WHY-FIXED-PRICING-IS-A-BAD-IDEA

							Letter to the Mass. Energy Efficiency Advisory Council.              April 11, 2011

WHY FIXED PRICING IS A BAD IDEA.

We are concerned that, although there are a few improvements in the new rebate program, there
are changes that will have serious negative consequences, including the flight of experienced
contractors from the rebate program as a consequence of lost profitability. The new program
also threatens job quality, safety, customer satisfaction—and the program efficiency goals.

Contractors were hoping the new program would be the key to making Massachusetts the
national leader in residential energy efficiency. We hoped for a transformation driven by highly
motivated entrepreneurial contractors developing effective ways to increase customer
participation while achieving higher customer satisfaction and lower costs. We had hoped to
establish a sense of partnership with the utilities, taking pride in ―our program,‖ and sharing
ways of making it better for all while rewarding individual performance.

Unfortunately, after eight months of unsuccessful efforts by contractors to be included as
participants in designing the new program, we are looking at policies that are detrimental to the
interest of the contractor, customer and the program. This is most evident in the new utility
company rebate program policy of fixed pricing.

Fixed pricing sets the same price for an installed measure, such as wall insulation, for any home,
and for every contractor. This includes the contractors who find their own customers, propose a
list of approved measures needed, and provide a price for work to be done. Fixed pricing does
not allow a contractor to adjust for job difficulty, differences in contractor costs, experience, or
job quality standards.

The utility companies are applying fixed pricing in a clearly discriminatory way: It applies only
to insulation contractors, not to contractors in any other trades. It doesn’t apply to plumbers who
install efficient furnaces, hot water heaters or to those who install ventilation systems or solar
panels.

The most serious consequence of fixed pricing will be the migration out of the rebate program of
the best and most experienced entrepreneurial contractors, a consequence that will be profoundly
detrimental to the overall goals of the program. Every contractor is different -- with different
marketing and overhead expenses, labor rates, and experience, training or certification levels.
Fixed prices do not allow any consideration of this critical fact. Consider the case, sketched out
below, of the contractors, ―Rob‖ and ―Rusty.‖
                                      ROB AND RUSTY

Rob has been in the insulation biz for 30 years. He has 23,000 installs. He is top contractor on
Angie’s List for six years in a row and he spends $40,000 annually on advertising. He and all of
his employees have passed all of the rebate program certifications. In addition, he is BPI-
certified and a HERS rater for the Home Performance with Energy Star Program. He pays his
long-term employees $19 per hour plus benefits and offers one week vacation. He has a $55,000
rig, which includes a high-pressure insulation blower. He spends one day a week doing sales
calls and often puts in three hours of discussion and estimate preparation to get a customer. He
works in towns like Weston, Wellesley and Wayland, and his customers, rather than being driven
by price consideration, want him to do the job because of his reputation and job cleanliness. His
crews frequently spend 3 hours vacuuming at the end of a project. He has brought hundreds of
customers into the rebate program every year. He charges $2.50 a square foot on average for
exterior walls. In the new program he will only be able to charge $1.70. He will receive the
rebate payment in 60 days on average. What will Rob do? He will cut his level of service and
wages, marketing and begin to move into other business opportunities.

Rusty has been in biz for 3 months. He does painting and window washing too. He is a
subcontractor for the lead vendor and finds no customers on his own and incurs no marketing
expenses. He has a pick-up truck which he drives to the Home Depot parking lot to pick up his
workforce – two $10 per hour day-labor non-English speaking employees. At Home Depot he
also picks up the Force One insulation machine which he rents for $50 per day -- or gets free
with 30 bags of cellulose. Rusty is the only member of the crew who is trained and certified by
the rebate program. He gets paid $1.70 per square foot and is paid in one week from lead
vendor.

Should these two contractors work for the same price? Which will help make the Mass
residential energy efficiency program more successful? Obviously, the fixed pricing of the new
program will drive the experienced, skilled, successful and effective contractor out of the
program.

Fixed pricing often results in a reduction in quality, safety and customer satisfaction because
every house is different. Some require extensive safety and health measures for lead paint
abatement, third-story work, or landscaping interference. Other houses take more time or
materials depending on cavity depth, balloon frame, back plaster walls, fragile old vinyl, mold,
thin or deteriorating interior walls or to limited space between buildings for ladders. If the price
does not fit homes with these increased levels of difficulty something gets cut, especially if an
unexpected problem develops on a job which is all too often.
In terms of the program goals, fixed prices will likely decrease customer energy improvement
projects. Research shows the most successful method of getting customers is through the
contractor, rather than through statewide mass media marketing. But contractors must spend
significant time reaching out to people in their communities through local advertising and
investing hours talking to potential customers before they sign up. This is very costly. The fixed
prices utilities want to impose on contractors are what the lead vendor currently pays
subcontractors who are not faced with these expenses. With fixed low prices, contractors cannot
afford marketing costs. The cost of acquiring a typical customer insulation project of $3500 is a
$560-aproximately 15%, to cover advertising and salesman expense, both of which would need
to be eliminated resulting in no new customers. Also, with a fixed price per measure, a job that
looks difficult may result in a lost potential customer when a contractor faced with what looks
like an unprofitable job, on the initial home visit, just walks away rather than leaving an estimate
too low to be profitable. Fixed pricing also reduces a customer’s choice when she cannot pay
more to get the highly recommended contractor she wants.

If the fixed pricing policy is intended to make insulation measures cost-effective, it is an
unnecessary solution to a problem that doesn’t exist. It is an accepted fact that insulation pays
for itself in savings in just a few years – much more quickly than most other energy efficiency
products. Insulation has always been cost-effective, even at higher prices than currently charged
either by contractors or by the lead vendor. And customer value, which is not always
synonymous with the lowest price, has always been insured by competition among contractors.
Most customers are getting multiple bids for the jobs, as recommended by the utility company.

Contractors are concerned, frankly, that the utility companies are establishing fixed low prices
simply to extract more work for less money from contractors. Establishing a low fixed price
leaves utilities with more funds to cover higher administrative fees, marketing costs and profit
for themselves and the lead vendor. Reductions in payment to contractors increases funding to
cover free energy audits, light bulbs, and air sealing. Unfortunately, these give-aways rarely
persuade customers to undertake significant home energy improvements. Over 30,000 energy
audits last year resulted in only a few thousand insulation projects. One might question if this
not an extremely expensive and ineffective program for finding real customers who will pay for
energy efficiency. Are we selling energy efficiency or are we are giving it away? Massachusetts
may be the best in the country at giving away energy efficiency but we cannot afford to do it on
the backs of the contractors who carry out this difficult work.

Fixed prices have serious consequences for the overall success of the energy efficiency program,
but other aspects of the new program are problematic as well:
         The program uses public funds for marketing purposes in an unfair and discriminatory
         manner. Contractors who choose to do their own audits will get not get any of the
         benefits of these public funds.
        The use of spray foam, which is the only cost-effective solution in some situations, has
         been eliminated.
        There are no opportunities for independent auditors to work in this state.

All these issues must be addressed, beginning with the fixed price policy. Contractors have a
variety of suggestions for improving the cost-effectiveness of installed measures and would be
glad to discuss these suggestions with the utility companies shortly. In the meantime, the fixed
price idea needs to be re-considered and abandoned.

Thank you,

Paul Johnson
Energy Efficiency Contractors of Mass.
978-973-6038