs more to do, and adjusting the discount rates allow for too much manipulation of the results. The payback period serves as the primary selection criteria, but the total savings is also considered.
The ICP process is divided into "cycles" of one year (1994 is "cycle 16"). In November, applicants attend a workshop on how to fill out the application. Applications are collected in January through March. In June, applications are approved or denied for an audit. Audits are completed by February of the next year, and are approved or denied for design and installation. Funding arrives in August, 20 months after the application process began. ICP is "definitely not fast track," according to Laura Merril, the Massachusetts ICP Programmer.
Originally, DCPO was involved with the ICP process, but now DCPO is only involved with projects in state buildings which are over $100,000 in capital expenditures. The DSB also approved early contractors, but has been dropped. Cities and towns also originally had to meet bidding requirements, which has also been phased out. By law, the audit and installation phases must be done by different firms. There must be no financial relationship between the institution and the engineering firms. ICP pays for the audits directly, to avoid a financial connection to the host institution.
ICP addresses the "information constraint" inherent with dealing with multiple small, decentralized facilities. Massachusetts runs workshops for both applicants and for aspiring applicants. They write to superintendents of public schools, state colleges, and private school headmasters. The mailing list consists of 1,600 institutions. They submit press releases to newsletters of hospital associations and so on. Massachusetts has spent some funds on "marketing" ICP, and the measure of its success is that there are more applicants than there are funds.
ICP is intended to complement other statewide programs. Some states "piggyback" ICP on their DSM programs. In Massachusetts, ICP handles small projects and the Shared Savings program handles bigger projects.
HEC is the energy services subsidiary of Northeast Utilities, one of the electrical utilities discussed in the Connecticut section, Section C.4 above. HEC performs energy conservation work on a competitive basis throughout Connecticut (not just for Northeast Utility customers, nor just within their region), as well as in Massachusetts and New York. HEC contracts both with public and private facilities. HEC has performed a number of energy audits with DCPO, and is currently performing water audits with MWRA and designing a co-generation plan for U. Mass Amherst. We interviewed Steve Pinkerton, HEC's Manager of Construction Services, who formerly worked for the Massachusetts DOER as Director of Renewable Energy.
HEC says that, compared to private contracts, Massachusetts is "very cautious," with "strict rules for bidding."[78] While HEC's opinion is that the Commonwealth has not implemented as much as they might have, they recognize that caution and strict rules are appropriate for state facilities.
Compared with other states, HEC says, Massachusetts does not have as much of a "power center" for energy matters. DOER and DCPO in Massachusetts have less power than NYPA is New York, or DPW in Connecticut, and hence have more trouble getting things done. In Massachusetts, because there is a lot of competition between agencies -- not only between DOER, DCPO, and other executive agencies, but between the host facility and the executive agencies as well -- ESCos must "tread lightly" to avoid conflicts. Energy service work in Massachusetts involves more "upper echelon" matters, whereas in other states ESCos can focus more on "meat and potatoes" of energy work itself. The Commonwealth's method is "more democratic," which alternatively means "less hierarchical," causing less energy work because the lines of authority aren't clear.
The essential difference between Massachusetts and other states is that here, the "political hoops" for funding are not within the host facility's control. Individual agencies could do more energy conservation work, but they don't have the funding under their own control. In order to secure the necessary funding, public facilities need an "internal champion," a person who is sufficiently concerned with energy conservation to take the initiative to work with multiple executive agencies.
The normal public procurement process consists of four substantive phases: site selection, feasibility audit, project design, and equipment installation. One reason that public procurement takes so long is that the Commonwealth must select a different firm for each of the last three implementation phases. Once DCPO selects a potential site for capital improvements, the public procurement process begins. First, the Ways and Means Committees must authorize funds for a project feasibility study. The process of site selection and study authorization can take 3 months. DCPO then advertises a Request for Proposals, known as the RFP, and awaits responses from potential service providers.
RFP responses must be reviewed by a group of independent and impartial experts who comprise an outside volunteer oversight committee, known as the Design Selection Board or DSB. The DSB meets every other week. DSB oversight is intended to ensure that the Commonwealth does not hire poorly qualified firms, and that state agencies cannot hire firms based on favoritism or lack of knowledge. The DSB selects one engineering firm based on its response to the RFP to conduct a project audit. On our timeline, auditor selection took three months.
