Green Building Law Blog

Mind Your Administrative P's & Q's When Rejecting Energy Code Changes

Shari Shapiro — Wed, 10 Apr 2013 16:15:25 -0500

The Court of Appeals of the State of New Mexico handed down a limited win for energy code advocates, holding that adopting changes to building codes that removed energy conservation provisions without any justification violated administrative procedure. The decision is available here.

Between 2006 and 2012, the construction and energy codes adopted in many jurisdictions have incorporated provisions increasing the energy efficiency of buildings built to code by 30% (15% from the 2006 to the 2009 codes, and an additional 15% from 2009 to 2012).

As I have posted about previously, there is a trend nationwide to resist adoption of the 2012 codes, in part based on the increased energy conservation requirements. In the case of New Mexico, the state had adopted codes which had energy conservation requirements beyond those in the 2009 energy codes.

The New Mexico Construction Industries Commission (the "Commission") sought to adopt changes that would have removed any energy conservation provisions from the New Mexico codes that exceeded the 2009 International Energy Conservation Code (IECC).

The Commission held several public meetings and solicited public comments on the code changes. Then, at a June 2, 2011 meeting, after a brief and (frankly) confusing statement by the Chair of the Commission, the Commission voted to adopt the code changes without further discussion.

Several groups including the Southwest Energy Efficiency Project, Environment New Mexico, several green builders, the Sierra Club and other sued to overturn the Commission's decision for (among other arguments) being "arbitrary and capricious" due to the Commission's lack of discussion and justification for the decision.

The Court of Appeals held that the Court could not even determine whether the Commission's decision was valid because the Commission failed to provide "what facts and circumstances were considered and the weight given to those facts and circumstances." Southwest Energy Efficiency Project v. New Mexico Construction Industries Comm'n, No. 313838, April 4, 2013 (N.M. Ct. Appeals) at 10. The Court remanded the Codes to the Commission for reconsideration, with a justification of its reasons for its decision.

The reason why I characterize the decision as a "limited win" is that, assuming that the Commissioners are the same, there is no reason why the decision on the code adoption will change. If the code revisions are again adopted, with justification, the Plaintiffs will have to institute another legal action, and demonstrate that the justification provided by the Commission is arbitrary and capricious.

However there may be value to the plaintiffs simply by filing the suit and making the Commissioners justify to the citizens of New Mexico in writing why the homes they live in should not be energy efficient.

Pennsylvania Executes one of the First Residential Energy Efficiency Loan Bundling Transactions

Shari Shapiro — Mon, 11 Mar 2013 15:43:10 -0500

After long and diligent work, my own Commonwealth of Pennsylvania announced last week that it had successfully bundled 4,700 residential energy efficiency loans, and obtained $23 million in cash and $8.3 million in deferred payments, for a projected total of $31.3 million. The press release is available here.

This is a holy grail of sorts. People have been saying for years that energy efficiency loans should be able to be bundled and sold, a la mortgages and credit card loans. In theory, bundling the loans would allow private capital to invest in pools of energy efficiency loans, as opposed to individual projects, injecting more capital into the market for energy efficiency upgrades and lowering the interest rates.

Although it seemed like a workable idea, few before the Pennsylvania Treasury had accomplished it. Energy efficiency loans were considered too weird, too complicated, too risky, etc. to be bundled. Most critically, financial institutions mostly considered energy efficiency loans to be too risky because there was an insufficient amount of data on energy efficiency loan defaults.

In light of these issues, the Pennsylvania transaction still does not really recognize energy efficiency loans as a unique asset class. By this I mean that the stream of income from the saved energy is not being recognized as part of the transaction. As far as the investors are concerned, the loans could be for HVAC equipment or Manolo Blahniks, they are all just unsecured consumer loans. In addition, Treasury still had to put up significant credit enhancements to make the loan pool desirable.

In addition, the transaction took a long time and had high transaction costs. A private entity probably would not have had the resources or perservernce needed to cross the finish line. Future transactions will need to be more standardized, both with in terms of assets and documentation.

Nonetheless, the Pennsylvania transaction and the many lessons its staff learned along the way may be a very important step in accessing greater pools of capital for energy efficiency.

Join me at the PA/NJ Sustainability Symposium on March 12

Shari Shapiro — Fri, 01 Feb 2013 11:15:54 -0500

For all my Pennsylvania and New Jersey fans, I will be speaking at the third annual PA/NJ Sustainability Forum on March 12, 2013. To get more information and register click here.

The half-day forum will bring together over 600 industry, education and community leaders to share best practices, address challenging issues and provide cutting edge information about sustainability in the Delaware Valley.

My panel will cover:

Codes and Disclosure Mandates: The key to market transformation?

The other members of my panel are:

• Katherine Gajewski: Director, Mayor’s Office of Sustainability, City of Philadelphia
• Cliff Majersik: Executive Director, Institute for Market Transformation
• Priscilla Richards: Program Manager, New Construction, NYSERDA

In addition, Mayor Michael Nutter and Rob Powelson, Chairman of The Pennsylvania Public Utility Commission will be keynote speakers.

