Los Angeles business owners and consumers may not realize it, but the price of their electricity could more than double in the next four years. Part but only part of that increase will result from the City Council's recent approval of higher rates to take effect between now and 2010. By then, the Department of Water and Power reportedly will be charging 23 percent more for electricity than it presently does.

Future increases in the cost of electricity will also come with growing global demand for fossil fuels and diminishing supplies.

Assembly Bill 32, which mandates a statewide 20 percent reduction in greenhouse gas emissions by 2020, will also increase energy costs. AB 32 is the most ambitious and comprehensive legislation of its type in the United States, addressing all sectors of California's economy, including transportation, agriculture, industrial production and electricity generation.

As part of the economywide approach of AB 32, the California Public Utilities Commission and the California Energy Commission recently issued a draft decision containing the broad outlines of a cap-and-trade system for limiting
emissions produced by power generation. The direct and actual impacts of cap-and-trade under AB 32 are as yet unknown, but AB 32 could increase the cost of generating electricity by 40 percent or more. These costs will be passed through to consumers.

The increased costs of power resulting from cap and trade under AB 32 are not a by-product of the program. Rather, the increased costs are intended to reduce emissions by lowering demand for electricity that is generated from carbon-intensive resources. But the fundamental supply-and-demand dynamic of global energy-commodity markets will continue to drive up the cost of energy now and for the foreseeable future. AB 32 is only hastening the inevitable.

Efficiency focus

The CPUC-CEC draft decision emphasizes that real emissions savings in the power sector in the near term will come not from the cap-and-trade program, but primarily from energy efficiency programs. The CPUC-CEC energy efficiency programs focus on power generation. Energy efficiency, however, is an opportunity not just for power generators but also for consumers who would not want to reduce energy costs for their business?

The primary obstacle for implementing wide-scale energy efficiency improvement is the problem of capital investment. Businesses or individuals may not have the cash on hand or the debt capacity to pay for energy efficiency technologies like new air-conditioning systems, boilers, retrofitted windows, new refrigeration or any other installation that would lower the amount of electricity used. Even though such improvements would pay for themselves over the long run, the initial investment decision is a serious barrier to implementing efficiency improvements on a wide scale.

The creation of an Energy Efficiency Finance Fund would address the challenge of capital investment. Such a fund would loan businesses and individuals money to increase energy efficiency at zero interest. These loans would be repaid with a portion of the savings realized over the useful life of the improvement, with the rest of the savings going directly to the business. California already has a policy of decoupling utility energy rates from energy rates, which allows utilities to generate comparable earnings when they invest resources in cost-effective energy efficiency methods. The utilities' programs focus on large customers, such as big box retailers or industrial facilities. The Energy Efficiency Finance Fund approach would work on a local level with small businesses and individuals.

Implementing this type of fund has been tried with uneven success in Cambridge, Mass. The Cambridge program has had difficulty obtaining commercial financing because of the aggregated nature of the credit risk, even with a relatively small target amount of efficiency loans of $30 million. In California, the total amount of such loans may run into billions of dollars. A program of government loan guarantees would encourage private capital sources to cut the kind of deals needed to support energy efficiency. In turn, the fund would lower energy costs for consumers, have real public health benefits because of reduced pollution, and create a profit center for businesses lending money.

The new economic reality of increased energy costs is here to stay. The challenge demands creative and strategic thinking to develop solutions that can have a broad base of political support and economic benefits. Broadening access to energy efficiency technology will keep California a leader on energy issues and strengthen our economy.

Ari L. Bessendorf is an associate in the Los Angeles law firm of Milbank Tweed Hadley & McCloy LLP. He is a specialist in energy project finance.

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