Before the DSB can select a firm for the audit stage, the firm must be certified by the Office of Contractor Certification. Certification may occur at the same time as DSB decision making. Firms are only required to become certified once and certification is valid for any of the three stages. However, this bureaucratic hurdle does represent a barrier to entry, and can represent a significant cost for small firms. The selected firm then conducts an audit, which in our example, took seven months.
At this point, DCPO evaluates the project, based on the audit. If the project is desirable, DCPO advertises an RFP for the design phase. The engineering firm which performs the audit, may not perform the design. Further, if a firm were not previously certified by the Office of Contractor Certification, it would have to do so prior to being considered as a potential designer. Once DCPO receives responses to the design RFP, it selects a firm to perform the design based on which firm submitted the lowest bid. In our example, that process took eleven months, during which time the selected firm submitted preliminary plans, DCPO gave preliminary approval, and the firm submitted its final plans.
Next we enter the installation phase and DCPO advertises another RFP. The engineering firms which performed the audit or design may not perform the installation, and the installation firm must be certified by the Office of Contractor Certification and accepted by the DSB, as above. DCPO selects the low bidder for the installation and the firm begins installation work. The process from design completion until the beginning of the installation took eight months in our example; installation took an additional twelve months.
The process for implementing energy conservation projects through the Shared Savings program consists of the same four substantive phases as the full public procurement process: site selection, feasibility audit, project design, and equipment installation[81] (Refer to Figure 5.1 for an overview of the Shared Savings process). DCPO identifies an eligible host facility, prepares an RFP, and advertises the project. That marks the beginning of the Shared Savings side of the timeline in Figure H.1, which represents a typical project. For DCPO to receive ESCo proposals and award the contract takes four months. The ESCo then performs the energy audit (or hires an engineering firm to perform the audit), and negotiates a contract with DCPO. The contract outlines the terms of the Shared Savings contract, i.e. the ESCos portion of savings, the length of the contract, the ESCo's profit cap, etc. The audit includes establishing a "baseline" of energy usage, for determining the amount of energy saved, and hence the payments to the ESCo. The audit includes a preliminary design for the installation of equipment, as well. The installation of the energy measures then begins; this occurs nine months after the RFP on the timeline. The installation itself took a year for this project, bringing the total to twenty months.
Like with bond financing, ESCos making Shared Savings proposals must be certified by the Office of Contractor Certification, since the ESCO is performing construction work under DCPO auspices. Unlike with bond financing, with a Shared Savings project one ESCo performs the audit, design, and implementation functions. That is the primary source of reduced time for Shared Savings -- the time waiting for RFPs, bids, and selection only occurs once instead of three times. Also, the wait for authorization of funding does not occur, since there is no funding needed for the initial audit, nor any other phases, other than the normal operating expenses of DCPO (the ESCo performs the audit for free, in anticipation of the later shared savings).
In addition, having one ESCo perform all three phases changes the incentive structure, since the ESCo is responsible for implementing the measures described in its design, and in meeting the expectations of energy savings described in its audit. The "low bid" criteria does not apply to Shared Savings projects, since there is a financial gain to the host facility. The evaluation criteria instead include the expected financial return to the Commonwealth, the level of protection against risk provided by "guarantees", the comprehensiveness of measures installed, and the firm's ability and experience (see box in Figure 5.1).
The Shared Savings program has successfully overcome many of the barriers to implementation of energy conservation measures. Capital constraints are removed, because ESCos provide equipment at their own expense. Bureaucratic hurdles are reduced, because Shared Savings projects are exempt from some of the public procurement process (the successful reduction of bureaucracy is evidenced by the timeline comparison in Figure H.2). ESCos have a profit incentive, although the host facility still experiences a lack of incentive because its share of the savings reverts to the General Fund.
The primary shortcomings of the Shared Savings program is that it cannot expand to cover other types of projects. Shared Savings projects must be profitable, since ESCos earn their share from profits. Shared Savings cannot be used as a financing method for other Clean State goals which do not generate cost savings. Even for profitable energy conservation and water conservation projects, if the rate of return is not sufficiently high, or the project is too small, ESCos will not bid on it. Shared Savings does not finance municipal projects, although there are no legal restrictions against doing so.