The details are as follows:

Tuesday, March 12th, 2013
7:45 AM - 1:30 PM

Temple University
Performing Arts Center
1837 North Broad Street
Philadelphia, PA 19122

Hurricane Sandy Relief Bill "Blows In" Opportunity for States to Adopt Better Building Codes

Shari Shapiro — Tue, 29 Jan 2013 11:26:18 -0500

The fifty billion dollar (yes, that's $50,000,000,000) Hurricane Sandy Relief Bill (the "Relief Bill") is headed to President Obama's desk for his signature. The Full Text of the bill is available here http://www.gpo.gov/fdsys/pkg/BILLS-113hr152rds/pdf/BILLS-113hr152rds.pdf

The Relief Bill provides several different opportunities for the Federal government to encourage states to adopt up-to-date building codes by tying distribution of the funds to commitments from the states to adopt the most up-to-date building codes.

According to studies by the Multi-Hazard Mitigation Council, for every dollar invested in building code adoption and enforcement, four dollars are saved in recovery costs. As a result, FEMA has been very public about the critical role building codes play in reducing building damage from natural disasters.

David Miller, the Associate Administrator for Federal Insurance and Mitigation Administration at FEMA, testified before the House Committee on Transportation and Infrastructure last year on this issue, concluding:

Post-disaster assessments of many communities have shown a direct relationship between building failures, the codes adopted, the resources directed toward implementation and enforcement, and the services available to support those codes.

Tying emergency relief funds to code adoption would not be new. Department of Energy state energy block grants from the American Reinvestment and Recovery Act (ARRA) were tied to governors' commitments to adopt the 2009 version of the International Energy Conservation Code (IECC) and ASHRAE 90.1-2007, as I posted in greater detail here http://www.greenbuildinglawblog.com/2013/01/articles/codes-1/2009-energy-code-adoptions-required-by-arrawhere-are-they-now/

Two allocations which could logically be tied to building code adoption commitments are the $5.4b allocated to the Federal Emergency Management Agency (FEMA) for the Disaster Relief Fund and the $16b allocated to the Department of Housing and Urban Development (HUD) for "necessary expenses related to disaster relief, long-term recovery, restoration of infrastructure and housing, and economic revitalization..." (Bill at 74)(emphasis added).

However, in tying emergency fund allocations to code adoption, FEMA and HUD should incorporate some lessons learned through the ARRA commitments. First, the ARRA commitments only related to a one-time adoption of the 2009 energy-related code provisions. Second, there was no reporting required from the states on their progress with adoption and enforcement of the codes. Finally, as I posted here (http://www.greenbuildinglawblog.com/2013/01/articles/codes-1/2009-energy-code-adoptions-required-by-arrawhere-are-they-now/), enforcement of the commitments has been weak. To be effective, any code-related commitments must require regular code updates, and a mechanism for reporting and recapture of funds for failure to fulfill the code commitments.

Hurricane Andrew ushered in a new era of code adoption on the Gulf Coast. With some encouragement by the Federal government, Hurricane Sandy could have the same effect.

2009 Energy Code Adoptions Required by ARRA--Where are They Now?

Shari Shapiro — Mon, 21 Jan 2013 15:32:33 -0500

A long time ago in a first term far away, there was the American Recovery and Reinvestment Act (ARRA), a.k.a the Stimulus.

As explained by the DOE, The ARRA section on State Energy Program funding included a statutory provision (Section 410) linking SEP funding to building energy code adoption and enforcement. As a condition of accepting the ARRA funding, the states provided assurances through governor’s letters indicating their state would comply with the terms of Section 410.

All 50 states took ARRA SEP money, and all 50 governors provided commitment letters commiting to do three things relating to building energy codes:

Adopt a building energy code for residential buildings that meets or exceeds the 2009 International Energy Conservation Code (IECC),

Adopt a building energy code for commercial buildings and high rise residential that meets or exceeds the ANSI/ASHRAE/IESNA Standard 90.1-2007, and;

Develop and implement a plan, including active training and enforcement provisions, to achieve 90% compliance with the target codes by 2017, including measuring current compliance each year.

In the four years since ARRA, eighteen states still have no energy code at all or have residential codes that do meet the ARRA requirements, and fifteen states still have no energy code at all or have commercial codes that do not meet the ARRA requirements. A map of the status of every state's energy codes is available here.

I have not been able to find state annual compliance reports or a report by the DOE Office of the Inspector General on the building code commitment aspect of the ARRA funding. So, there is little, if any, data on when or whether states will comply with their ARRA commitments. [NOTE: I would welcome being proven wrong in this area. If you have data, please send me a link and put it in the comment section].

Given the vast research that building energy codes are an inexpensive way to acheive energy efficiency, it was a really good idea to tie the ARRA finding to energy code adoption. Unfortunately, lack of enforcement of ARRA commitments appears to be a missed opportunity to move the country forward in this area.

The Green False Claim Most Companies Are Making Without Realizing It

Shari Shapiro — Tue, 15 Jan 2013 18:07:17 -0500

You are a good green company. You have dutifully installed a solar array on your facility, and use the energy it produces to power your manufacturing process.

You proudly proclaim on your website, in your SEC filing or on your product packaging that you "use renewable energy." You calculate your Carbon Footprint and deduct the emissions that would have been generated using conventional fuel.

If, like most companies, you have sold the renewable energy credits (RECs) attributable to the renewable energy, you will potentially be in violation of Section 5 of the FTC Act (15 U.S.C. Sec. 45) (“Section 5”), which prohibits “deceptive acts or practices in or affecting commerce.”

