Another PACE Setback: Court Dismisses Suit, Leaving Uncertainty


Will the U.S. residential solar market ever see a powerful program return to its project finance toolbox?

Residential property assessed clean energy (PACE) finance, which allows property owners to pay for solar installations and other energy efficiency improvements through their property tax bills, has been essentially sidelined by mortgage-related legal complications for the past few years. Unfortunately, the most recent court decision failed to raise the hopes of PACE supporters.

Last week, the Ninth Circuit Court of Appeals in California dismissed a case filed by Sonoma County, the State of California and other parties to challenge the legality of action taken by the Federal Housing Finance Authority (FHFA) to curtail PACE back in July 2010.

‘We â�¦ conclude that FHFA's decision to cease purchasing mortgages on PACE-encumbered properties is a lawful exercise of its statutory authority as conservator of the enterprises,’ the court wrote in its ruling.

‘There are three other appellate courts that have ruled similarly,’ says Adam Browning, executive director of the solar advocacy organization Vote Solar. ‘There is a line of thinking that this ruling was not unexpected.’

According to the 2010 statement from the FHFA, which serves as the conservator for government-sponsored enterprises Fannie Mae and Freddie Mac, PACE loans pose ‘significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for energy conservation.’

At the time, the agency also questioned whether the PV arrays and other systems installed under PACE programs ‘actually produce meaningful reductions in energy consumption.’ The end result for solar energy companies looking to install PACE-funded projects was a series of new rules for handling mortgages on the properties where the solar arrays were to be installed – halting PACE.

A series of lawsuits from the Natural Resources Defense Council, the California Attorney General and others followed, and a preliminary injunction in 2012 led the FHFA to begin a rulemaking process on how to deal with PACE loans.

Comments in favor of PACE poured in from thousands of entities, Browning notes. This response provided a generous record of evidence on ways that PACE could be ‘administered in a way that would be protective of FHFA's concerns,’ he adds.

Next steps?
One question raised by the most recent court ruling is whether this rulemaking process will continue, as the FHFA may no longer be required to proceed with it. Before the ruling, the agency filed for an extension on presenting its final rule until September, Browning says. That final rule, if issued, may wind up being either a positive or a negative for PACE.

‘The other potential outcome is that the case is dismissed and [sees] no more legal challenges, and FHFA decides it doesn't want to go through the rulemaking process,’ he explains. ‘We would be back to where we began.’

A third – and likely most favorable – possibility is that Sonoma County and the other plaintiffs will appeal the decision and petition for a larger panel or the Supreme Court to hear the case – a step that must be taken within the next 45 days.

PACE advocates could also seek relief in federal legislation, although Browning warns that for any policy goal – solar-related or otherwise – finding success when Congress must be involved tends to be ‘extremely difficult.’

One bipartisan House bill introduced last year to protect PACE failed to result in a companion bill in the Senate, where several senators voiced their willingness to sponsor such legislation, but no one stepped forward to serve as a sponsor, Browning recalls.

Furthermore, for PACE in particular, pulling members of Congress into the fray runs contrary to the program's chief identity as a town- and state-level offering that does not require taxpayer funds or other congressional backing, he adds.

‘This is all about local control and not waiting for the federal government to come in and establish something,’ he says. ‘It's for communities that want to take action and go forward.’

While the future of residential PACE may seem murky at the moment, commercial programs – including California's record-setting initiative announced last fall – continue unaffected. In fact, Browning adds, PACE-enabling bills continue to clear legislatures across the U.S., including most recently in Utah. Texas and Arkansas recently began considering PACE legislation as well.

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