Overall, we judge the Share Savings program to be a success. On our evaluation criteria (refer to Figure 5.3 and 5.4), Shared Savings scored comparably well with the proposed Clean State Revolving Fund. The CSRF applies to more types of projects, and keeps all of the savings within the state government, but Shared Savings is operational and proven. Shared Savings scores somewhat lower than DSM, but DSM is only applicable to even more restrictive types of projects (electricity reduction). Shared Savings scores considerably higher than bond financing across a range of criteria.
The House Ways and Means Committee then considers the Governor's budgetary recommendations. The Committee makes its amendments and submits a revised proposal to the full House. Once the House approves the budget, the Senate Ways and Means Committee reviews the proposal and makes its recommendation to the full Senate. After the Senate develops its version of the proposal, a legislative conference committee negotiates a compromise proposal for both branches of the Legislature to consider. If the Legislature accepts the compromise plan, the Administration reviews the plan once again.
At that time, A&F can make amendments, recommend line item vetoes or reductions, and propose the "outside section." The outside section represents budgetary appropriations of importance to the Administration that the Legislature failed to include in the compromise proposal. Once the Legislature approves the outside section, the Governor may sign the budget, thereafter officially known as the General Appropriation Act. The Governor has the option of vetoing the budget, or making any specific line item veto. But the Legislature may override either type of veto with a two-thirds vote.[84]
Once the Legislature has authorized the issuance of bonds, the Administration may proceed with plans to raise funds for projects that fall under the authorization. A bond authorization serves only as legislative permission to issue debt; it does not compel the Administration to pursue any capital project. In fact, the Commonwealth presently has a significant amount of authorized debt which the current Administration has chosen not to issue. At 1993's fiscal year end, the Commonwealth had over $4.6 billion in unissued, authorized general obligation (GO) debt. Table G-1 displays the amounts of authorized but unissued GO debt at the end of fiscal years 1989 through 1993.
General obligation bonds are secured by the full faith and credit of an issuing entity. An issuer's credit rating, its ability and legal authority to collect tax revenues, the interest rate and the political environment determine how much GO debt any one issuer can borrow. The Commonwealth is currently a high debt state. In 1993, the state's ratio of tax-supported debt to personal income ranked the fourth highest in the nation[87] and its per capita tax-supported debt ranked third highest.[88] Between fiscal years 1987 and 1989, annual capital spending in the state grew by 62% from approximately $600 million to $971 million.[89] To address its debt problems, the Commonwealth has taken legislative measures to limit total debt outstanding, and executive measures to limit new debt issuances.
Authorized but Unissued Actual Date General Obligation Debt Capital Expenditures June 30, 1989 $6,323,810 $970,668 June 30, 1990 $5,383,743 $936,068 June 30, 1991 $4,937,306 $847,057 June 30, 1992 $6,393,832 $694,057 June 30, 1993 $4,614,367 $579,905
Since the Commonwealth has limited debt capacity, debt financed projects "crowd out" other capital projects that the Commonwealth might want to finance with bonds. Therefore, capital appropriations in general, and bond revenue in particular, are highly sought after by the twelve Executive Offices and the many state agencies, each of which has its own view as to the optimal allocation of capital funds. The Executive Office of Administration and Finance, with the approval of the Governor, determines allocations of the year's capital budget among each of the Executive Offices. These allocations are determined by the five year capital spending plan. See Insert G-2 and G-3 which detail current capital authorizations for the Executive Office of Environmental Affairs and The Division of Capital Planning and Operations, respectively.
The five year capital spending plan specifies line item spending authorizations for various government projects. For example, DCPO's total five year capital spending plan for fiscal years 1993-1997 authorizes a total of $250 million. This amount is broken down into expenditure categories such as feasibility studies, preventative maintenance, wastewater treatment, air pollution improvements, state house renovations, etc. Given these line item authorizations, DCPO will finance specific projects that fall under each category. Ultimately, A&F and the Governor have the final word concerning spending within each Secretariat. A&F holds significant power in determining which capital projects will receive bond revenue, and the capital spending process can become very political. The projects which A&F considers to be a priority will receive funds and those projects which are less of a priority will not.