The Federal Trade Commission released the long-awaited fourth edition of the "Green Guides" on October 11, 2012. The purpose of the Guides is to provide a framework for companies to truthfully and non-deceptively market environmental and “green” products, packages, and services. A copy of the Guides is available here.

The Guides address green marketing in general and specific applications, including renewable energy (Section 260.15). In one of the more controversial aspects of the Guides, the FTC advises that:

If a marketer generates renewable electricity but sells the renewable energy certificates for all of that electricity, it would be deceptive for the marketer to represent, directly or by implication, that it uses renewable energy.

Guides at § 260.15(d).

The FTC has concluded that renewable energy stripped of its carbon reduction and other environmental benefits is just energy. Thus, even if a company has a renewable energy installation on its facility, and uses the energy from that facility to power its manufacturing process, if it sells the renewable energy credits, it still would not be able to represent that it used renewable energy. In addition, any carbon offsets or emissions reductions could not be included in the company's calculation of its environmental impact.

This counter-intuitive result was roundly criticized in comments on the Guides:

Most commenters agreed that it would be deceptive for a marketer to represent that it uses renewable energy if it sold all the renewable attributes of the energy it uses. Most who addressed this issue, however, disagreed with the Commission’s proposed guidance. They argued that, even when a firm sells RECs, it should be able to market its role in generating renewable energy.

The FTC, in its response, defended its position regarding RECs, but said that a company hosting a renewable energy facility and selling the RECs would not be violating the FTC Act if it describes fully and accurately its role in the transaction. Most companies, however, are not doing this.

There is some evidence that the FTC is increasing its enforcement of false environmental claims. The FTC brought claims against four national retailers, including Amazon, Macy’s and Sears, that were allegedly selling textiles as made of bamboo when they were actually made of rayon. The companies settled with the FTC on or about January 3, 2013, paying a total of $1.26 million in penalties for the false advertising.

The FTC brought claims against Sherwin Williams and PPG for deceptively marketed their paints as free from volatile organic compounds (VOCs). According to the FTC, the base paints were VOC free, but tinted paint (which most customers buy) contained VOCs. The FTC settled the claims in October, 2012, and the companies were forced to change their marketing practices.

Given the frequency with which the Renewable Energy/REC rule is broken, it would be impossible for the FTC to police all of the violators. However, In the context of other green marketing claims, the FTC may scrutinize a companies' representations about renewable energy and greenhouse gas reductions. For companies that make public disclosures in Securities and Exchange Commission filings, this could be of even greater concern.

Fiscal Cliff Bill Extends Home Energy Efficiency Tax Credits for Businesses and Homeowners

Shari Shapiro — Mon, 07 Jan 2013 09:43:49 -0500

On January 1, 2013, the U.S. Congress passed last minute legislation known as the American Taxpayer Relief Act of 2012 to avoid automatic increases in income taxes for millions of Americans, as well as draconian cuts to the budget of the federal government, that many feared would plunge the nation’s economy back into recession.

Also included in this eleventh-hour legislative compromise were reinstatements of two business and personal tax credits applicable to energy efficient residences and appliances that had expired on December 31, 2011. The Act extended the tax credits through December 31, 2013, and made them retroactive to December 31, 2011, meaning that the credits are now available for both 2012 and 2013 projects.

26 U.S.C. §45L Business Tax Credit for New and Renovated Energy Efficient Residences

The Act reinstated and extended the 26 U.S.C. §45L business tax credit of up to $2000 for contractors or developers that construct or significantly renovate “dwelling units” (apartments, condos or single-family homes) that meet certain energy efficiency standards.

Importantly, the credit is calculated based on the “dwelling unit,” not the building. IRS guidance on the credit defines “dwelling unit” as “a single unit providing complete independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking, and sanitation, within a building that is not more than three stories above grade in height.” Therefore, contractors and developers of low-rise multi-family properties can claim a credit for each individual unit, and attached townhomes each qualify for an independent credit.

In addition, the credit had previously applied only to residences acquired before December 31, 2011. The credit is now available for homes built and acquired from December 31, 2011 through December 31, 2013, which includes those built and acquired either in 2012 or 2013.

In addition to extending the credit, the Act changed the baseline of energy efficiency required to qualify. Previously, §45L required a 50% reduction in energy usage as compared to the 2003 edition of the International Energy Conservation Code (IECC). The Act amended the baseline energy standard to reference the 2006 edition.

The 2006 edition of the IECC contains several structural changes to make the code easier to apply, and adjusted some of the technical requirements. However, as determined by the Oak Ridge National Laboratory, the revisions did not change significantly the level of energy efficiency from the 2003 edition. Therefore, although it is important to be aware of the technical changes, properties that would have qualified for the prior version of the §45L credit will likely meet the energy efficiency requirements of the new standard. This will disappoint many critics of the §45L tax credit, who have argued that it is not stringent enough from an energy efficiency perspective.

The Act also freezes the credit to the standard “in effect on January 1, 2006,” the 2006 edition of the IECC. Updating the baseline energy efficiency standard to more current editions of the IECC, which are up to 30% more energy efficient than the 2006 edition, will require further legislative amendment, and is therefore unlikely to occur in the near future.

