Keeping Pace in Tough Economic Times

Renewable energy will surely see some lean years ahead with a poor economy and lawmakers looking to cut trillions from the national budget. The recent bankruptcy of industrial solar manufacturer, Solyndra – a recipient of federal stimulus money – will only hurt the argument for further government investment in renewables. Put simply, the poor economy and fights in Washington will undermine any grand legislative progress on the clean energy front. However, in the near-term, victories can still be won on the local and administrative front.

One such administrative battle concerns PACE bonds. Heralded as “one of the best publicly and privately-funded tools for gaining energy independence,” PACE bonds allow property owners to defray the upfront costs of energy efficiency or renewable energy projects. PACE is a new take on an old idea. Just as property owners incur assessments for street paving, parks, street lighting and sewer systems, owners seeking to invest in “green upgrades” (e.g., weather sealing, solar installations, etc.) can opt in for PACE financing that is repaid through an assessment on their property taxes for up to 20 years. These assessments “run with the land” (i.e., the new owner continues to pay the assessment as they continue to receive the benefit of the energy savings), and are believed to be paid for through the energy savings.

However, the battle lines over PACE were drawn in the summer of 2010 when the Federal Housing Finance Agency (“FHFA”) issued a statement that directed Fannie Mae and Freddie Mac to cease underwriting mortgages for properties with a PACE assessment. The reason: PACE bonds provide the issuing municipality with a “priority” lien on the property in the event of default. Because banks do not want to compromise their priority position, the FHFA made the rather dubious claim that PACE does not meet a “valid public purpose.” In turn, the State of California sued the FHFA and more recently, the Federal District Court in Oakland ruled that the FHFA may not unilaterally issue directives, but instead must go through the proper administrative channels and conduct a “rulemaking procedure” (i.e. address comments and explain and justify its rules).

The case of PACE bonds illustrates the need to focus on administrative law efforts. While a court ruling requiring the FHFA to follow administrative procedures is not game changing, it is progress. Requiring agencies to effectively administer the clean energy policies that do exist will help maximize the current array of green technologies and financing options.