When a state agency wants to make capital improvements of over $100,000 to one of its facilities, it must seek DCPO's assistance. Through the public procurement process, DCPO bids out government projects to private contractors. Before a contractor may begin to provide services, it must first send an invoice to the Commonwealth for A&F's approval. With such approval, the firm may become an authorized vendor, and the Commonwealth may write a check for services to be rendered. The Comptroller then enters record of this transaction on a computer account known as the Warrant. Whenever the Warrant grows large enough, the Treasurer's Office (at the request of the Governor) issues a sufficient amount of debt to replenish the capital spending account. The Commonwealth's most recent GO issue, on January 1, 1994, amounted to $200 million. This process of issuing bonds after payment has been made is known as "bonding in arrears."
To summarize, the capital spending process consists of several steps. First the Legislature authorizes the issuance of debt for certain government programs. Then A&F allocates funds to each Executive Office and sub-agency. Next, a particular agency decides to utilize its authorization. If the authorization is within the five year spending plan, then A&F will most likely approve the project. The agency then seeks DCPO assistance (if necessary) and A&F approves the selected vendor. Payment is made to the vendor by the Comptroller, and eventually the Treasurer's Office issues bonds in arrears, to cover capital expenditures.
1 Executive Order No. 350
2 Energy efficiency is a means to achieve energy conservation. This report, however, uses the two terms interchangeably.
3 Clean State Coordinating Council, "Massachusetts Clean State Program," September, 1993.
4 Division of Energy Resources, "The Massachusetts Energy Plan: The Power Behind Economic Growth"
5 Total annual energy expenditures include electricity, oil, and gas expenses in state owned and leased facilities. Division of Energy Resources, The Massachusetts Energy Plan, p. 19. The Executive Office of Administration and Finance projects the FY94 budget to be $15.5 billion.
6 From "DCPO Energy Team Project Savings: 1985-1993". In 1985 the first Shared Savings project was completed, and the Commonwealth began to implement energy efficiency projects in earnest.
7 Discounted payback periods depend upon the interest rate. See Finding 2.4 for a detailed discussion. However, A&F and DCPO's guidelines specify simple payback periods. Bond funded projects allow a maximum payback period of five years, and the Shared Savings Program implements projects with payback periods of seven to ten years. The average simple payback period on projects that DCPO completed since 1985 is 4.5 years.
8 Primary consumption (excluding exports) is produced from 63% oil, 22% natural gas, 9% coal, 4% nuclear, and 2% hydro. Source: Massachusetts Energy Plan, p. 12.
9 Derived from "DCPO Energy Team Project Savings: 1985-1993", and "Total Emission Reductions from Energy Conservation Projects at State Facilities: 1985-1993", from DCPO Energy Database. Emission estimates are the EPA Green Lights program 1992 Conversion Factors for Massachusetts.
10 Source: EPA "Opt-In Program", (202) 233-9154. Current auction prices for SO2 are $150 to $300 per ton.
11 Source: "DCPO Energy Team Project Savings: 1985-1993" and external cost estimates in Table 2.3.
12 Massachusetts Department of Public Utilities November 1988 Order DPU 86-36-F., page 67, cited in Environmental Costs of Electricity, by Richard Ottinger, David Wooley, et. al., Pace University Center for Environmental Legal Studies, prepared for New York State Energy Research and Development Authority and the US Department of Energy, © 1991, Oceana Publications. page 597.
13 For example, energy conservation projects in fiscal year 1993 reduced energy usage by the equivalent electricity consumption by 110,600 megawatt-hours, which resulted in the emissions reductions indicated in the last two rows of Table 2.1.
14 For comparison to our 2.8¢/kWh, "the top rate in Massachusetts" per kWh is about "three cents for environmental costs avoided," per The Economist, Aug. 31, 1991, page 20, "Energy and the Environment."
15 Schedule of Rates of Boston Edison Company, effective November 13, 1992, General Service Rate G-2 per M.D.P.U. No. 821, base energy charge of 11.460¢/kWh.
16 Source: The conversion between electricity consumption and emission reductions is determined by the EPA Green Lights program, in row (A). The conversion between emission reductions and benefits, indicated in row (B), is derived from Environmental Costs of Electricity, based on health costs of SO2 and NOx and mitigation costs of CO2. The EPA Green Lights "conversion factors" change from year to year, depending on the fuel mix of electricity generation facilities in each state in a given year. The conversion factors in Figure 3 are for Massachusetts for 1993. For 1992, the conversion factors for 1 kWh were 1.6 lbs CO2, 6.3 gm SO2, and 2.3 gm NOx.. Those conversion factors represent less energy-efficient electricity production in earlier years.