26 U.S.C. §25C Individual Tax Credit for Energy Efficient Residential Improvements and Appliances

The Act also reinstated the 26 U.S.C. §25C individual tax credit of 10% (up to $500) of the cost of certain energy efficient existing property improvements, like insulation, windows and door, and energy efficient heating, cooling and water heating appliances.

As with the §45L credit, the §25C credit, the Act extended the availability of the credit to improvements placed in service between December 31, 2011 and December 31, 2013, meaning that improvements placed in service in either 2012 and 2013 are now eligible.

Shari Shapiro — Wed, 28 Nov 2012 17:22:09 -0500

Even After Installing Extra Insulation, the FHFA Proposed Rule on PACE Leaves Homeowners Out in the Cold

Shari Shapiro — Fri, 20 Jul 2012 12:55:47 -0500

Property Assessed Clean Energy (PACE) is a property assessment used to finance the upfront costs of energy efficiency upgrades. A local government provides funding, and the assessment is paid back as a line item on a property’s tax bill.

PACE became a controversial issue in 2010, when the Federal Home Finance Authority (FHFA), the regulator of Freddie Mac and Fannie Mae, issued an order prohibiting Freddie Mac and Fannie Mae from purchasing mortgages with PACE assessments on them. The concern was that, as property tax assessments, the PACE loans would have priority over the Freddie Mac and Fannie Mae-backed mortgages, so the PACE loans would get repaid first out of any foreclosure sale proceeds.

FHFA proposed a rule on PACE financing on June 15, and is available for download here. The FHFA has not changed its position, and the proposed rule is a blanket prohibition on purchasing mortgages on PACE encumbered properties, and from consenting to PACE liens on properties with existing Fannie Mae and Freddie Mac backed mortgages. The argument is that the threat of default is immeasurable, and the environmental benefits difficult to calculate, so it is not worth the risk. If the FHFA rule becomes final, PACE is dead. Comments on the rule are open until the end of July.

If the FHFA rule goes into effect, what happens to the homeowners who already took PACE loans? Many communities have had PACE programs in place for some time. The FHFA rule will certainly prevent Fannie Mae and Freddie Mac from backing loans when those homes are sold unless the PACE loan is paid off. Likewise, the PACE loan will have to be paid off if the home is refinanced. This will be an ugly surprise for those homeowners that took a PACE loan specifically because it was transferable with the property.

More concerning is whether the FHFA rule could be read to require Fannie Mae and Freddie Mac to call the mortgages on properties with a PACE assessment. The proposed rule states that Freddie Mac and Fannie Mae are required to:

immediately take such actions as are necessary to secure and/or preserve their right to make immediately due the full amount of any obligation secured by a mortgage that becomes, without the consent of the mortgage holder, subject to a first lien PACE obligation.

In other words, if you take on a PACE loan, you have to pay off your mortgage.

The rule doesn't specifically address retroactive application of the rule, but the phrase "becomes...subject to a...PACE obligation" seems to be proactive, as opposed to retroactive. With a hammer as big as calling a mortgage, however, the final FHFA should specifically state that it does not apply to existing PACE loans.

Decision in BIA v. Washington does not clarify when energy efficient codes are preempted by Federal law

Shari Shapiro — Fri, 13 Jul 2012 09:22:25 -0500

On June 26, 2012, the United States Court of Appeals for the Ninth Circuit decided the BIA v. State of Washington case. The opinion can be downloaded here.

In its decision, the Ninth Circuit held that the Washington State energy efficient building code was not preempted by Federal law. This ruling was contrary to the ruling in a companion case, AHRI v. City of Albequerque, which was before the Federal District Court for the District of New Mexico. In the Albuquerque case, the court held that the code was preempted.

Because there was a split, the interesting question is whether the cases, when read together, create a clear legal framework for ensuring that local energy efficient building codes are not preempted. In my opinion, the Washington court did not articulate a clear rule that can be used to guide local governments through the preemption waters.

Both Albuquerque and the State of Washington passed building codes requiring that new buildings acheive certain levels of energy efficiency. In their suits, the trade associations alleged that the codes were invalid because they were preempted by Federal law. Specifically, the trade associations alleged that the codes mandated the use of heating, ventilation and air conditioning systems that exceeded the energy efficiency standards set by the Energy Policy and Conservation Act of 1975 ("EPCA"), 42 U.S.C. Sec. 6295, et seq.

The Albuquerque code offered two paths--a prescriptive path, under which the installation of HVAC exceeding the Federal standard was required, and a performance path, under which a builder could choose how to acheive the required level of efficiency. Early on, the Albequerque court held that the prescriptive path was preempted. Ultimately, the court found that the performance path was not severable from the prescriptive path, and did not reach a verdict on the preemption of the performance path.

The Washington code did not have a prescriptive path. Rather, the Washington code had a point system, where different building techniques, including the installation of energy efficient HVAC systems, acheived different "scores."

The Washington court differentiated the Washington and Albequerque codes based on the costs imposed on the builder for not using high efficiency HVAC equipment, not to the difference between a prescriptive and a performance standard. The court reasoned:

Albuquerque’s ordinance imposed costs, as a matter of law, on builders who installed certain covered products meeting federal standards, by requiring the builder to install additional products that would compensate for not using a higher efficiency product. As the [Albequerque] court explained, “if products at the federal efficiency standard are used, a building owner must make other modifications to the home to increase its energy efficiency.” The Albuquerque ordinance thus effectively required use of higher efficiency products by imposing a penalty through the code itself.

