Warning: I am not a CPA or tax attorney, and I do not have 63 years available to determine for myself that all contents of this rant are correct.
A couple years ago I wrote an Energy Brief about the need for life cycle cost analysis to make the right decisions for selecting the best option for an energy project. Since that time, we haven’t exactly been living up to this ideal, in large part because we’ve been doing a lot of work for profit-driven enterprises.
Life cycle cost analysis for non-profits is pretty easy. It includes first cost, borrowing cost, if any, maintenance, effective useful life of the measure(s), and energy cost. It gets much more complicated for profit seekers because of tax laws. In general, profits that are taxed equal revenue minus expenses. Energy is an expense and therefore, a dollar of energy savings is not (even close to) a dollar added to the bottom line. Another perverse element of taxes is that when a customer invests in equipment they have the pleasure of paying property tax on that equipment. I learned this as we bought a bunch of office furnishings and invested several hundred thousand dollars for our new office space downtown. Then over time the stuff can be depreciated and subtracted from earnings.
Corporate bean counters roll all this junk together and spit out something around a two-year payback requirement. But there is likely some subjective risk-aversion quotient in there also. The payback requirement isn’t an arbitrary qualification for an investment in EE. Rather it is a simplified way to boil all these factors into one easy-to-understand metric.
I would guess most readers do not know that the US has the second highest corporate tax rate in the industrialized world, behind Japan, but just barely. Coincidentally, these two countries among the most debt ridden countries in the world, including misers like Greece and Italy. Surprise! Pile on state taxes and companies can be staring at close to 50% marginal tax rates, the tax on the next dollar of earnings. Iowa of all places has a top rate of 12%. Texas on the other hand has no personal income tax OR corporate tax on profits.
Since the end of the recent meltdown that began in 2008, Texans have generated as many jobs as 47 states plus the District of Columbia, combined. Our most populous and once golden state California has since contracted. Without Silicon Valley – Apple, Google, and Facebook alone – the once golden state would be a burned out smoldering carcass.
Texas: 733,000 new jobs in past 10 years (no other state topped 100,000)
California: minus (negative) 624,000 in past 10 years (dead last)
You do the math. Probably the most hilarious non-comic event I read about was Gavin Newsome, California’s lieutenant governor and a band of dimwits, er I mean congress persons from Sacramento recently traveled to Texas, on California taxpayer money, to see why Texas was stealing all of California’s jobs. These people should be fired for that alone. As a friend of Californians, I would have asked the pilot to drop them off in Havana and quickly get the hell out of there.
The challenge to do EE with for-profits is when companies are making good money, they don’t so much care about reducing cost as they are with increasing output, expanding and making more money. This is compounded with the nearly 50% tax hit against EE impacts. When companies are operating in the red, they of course tend to reduce cost but without spending money to do so. Eliminating jobs or furloughing is an easy, very effective way to reduce cost with virtually no immediate cost. Energy efficiency costs money now and returns savings later and furthermore, it is difficult to save energy on a production line that is sitting idle in the dark.
When companies are losing money, they want an extremely quick payback as they are risk averse and they want to see investment paying off as quickly as possible. When companies are making money competition for capital is brutal as they have a lot of demand for it for expansion.
These all remind me why utility-sponsored performance contracting eliminates these barriers for most profit-seeking enterprises. For the growing company with shortage of capital, such a program provides capital with virtually no carrying (borrowing) cost because the program uses the would-be cash incentive to buy down the finance rate. For the customer running in the red, the project provides an immediate positive cash flow, guaranteed. Of course the money losing enterprise needs to be financially sound and not an immanent risk of insolvency.
Depending on the corporate bean counter and tax attorney, a performance contract may be declared a lease, or an operating expense to avoid the property tax and depreciation hassle. I believe this also helps it fly under the Sarbanes Oxley radar and associated red tape if they want to play with that fire. Sarbox is a toxic residue from the remains of Enron scum mixed with brilliant Washington opportunists who always attempt to avoid the last collapse with a suffocating mélange of hellish regulation. The most recent straightjackets and matching millstones are rolling out at banks, credit card companies, and brokerage houses near you via the Dodd-Fwank bill.
Maybe if rather than beating on companies that move and expand business overseas, Washington would provide us with a competitive business climate and knock off the myriad of carve-outs for politically connected money-grubbing schmoozer-losers… We could revive manufacturing, move demand for energy from overseas to this country where we can do something about it, and increase return on EE investment by creating more after-tax income.