17 Source of Figure 2.4 and Figure 2.5: Statistical Abstract of the United States, 1993, table No. 756, "Consumer Price Indexes, by Major Groups," indexed by authors to 1972=100.
18 The Energy Information Administration (EIA), the independent analytical agency within the US Department of Energy, predicts a slow rise in energy prices over the next 20 years. However, the EIA's predictions have regularly been incorrect by factors of 50%. The EIA's poor accuracy reflects not so much over-pessimism as it does a great difficulty in predicting energy prices accurately. Source: Electric Power Annual 1990, DOE/EIA-0348(90), released 1/24/92.
19 Morgan Stanley, Energy Price Swaps for the Public Sector, Public Finance Notes, August 1991.
20 House Bill No. 105 proposes that state agencies should be allowed to spend energy conservation savings on other Clean State programs without explicit permission.
21 The public procurement process applies to most capital projects that exceed $100,000. This includes bond financed projects and utility company sponsored "demand side management" projects. The Shared Savings program, however, circumvents some of the bureaucracy of the approval process.
22 The average simple payback period for projects implemented since 1985 is 4.5 years. Their average discounted payback period is just over 5 years.
23 Source: Moody's Investor Services, 1993 Medians, Selected Indicators of Municipal Performance.
24 Francine Spinelli, Commonwealth of Massachusetts: Analysis of Commonwealth and Related Indebtedness, PAE for Kennedy School of Government and Executive Office for Administration and Finance, April, 1993.
25 Commonwealth of Massachusetts, Information Statement, June 19, 1994, page A-34.
26 Direct bonds includes only general obligation bonds and minibonds (bonds with small denominations, designed for small private investors).
27 The law set a limit of $6.8 billion in fiscal year 1991, and that limit grows by 5% per year.
28 Source: Interview with Hope Davis, DCPO.
29 Source: DCPO Energy Team Project Savings Spreadsheet, 1985-1993.
30 Some small energy conservation projects may have the flexibility to be funded from operating expenses. It is sometimes unclear as to the appropriate account in which a government expenditure belongs; an agency may classify computer purchases, for example, as either an operating expense or a capital investment. Expenses may also be reclassified and money may shift among accounts with the permission of both A&F and the Ways and Means Committees. Job descriptions, for example, may be reclassified such that payment of an employee's salary may shift from the capital budget to the operating budget, or vice-versa. To receive this permission requires both financial need and political connections.
31 Reversion is the act of transferring retained revenues into the Commonwealth's "General Fund." The General Fund is the general-purpose budgeted operating fund. Reversion may occur at the fiscal year's end, or if a fiscal crisis were to arise, the budget bureau could reverse revenues mid year.
32 $160 million figure is for calendar year 1991; source: Ken Blonder, DOER. $2.1 million is the average annual capital from DSM at state facilities from FY85 through FY93; source: DCPO Energy Team Project Savings.
33 See Appendix C-6 for a fuller explanation of utility's incentives for demand-side management. In summary, the regulatory structure of electric utilities lets utilities charge ratepayers for energy conservation equipment, so DSM is a transfer of funds from ratepayers to DSM participants. Using DSM at state agencies, in effect, pays for energy conservation projects by taxing citizens via their electricity bills.
34 Congressional Record, Vol. 138, No. 142, Title 1, Subtitle E, ¤141(a)(1)(f), page H12074, October 5, 1992. For any state that "has demonstrated a commitment to improving the energy efficiency of buildings within such State, the Secretary may, beginning in fiscal year 1994, provide up to $1 million to such State for deposit into a revolving fund established by such State for the purpose of financing energy efficiency improvements in State and local government buildings." Also see ¤112(a), page H12062, which stipulates that a $250,000 grant is available to a regulatory authority for several kinds of energy projects.
35 Quotation from the enabling legislation of the Massachusetts Water Pollution Abatement Trust Fund from MWPAT Official Statement Relating to $91,100,000, June 1993, p. 13.
36 If the Commonwealth invests more than $3 million to capitalize the CSRF, it can attract more bond revenue. For the first $3 million of investment, CSRF receives $8 for every $3. Thereafter, CSRF receives $2 for every $1 invested.