Here, by contrast, the Washington Building Code itself imposes no additional costs on builders. The district court noted that there are “substantial differences” between the Washington Building Code and Albuquerque’s ordinance. It correctly rejected the Plaintiffs’ argument concerning subsection (B), explaining that the Washington Building Code created no penalties, and did not require higher efficiency products as the “only way to comply with the code.”

In the Washington code, however, it appears that the same costs are imposed on the builders. If a builder chooses to use a standard HVAC system, the builder must make other changes to acheive the required points. Later in the opinion, the Court acknowledged that the cost of adopting the other changes (and not installing more efficient HVAC equipment) could be higher.

Unfortunately, I do not see how the Washington court's analysis works to differentiate the Albuquerque code from the Washington code. As a result, it does not make clear what type of structure is "safe" for local governments to adopt, and not risk a preemption fight.

Home Depot and Whirlpool Face Class Action for "Fraudulent" Energy Star Appliance

Shari Shapiro — Sat, 02 Jun 2012 12:44:11 -0500

A lawsuit was filed on Friday in the United States District Court for the Northern District of Ohio on behalf of nationwide and Ohio-only classes of consumers who purchased three models of Maytag Centennial washing machines whose ENERGY STAR status was later revoked.

The plaintiffs allege that Whirlpool and Home Depot are in violation of Ohio’s Consumer Sales Practices Act, Ohio’s Deceptive Trade Practices Act, unjust enrichment under Ohio law, Ohio common law fraud, and breach of contract because they paid more up front for an energy efficient appliance which turned out not to be energy efficient. The complaint is available here.

In November 2009, Adam Savett purchased a Maytag Centennial washing machine from a Home Depot retail store in Ohio. The machine he chose bore the now-familiar ENERGY STAR label, which is issued under a program jointly administered by the Environmental Protection Agency and the Department of Energy. While ENERGY STAR-qualified washing machines typically demand higher retail prices than standard models, consumers are projected to come out ahead due to the long-term operating savings that result from the more efficient use of both water and energy.

However, less than 10 months after Savett purchased his machine, an independent laboratory completed a DOE efficiency test of that model, revealing that the unit did not meet ENERGY STAR standards. In order to qualify for the ENERGY STAR label, the Maytag machine would have had to have been at least 37% more energy efficient than the minimum energy efficiency standards mandated by law.

Now, Whirlpool Corporation, which acquired Maytag in 2006 and continues to sell appliances under the Maytag name, and Home Depot, are facing a nationwide class action lawsuit for fraud.

Many green legal prognosticators, including me, anticipated that a suit of this type would be forthcoming. The increased interest in green and energy efficiency has also led to a rise in "greenwashing"--making claims of environmental friendliness or energy efficiency simply for marketing purposes. This suit echoes the allegations in Henry Gifford's ill-fated lawsuit against the United States Green Building Council that their buildings were not as energy efficient as promised.

It remains to be seen whether actual fraud, which requires the intent to deceive, was committed in this case. Nonetheless, it is significant that this type of suit has been filed.

More analysis to come….

Spending on Industrial EE Programs Tops $1b

Shari Shapiro — Wed, 11 Apr 2012 15:46:50 -0500

A report released last week by the American Council for an Energy-Efficient Economy (“ACEEE”) showed that overall spending on industrial energy efficiency (“EE”) projects is on the rise.

The report tracked 2010 spending by utilities, state and federal agencies, public benefit fund organizations, and nonprofit entities that was used for providing industrial energy users with incentives, rebates, grants, loans, technical assistance, energy audits, and assessments, among other services to encourage EE.

Total spending topped $1 billion. While 2010 spending received a boost to the tune of approximately $228 million in funds from the American Recovery and Reinvestment Act (“ARRA”), the rest came from other sources. Research shows that the largest programs, by far, were run by utilities and public benefit fund organizations, who accounted for $737 million of the $1.1 billion pot.

The report, however, does not account for private spending which would undoubtedly increase that figure substantially. Industrial users of energy have been very pro-active in implementing EE programs to lower operating expenses and protect themselves against spikes in energy costs. The study also leaves out the millions of private sector dollars that are raised through leveraging public funds. However, ACEEE’s data clearly shows an uptick in total industrial EE program spending.

Pennsylvania and New Jersey both finished among the top 10 state spenders. Pennsylvania ranked third, behind New York and California, at about $65 million, while New Jersey spent just under $28 million, providing the Garden State with an 8^th place finish.

DOE Releases Green Lease Website, and More Musings on the Split Incentive "Problem"

Shari Shapiro — Tue, 20 Mar 2012 13:46:34 -0500

The Department of Energy and several interesting partners (both BOMA and NRDC, for example) have launched a website consolidating green lease resources. It is available here. A number of public agency versions of leases, as well as some guidance documents are included.

Much is made of green leases, and the "split incentive problem" that is seen as a barrier to green building, and which green leases are designed to address. The frequently cited example of the split incentive problem is where the tenant pays for utilities, as in a triple-net lease. The landlord does not have an incentive to invest in energy efficient or green capital improvements because they will not see the benefits of the energy savings. Another example is which party will be responsible for maintaining green featuress of tenant space.

My feeling on this topic has always been that it is illusory.

