Posted by Charley Cormany, EFCA Executive Director
The energy efficiency industry in California is tangled with regulation.
Without a doubt, there are many policies that have been successful. California’s strict building codes have reduced energy use per capita and are responsible for eliminating the need to build 15-20 new power plants over the last 30 years. This is a great result and job well done.
But there are also plenty of cases where regulations that aren’t enforced actually end up penalizing those who play by the rules. It’s time to rethink our approach so we can level the playing field and get the good results we all agree are needed.
Contractors are subject to many rules and regulations. The most obvious are building standards known as “codes”. The purpose of building codes is to protect public health and safety related to the construction and occupancy of buildings. In California, there are two governing bodies responsible for creating and enforcing building codes and standards. The California Public Utilities Commission (CPUC) is where regulations start, and the California Energy Commission (CEC) is responsible for enforcement.
For the most part, building codes work well for new construction: if what you built doesn’t meet “the code” it won’t pass final inspection.
CARROTS AND THE STICKS
Regulating improvements on existing buildings is more challenging. In existing buildings, there are basically two ways to achieve the desired outcome. The first option is a “carrots”, this means you provide some incentive for good behavior. The second option is using “sticks”, or penalties to achieve the desired outcome. (If you have ever raised a dog you likely recognize the terminology. Giving a dog a bone when they do what you ask is a form of “carrots”. When the dog is out-of-line and you swat it on the bum with a rolled up newspaper or stick you are using a “sticks” approach). Both methods can be effective and have their place in encouraging behavior.
Most would agree that the CEC would prefer to use a “carrots” approach to encourage compliance with codes and other regulations. After all, who wants to be the bad guy all the time? Incentives are intended to shape the desired outcome of a situation and are a form of a “carrots” approach. The incentive can come in many forms, including discounts or cash rewards.
Unfortunately, due to human behavior, the CEC sometimes has to resort to a “sticks” approach in order to be effective. When an individual or company does not follow regulations you can impose financial burdens (fines), or perhaps restrict how they can operate in the future (revoke their license). But unless the rules are enforced, your “stick” is useless.
PROVIDE RESOURCES OR CHANGE REGULATION
What do you do when everyone ignores the regulation and continues to do as they please? Either you provide the resources to enforce the regulation or you change the regulation to fit the situation. Raising speed limits is an example of how regulations were adjusted to fit the situation. For a long time the national speed limit was 55 miles per hour. This was a response to the oil embargo of the 1970s, and was intended to save fuel. The problem was that in states with a lot of wide open spaces, drivers simply ignored the speed limit and drove at 70 mph or more. The regulators then had a choice to make. They could pay for a large police presence and give everyone in these areas a ticket, or they could review the regulation and adjust it to better suit the situation. Today many states have speed limits of 70 mph or higher, as the cost to enforce lower limits was out of proportion to the intent of the regulation.
In California, there are multitudes of regulations imposed each year that in practice have little or no effect due to lack of enforcement. An example is residential heating and cooling system replacements and duct testing requirements.
THE PROBLEM IS SUBSTANTIAL
Current building code requires that upon replacement of a heating ventilation and cooling (HVAC) system, the ducts must be checked and verified by an independent third party. The concept is to insure that the delivery system is working properly and that the ducts are not leaking expensive conditioned air outside the building. In the 2016 code, new duct systems are required to be sealed to less than 5% of the total system output. This is a good policy, as the average duct system in California leaks 30% to 50% outside the building. This means 30% to 50% of the heating or cooling consumers are paying for goes to waste.
The regulation is enforced via the permitting process. When you obtain or “pull” a permit for HVAC, a series of compliance forms are automatically generated. These forms must be filled out by a certified independent third party called a HERS rater before you call for inspection. When the installation is complete, the HERS rater tests the ducts and confirms that they meet the requirement. If they fail, the contractor must fix them until they pass. Once they pass, the HERS rater submits their forms to the state and the permit can be approved or “closed”. It sounds like a well thought out and effective process. In reality, there are several challenges with this approach.
First off is cost. Third party verification adds expense, in the form of money and time. Paying the HERS rater takes money and scheduling inspections takes time. This makes conforming to the regulation a financial and scheduling burden. A contractor that includes the cost of permits and HERS testing in their pricing will be more expensive than one who doesn’t. Complying with the regulations (the law) can add significant cost to the proposal. How much? Let’s use some rough numbers and say the cost of the permit is $150 (the actual cost varies depending on the local building department). Add $150 for the permit and roughly $350 for the HERS rater we have $500. When you factor in some time for the contractor’s staff to fill out and process all of the required documentation and sit for inspections, the actual cost can easily reach $750 to $1,000 per job. Adding a $1,000 burden to a $10,000 job is significant. Many HVAC contractors are avoiding these expenses by not pulling a permit, which means the system is effectively penalizing contractors who play by the rules and rewarding those who don’t.
How big is this problem? Huge. Studies have shown that before HERS compliance and duct testing was required in California, roughly 80% to 85% of HVAC jobs included a permit.
Currently, fewer than 8% do. In other words, a permit process that was intended to serve as a consumer protection is simply being ignored.
PERMITS ARE THE LAW
Consumers are being misled by HVAC contractors, who often give the impression that permits are optional. This simply is not true. Permits are required for residential HVAC change-outs: not pulling one is against the law. When consumers compare bids, the legitimate contractor will always be more expensive, as they have to cover the cost of the permitting and verification process. Homeowners seldom recognize the value of the permit, and often make their choices on the bottom line alone. This means law-abiding contractors are losing work every day to those who choose to skirt the system.
The worst part is that the CPUC knows this, the CEC knows this, local building departments know this, and yet little is being done to change the situation. Local building departments are aware of the issue but are resource challenged. The CEC is aware of the problem but is faced with difficult choices. Do they use “carrots” or “sticks” to solve the problem? One solution that has been proposed would be a registry where equipment model numbers are tracked to ensure a permit has been pulled. Many contractors are in favor of this approach, as it would level the playing field, but it’s not a popular solution for manufacturers and distributors who would have an added burden of tracking their inventory.
None of this would be a problem though, if building departments were being compensated to enforce the regulation. With proper funding, they could hire the required staff to ensure that permits were being used, and that duct testing was being performed.
REGULATION WITHOUT ENFORCEMENT IS A WASTE
This example makes one thing crystal clear. Regulation without enforcement is a waste of time and money, and may actually have the opposite effect from what was intended.
As we move forward to a clean energy future, our policy makers are working on all kinds of new regulations. In each case, the question we need to ask is: does this new regulation have a built-in mechanism to include enforcement? All regulation and policy discussions have cost considerations as part of the discussion. We need to be diligent and insist that new regulations also include funding for enforcement as part of their cost. Moving forward, we should also review existing regulations and get rid of outdated, ineffective policies.
Properly designed and enforced regulations can be very effective at achieving desired outcomes. The problem is when lawmakers simply stack on more and more regulation without considering all of the potential costs. Until regulations include the cost of enforcement, adding new regulations will likely not achieve the intended result.
We should strive to not create another situation like we are seeing in the residential HVAC industry. Consumers need to be educated as to why permits exist, and what they are risking by avoiding the process. It’s time to enforce HVAC duct testing and penalize contractors who don’t pull permits. Let’s encourage policymakers to propose smart regulations that help shape and strengthen the industry, instead of clinging to outdated regulations that stymie growth. And most of all, let’s make sure there is funding to support enforcement.
We need regulation. What we don’t need is rules that no one follows because they’re not enforced. It’s time to level the playing field, and enforcing regulation is a good place to start.
Efficiency First California
Image from iStock.