37 The amount of investment income that the Commonwealth can earn on its debt service reserve fund will depend upon the term of the CSRF's debt, the shape of the yield curve and available investment opportunities. The debt service on CSRF bonds will be determined at tax-exempt rates. However, because municipal issuers are exempt from paying taxes on their investments, the CSRF may invest its debt service reserve fund in higher yielding taxable investments without incurring a tax burden.
38 The Commonwealth may chose to capitalize the CSRF with GO bond revenue. No provision in the Federal Energy Policy Act prohibits doing so. However, the Commonwealth may choose not to do so. Federal law prohibits arbitrage (when municipal issuers borrow money and reinvest bond revenue at higher interest rates). Therefore, if the Commonwealth capitalizes CSRF with GO debt, investment income on the debt service reserve fund would be limited by the yield on the GO bonds used to provide the initial seed money. This might limit CSRF's ability to subsidize loans.
39 For state agencies, that rate would be half of the GO yield, on the particular day of issuance, with a maturity equal to the payback period of the project in question.
40 $1 million is equivalent to the capital requirement of one average-sized energy conservation project, or of a few small energy conservation projects. The federal subsidy is small relative to the Commonwealth's overall energy conservation capital needs.
41 There are currently five full-time and one half-time employees on the Energy Team.
42 All state facilities were audited as of July 1, 1987, as part of DCPO's initial mission. Many facilities have not been audited since then. Also, many new facilities and expanded facilities have not had audits performed at all.
43 Quote of the enabling legislation of the Massachusetts Water Pollution Abatement Trust Fund from MWPAT Official Statement Relating to $91,100,000, June 1993, p. 13.
44 The amount of investment income that the Commonwealth can earn on its debt service reserve fund will depend upon the term of the CSRF's debt, the shape of the yield curve and available investment opportunities. The debt service on CSRF bonds will be determined at tax-exempt rates. However, because municipal issuers are exempt from paying taxes on their investments, the CSRF may invest its debt service reserve fund in higher yielding taxable investments without incurring a tax burden.
45 The Commonwealth may chose to capitalize the CSRF with GO bond revenue. No provision in the Federal Energy Policy Act prohibits doing so. However, the Commonwealth may choose not to do so. Federal law prohibits arbitrage (when municipal issuers borrow money and reinvest bond revenue at higher interest rates). Therefore, if the Commonwealth capitalizes CSRF with GO debt, investment income on the debt service reserve fund would be limited by the yield on the GO bonds used to provide the initial seed money. This might limit CSRF's ability to subsidize loans.
46 For state agencies, that rate would be half of the GO yield, on the particular day of issuance, with a maturity equal to the payback period of the project in question.
47 Every municipality in Massachusetts receives some level of state aid. If, however, a municipality were to default on its debt service, its earmarked local aid payment could be made directly to the revolving fund.
48 Massachusetts Water Pollution Abatement Trust Fund, Official Statement Relating to $91,100,000, pp. 17-18.
49 Clean State Program guide, page 2.
50 David Osborne and Ted Gaebler, "Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector", Plume Books, NY 1993.
51 ibid., frontispiece and p. 19.
52 UMass Amherst energy savings since FY86 are $8.7 million in 40 projects, with an aggregate simple payback period of 0.5 years (DOE P2/RC Report).
53 Boston Edison energy conservation program saved $70,000 per year (at no cost to the agency), by replacing half the fluorescent bulbs with reflectors (Executive Office of Economic Affairs P2/RC Report, DET p.15, IV(A)).
54 DET is planning installation of aerators on water faucets to reduce water consumption; "the expected savings will pay the cost of the units in the first year of operation." (Executive Office of Economic Affairs P2/RC Report, DET p.16,V(c)).
55 Of course, many capital purchases are made, under the existing DCPO program of energy audits. For example, the Massachusetts College of Art is working with DCPO to acquire and install "modern convertible gas/oil energy efficient boilers" (DOE P2/RC Report). The question to be addressed is, What is holding up the projects which aren't being done?
56 "We are working with DCPO to put out an RFP for a Shared Savings Program for energy conservation." (Fitchburg State College, DOE R2/PC Report).
57 "Plans are now underway with DCPO for Shared Savings Energy Conservation Program." (Westfield State College, DOE R2/PC Report).
58 "...applied to DCPO (4/7/93) for an energy and water conservation study." (Berkshire Community College, DOE R2/PC Report)
59 Expansion is under way -- see note 62 below.
60 "The College has for many years requested funds to replace underground storage tanks that are over twenty years old... In most instances requests of this nature have gone unanswered." (Westfield State College, DOE P2/RC Report).