All lease negotiations, at some level, address the conflicting interests of landlords and tenants. If energy and/or sustainability was an important enough issue, the parties will negotiate a solution.

In other words, put lawyers in a room with enough diet coke, and there will be a drafting solution to the split-incentive problem. Indeed, the varied resources on the DOE site are a testament to the fact that enough diet coke exists to solve the green lease issue in several different ways.

So, I think the "split incentive" problem is really one of priority. Energy costs represent about $1 per square foot, in a $150+ per square foot lease. Thus, they will not rise to the top of the make-or-break lease terms.

This is not to discount the value of the resource that DOE has put together, but rather to put it into context. The green lease resources reduce the transaction costs associated with including green/energy efficiency terms in a standard lease. If the poor lawyers don't have to draft the provisions from scratch, and the parties do not have to negotiate from a blank slate, they are more likely to be included.

PennEnvironment Releases Energy Efficiency Study Just When Pennsylvania Needs It Most

Shari Shapiro — Thu, 15 Mar 2012 14:40:47 -0500

PennEnvironment released the "Building A Better America" study today quantifying the benefits of strong building codes and other policies promoting energy efficiency. A press release summarizing the findings is available here, and the study can be downloaded here.

The median home in the United States is forty years old, and in Pennsylvania, even older. Because buildings last so long, the Building a Better America study notes that strong building and energy codes are critical to realizing the benefits of a more energy efficient building stock, like reduced energy use and bringing cost savings to companies and families. Enacting strong building and energy codes locks in energy savings for decades to come.

Likewise, weak or outdated codes create a legacy of inefficient and potentially unsafe buildings long into the future. This is the situation that Pennsylvania now faces.

In 2012, the International Code Council, the body that develops the model building and energy codes, issued updates to the building and energy codes that will make new buildings 15% more energy efficient than ones built to the current codes, and 30% more efficient than buildings built to the 2006 codes.

Until 2011, Pennsylvania's building and energy codes were some of the most up-to-date in the nation. Last year, however, the Pennsylvania legislature made a series of changes to the way building and energy codes are adopted. As a result, in January, the committee that updates the codes voted to reject the 2012 updates to Pennsylvania’s codes. The committee also recommended that the Pennsylvania codes be updated every six years, instead of every three years as they are now.

If the committee’s recommendations are adopted, Pennsylvania will still be using the 2009 codes until at least 2018, and perhaps longer. As a result, the reductions in energy use and energy costs highlighted in the Building a Better America study will not be realized in Pennsylvania.

To make this real, look back. If Pennsylvania still used the 2006 codes, buildings built today would be 30% less energy efficient than ones built to the 2012 codes. As the study says, building energy efficiency is only increasing. If we are still building to 2009 codes in 2018, imagine the missed opportunity for energy and cost savings.

In addition to strong building and energy codes, the study also notes the importance of incentives to advance building efficiency. In 2008, the Pennsylvania legislature enacted Act 129, which, among other things, requires electric utilities to provide energy efficiency and conservation programs sufficient to achieve a 3% decrease in electricity use by 2013.

Most of the energy efficiency incentives in Pennsylvania are Act 129 programs offered by the utilities. However, after 2013, there are no additional set goals for energy reduction in Act 129. Rather, Act 129 requires that the Public Utility Commission set new goals, but only if the benefits exceed the costs. Right now, the Commission is in the process of evaluating the cost-effectiveness of the utilities’ energy efficiency programs, and determining whether to set new goals for energy reduction. The utilities are likely to meet the 3% target, so if no new goals are set, the utilities have no obligation to continue their energy efficiency programs after 2013.

The Building A Better America study proves that good policies, including strong building codes and incentive programs are critical for improving building energy efficiency and saving money.
Because of the imminent changes to Pennsylvania’s energy efficiency policies, to ensure that Pennsylvania realizes the financial and environmental benefits highlighted in the study, businesses, organizations and individuals need to speak out now to ensure that Pennsylvania’s policies stay strong, and provide support to Federal, state and local policymakers that advocate for energy efficient policies.

PA Code Council Votes to Reject 2012 ICC Changes, Delay Code Updates until at least 2018

Shari Shapiro — Fri, 02 Mar 2012 14:32:58 -0500

It has been stated that building energy codes are the “quickest, cheapest and cleanest way to improve energy efficiency in the building sector.”

Unfortunately, if the January 18, 2012 recommendations of the Uniform Construction Code Review and Advisory Council (the “Advisory Council”) go into effect, Pennsylvania will not adopt the 2012 updates to Pennsylvania’s building and energy codes. The Advisory Council voted to reject the 2012 model codes issued by the International Code Council (“ICC”) in their entirely, except for a few provisions regarding accessibility for the disabled.

The Advisory Council also voted to recommend that the revision cycle for the Pennsylvania Construction Code be extended from three years, consistent with the international model code update schedule, to six years. If both the rejection of the 2012 codes and the extension of the code revision cycle go into effect, the 2009 codes will be in place until at least 2018, and Pennsylvania may miss out on the environmental and financial benefits of the 2012 code updates, and perhaps even the 2015 updates, as well.

This means that much of Pennsylvania’s new construction for the foreseeable future will be less energy efficient than “state-of-the-art” construction, placing owners and tenants at a competitive disadvantage compared to forward-thinking neighboring jurisdictions like New York City, Washington DC, and Maryland.