61 "Lack of motivation to increase energy efficiency: Under the existing EOAF procedures, any reduction in energy consumption costs at a state facility during a fiscal year results in a reduction in the allotted energy budget the following fiscal year." (DOER, Executive Office of Economic Affairs P2/RC Report).
62 DCPO P2 action plan includes: • Expand energy audit program -- "funding is approved and in place" for four new contractors; • More shared-savings energy projects, with private investment. (Executive Office of Administration and Finance P2/RC Report)
63 The New Jersey agency which operates the Energy Conservation Program is the Department of Environmental Protection and Energy (DEPE). This information comes from interviews with Bill Barretti, Supervising Engineer at the Board of Regulatory Commissioners, an independent commission under DEPE. We also interviewed Mike Ambrosio (201-648-2129), Bureau Chief of the Public Utilities Commission (PUC), the utility regulatory arm of DEPE.
64 This section is based on interviews with Joe Sullivan (609-984-9701) and Frank Parrotti (609-292-8213), the Energy Conservation Program Reviewer for the State Office of Energy.
65 Based on interviews with Jay Taylor of the New Hampshire Energy Resources Department, 603-271-2611.
66 Based on interviews with Mert Mann of the New Hampshire Energy Resources Department, 603-271-2611.
67 Information based on Executive Order No. 132, January 2, 1990, and the State Energy Office Implementation memo, of the same date.
68 Information based on telephone interview with Amy McCane, New York State Energy Division, Policy and Planning Department.
69 Report on 1992 State Agency Energy Plans, by New York State Energy Office, State Facilities Energy Conservation Program, page 1-9.
70 Ibid., pp. 1-20 through 1-26.
71 Information based on New York State Environmental Facilities Corporation, 1993 Annual Report.
72 Section based on interview with Steve Murphy, Lead Planning Analyst at the Connecticut Office of Policy and Management, and Program Manager of the State Building Conservation Program.
73 Connecticut is currently considering a large co-generation project at U. Conn. Storrs, which is within Northeast Utility's service area.
74 Per press release of 3/8/94, courtesy of Brian J. Johnson, Office of Environmental Policy, internet @eop.sprint.com.
75 Energy Policy Act of 1992, ¤152, and 10 USC 2865 and 2866.
76 This section is based on interviews with: Ken Blonder, Electric and Gas Analyst at DOER; and Andre Meade, Rate Analyst at NJ PUC.
77 Information for this section is based on an interview with Laura Merril, ICP Programmer, Massachusetts DOER.
78 All quotations are from Steve Pinkerton, (508) 653-0456, as interviewed 3/22/94.
79 Source for much of this Appendix: Energy Efficiency in State Buildings: Shared Savings Pilot Project Evaluation, by Hope Davis, Shared Savings Project Manager, April 1987, Rev. 12/14/88.
80 Source: DCPO Energy Team Project Savings, 1985-1993.
81 The process of hiring ESCos to perform energy services under the Shared Savings Program is technically "public procurement." However, the Shared Savings Program is exempt from many of the steps that bond funded projects must complete.
82 The Commonwealth's fiscal year runs from July 1 to June 30.
83 The Commonwealth of Massachusetts Information Statement, January 19, 1994, p A-7
84 Ibid.
85 In some cases a bond authorization starts in the Executive Office of Administration. Officials in A&F may draft a bond authorization at either the Governor or the Secretary of A&F's request, and introduce the proposed authorization to the Legislature.
86 The Executive Office of Administration and Finance's current Five Year Capital Investment Plan includes appropriations to address many of the Clean State Initiative's goals. The plan has broad language that includes energy conservation projects, but no specific line item sets money aside for this purpose.
87 Source: Moody's Investor Services, 1993 Medians, Selected Indicators of Municipal Performance.
88 Francine Spinelli, Commonwealth of Massachusetts: Analysis of Commonwealth and Related Indebtedness, PAE for Kennedy School of Government and Executive Office for Administration and Finance, April, 1993
89 Commonwealth of Massachusetts, Information Statement, June 19, 1994, page A-34
Reprinted from a repport for the Massachusetts Clean State Program,
Executive Office of Environmental Affairs, Commonwealth of Massachusetts
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