There is much more to this story. The full article is available here

Performance-Based Energy Code Does Not Eliminate Threat of Preemption

Shari Shapiro — Thu, 02 Feb 2012 21:39:15 -0500

Yesterday, I posted that the District of New Mexico had issued a decision on the remaining open issues in the AHRI v. City of Albuquerque case. The memorandum and order is available for download here.

In the 1970's, the Federal government enacted minimum efficiency standards for certain HVAC equipment, which have been updated periodically since. In 2007, the City of Albuquerque adopted a new energy conservation code designed to achieve greater energy efficiency in buildings. The new Code had both a prescriptive path and a performance path for complying with the new energy efficiency requirements.

The plaintiffs in the AHRI case are HVAC trade associations and contractors. They alleged that the City of Albuquerque's energy code required HVAC equipment that was more efficient than the efficiency standards set by the Federal government. As a result, the AHRI plaintiffs argued, the Albuquerque code was "preempted" by the Federal law setting efficiency standards for HVAC equipment. "Preemption" is when a higher level of government (like the Federal government) prohibits a lower level of government (like the states or municipalities) from regulating the same issue.

In 2008, Judge Martha Vazquez granted the AHRI plaintiffs a preliminary injunction, preventing the new energy code from taking effect. In granting the injunction, Judge Vazquez stated that the Albuquerque Code was, most likely, preempted.

In 2010, Judge Vazquez granted partial summary judgment for the AHRI plaintiffs. She held that the prescriptive paths for compliance with the energy conservation code mandated HVAC equipment with higher levels of efficiency than the Federal standards. At the time, she specifically declined to rule on whether the performance path was also preempted.

The January 25, 2012 decision takes up the issue of whether the performance path was also preempted. Judge Vazquez did not rule on whether the performance path standing alone was preempted. Rather, Judge Vazquez decided that it was not possible to sever the prescriptive and performance paths, and therefore "all provisions of the Code concerning HVAC and service water heating equipment are invalid and unenforceable." She rests her decision on a stipulation by the City that:

Neither Volume I nor II of the Code would have been enacted by the City Council in the absence of the inclusion of the prescriptive compliance paths, and that, accordingly, the prescriptive compliance paths are not severable from the remaining performance-based compliance paths.

Thus, the Court left unresolved whether a performance-based code that requires overall energy efficiency, but does not specifically require more efficient HVAC equipment, would also be preempted.

The District Court for the Western District of Washington addressed this issue in BIA v. Washington State Building Council, and ultimately held that the Washington State Energy Code was not preempted. The Washington State Energy Code did not mandate enhanced energy efficiency of the HVAC equipment. Rather, it allowed for a point system whereby energy efficient HVAC components were one path for compliance with an overall energy efficiency target. The BIA complaint alleged that it was essentially impossible to comply with the energy efficiency targets without installing enhanced HVAC equipment. This is an interesting twist on the AHRI case, because in the Washington code it was possible to comply with the Code without running afoul of federal HVAC energy requirements.

The ultimate lesson from these two cases may be that, with respect to energy efficiency, performance-based energy codes are preferable. However, the fact that there is litigation and controversy around energy codes may make local governments wary of adopting more stringent efficiency codes.

AHRI defeats the City of Albequerque, Complicating Matters for Local Governments

Shari Shapiro — Thu, 02 Feb 2012 16:27:10 -0500

AHRI vs. City of Albuquerque, a case that I first posted on in 2008, finally reached its conclusion last week. In line with the preliminary injunction she ordered on October 3, 2008, Judge Martha Vazquez of the District of New Mexico decided that Albuquerque's energy code was preempted by Federal law mandating the energy efficiency of HVAC equipment.

Appliance Magazine reported:

In the latest opinion, Judge Vazquez confirmed her Sept. 10, 2010, rulings:
(1) The prescriptive energy efficiency standards in the 2007 Albuquerque code that are more stringent than federal minimum efficiency standards are preempted and cannot be saved from federal preemption by the availability of alternative code compliance paths.
(2) A particular performance-based code compliance option is preempted because it is based on a standard reference design that uses efficiency levels that exceed federal efficiency standards. Responding to a summary judgment motion filed by the city that essentially asked Judge Vazquez to reconsider her earlier rulings, she declined to do so and denied the city’s motion.

A similar suit was filed by the Building Industry Association in 2010 to enjoin (or, in regular english, stop) the Washington State Energy Code from taking effect.

The foundation of both AHRI and BIA is in essence one of preemption--that the federal government has enacted laws that prevent lesser governmental authorities from passing laws on the same subject, here the Federal regulations governing the efficiency of HVAC equipment preempted state and local energy efficiency laws.

Interestingly, in the Washington case, the court found that the Washington State energy code was not preempted. This creates a split between the District of New Mexico and the Western District of Washington. In my next post, I will give more detail on the difference between the two cases. It will make it more difficult for local governments to know the extent to which they can regulate HVAC energy efficiency, which may make local governments shy away from doing so.

A New Lease on Life or a Nail in the Coffin? Notice and Comment Period on PACE Opens

Shari Shapiro — Thu, 02 Feb 2012 15:40:57 -0500

Property Assessed Clean Energy (PACE) programs allow local governments to loan money to homeowners to do energy efficiency projects. The PACE loans are generally repaid as a property tax line item. PACE programs were initially very popular, and more than 25 states passed PACE-enabling legislation.

As discussed in earlier posts, in the summer of 2010 the Federal Housing Finance Agency put the brakes on PACE programs. The FHFA issued an advisory that Fannie Mae and Freddie Mac should put more stringent evaluation standards in place for mortgages on properties with PACE assessments. On February 28, 2011, FHFA issued a directive stating that Fannie Mae and Freddie Mac should continue to refuse to purchase mortgages on properties with PACE loans.

In the wake of the FHFA actions, several law suits were filed, including one in the Northern District of California. The plaintiffs in the California PACE case alleged that the FHFA acted without following the appropriate administrative procedures, and without doing and Environmental Impact Assessment.

The District Court issued a preliminary injunction requiring FHFA to proceed with the the necessary administrative steps that FHFA had failed to do prior to issuing its greenlining mandates.

On January 26, 2012, the FHFA began the "notice and comment" period for advanced notice of proposed rulemaking on PACE. Specifically, the FHFA's proposed action is to prevent Fannie Mae and Freddie Mac from buying certain mortgages whether or not the particular mortgage has a PACE assessment associated with it:

FHFA's Proposed Action would direct [Fannie Mae and Freddie Mac] not to purchase any mortgage that is subject to a first-lien PACE obligation or that could become subject to first-lien PACE obligations without the consent of the mortgage holder.

The wording of the proposed rule is interesting. Not only would it prevent Fannie and Freddie from buying mortgages on properties with PACE loans, but also potentially from buying any mortgages in a community that has a PACE program, whether or not the particular mortgage has a PACE loan associated with it.

The Advanced Notice of Proposed Rulemaking triggers a 60-day comment period, which opened January 26 and closes March 26. The ANPR seeks comments about both the environmental and fiscal aspects of PACE. The ANPR is here.

DOD Budgeting Rules May Impede Green Building

Shari Shapiro — Fri, 20 Jan 2012 14:51:14 -0500

In April 2010, the Department of Defense (“DOD”) issued a memorandum (“memo”) that altered the structure of the defense budgeting cycle, beginning with fiscal year (“FY”) 2012 budget. These changes were ostensibly made to offer more stability to the budgeting process, which prior to the memo involved a more complicated two-year budgeting process where major funding changes were supposed to be made in even-numbered years and smaller adjustments were supposed to occur in odd-numbered years. However, as then Deputy Secretary of Defense Willy Lynn stated, “everyone involved just ignored that second year.”

The new rules replaced the two-year cycle with single-year budgets, which were intended to more accurately reflect current defense needs and budgeting realities caused by the economic slowdown. A second requirement of the memo, however, could have the unintended consequence of hindering DoD green building projects.

The memo requires that the Pentagon’s annual Program/Budget Reviews, or Future Years Defense Program (“FYDP”), to focus on a five-year period each cycle. Readers may recall my earlier post on the recently enacted National Defense Authorization Act (“NDAA”), which among other things, prohibits the DoD from using appropriated funds to achieve LEED platinum or gold certification unless the Secretary of Defense can certify that the LEED project in question will result in no additional costs to the DoD, or if a cost-benefit analysis reveals that the project will produce a financial payback.

A potential concern to proponents of DoD green construction projects could be the imposition of a five-year “horizon” to determine the financial benefits of energy improvements or sustainable design features. While the NDAA does not specify a time window to be used in conducting cost-benefit analyses, defense officials may be discouraged (under Congressional opposition to seeking LEED gold or platinum certification) from proposing green projects that will have a payback period beyond the five-year FYDP cycle.

Congress requires the Department of Defense to do a cost-benefit analysis of LEED and ASHRAE 90.1-2010

Shari Shapiro — Wed, 04 Jan 2012 16:14:07 -0500

Many people, including me, have noted that the National Defense Authorization Act (“NDAA”), signed into law by President Obama on December 31, 2011, prohibits the Department of Defense (“DoD”) from using any appropriated funds to achieve the two highest levels of green building certification offered by the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) Program – platinum and gold. The NDAA, however, does provide that the Secretary of Defense can certify a building under LEED gold or platinum standards if certification imposes no additional cost to the DoD, or if the DoD conducts a cost-benefit analysis of the project and there is a demonstrated payback for implementing energy improvements or sustainable design features.

More interesting, upon further reflection, is that the bill requires that by June 30, 2012 the Defense Secretary must provide Congress with a report on the energy efficiency standards the DoD uses for military construction and repair. The report must include:

A cost-benefit analysis as well an examination of the return on investment and long-term payback of LEED, ASHRAE 189.1 and ASHRAE 90.1-2010; and,

A new DoD policy on energy efficient construction based on the cost-benefit and ROI analysis.

The methodology for assessing the "cost-benefit" and return on investment of the standards is not specified. Given that life-cycle costing makes the ROI of energy efficiency and other green features much more attractive, the standard that is used will be significant.

The proposed DoD "policy" could also be used by Congress as a model to impose on the other Federal agencies, which mostly use LEED-Silver as their building standard.

Look out for a debate in the middle of the year over whether LEED and ASHRAE 90.1-2010 should be scrapped from DoD (and potentially other agency) requirements because they fail the "cost-benefit" analysis.