Many apartment communities have adopted utility billing programs as part of their energy management initiatives. Properties will use these programs to help encourage conservation, share the burden of utility costs, advertise lower rents, and to pass along utility rate increases as they occur instead of waiting for the lease to renew. These programs can be of value but ONLY if they are done correctly. Unfortunately, I often find that there is substantial room for improvement.
First, let’s consider the business model of the billing company. They get paid based on the number of bills they send out each month to your residents. They don’t get paid based on how effective the program is - meaning they don’t have any incentive to ensure the program is meeting the property’s goals. Further, once a property starts a billing program it is hard to stop which means the billing company has a rather secure source of revenue. These programs are hard to stop because the properties build them into their leases and rent structure. Also, many of the billing companies try to get management companies to sign long-term contracts with auto renewals – don’t do those.
Before you begin a utility billing program for any utility type (water, electric, gas, etc.), I strongly suggest that the property take measures to make sure the consumption issues have been addressed prior to starting. Trying to pass along the cost of utilities when consumption isn’t where it should be is going to mean higher bills for your residents which leads to complaints, move outs, and poor collections. Trying to get residents to pay for your deferred maintenance is a recipe for failed programs. It is much easier to get residents to buy into these programs when the property has done its part to ensure the bills represent controlled or “normal” usage.
When it comes to creating the bills for your residents there are really three inputs – who, what, and how. The ‘who’ is your resident information that tells the billing company what residents to bill and for what period of time (occupancy period) to bill them. The ‘what’ is the utility bill(s) that you are allocating or passing along to the residents. And, the ‘how’ is the method by which the resident bills are calculated.
The ‘who’ is where I often find the biggest problems. As we all know, your resident population is constantly changing and if the billing company doesn’t have the correct information your billing is wrong. This is especially important when using RUBs. For example, if the billing company does not have all the residents in their system to bill that should be billed then they are essentially over charging the residents they are billing. Many billing companies have websites or fax systems that community staff use to send the billing company the community’s resident information. Unfortunately, this just doesn’t always happen. In the multifamily industry, employee turnover is high and new employees learn the basics first – leasing and collecting. Often by the time they get around to learning the ancillary programs they are gone or transferred. Do a quick comparison of the residents billed to your rent roll to see what I mean. Your billing company’s resident population should EXACTLY mirror your property management software’s information. I strongly suggest working with your billing company to set up an automatic data exchange program whereby your property management software sends the billing company the resident information. This ensures that the billing company bills the correct residents each month, removes the burden from your property staff, and will greatly affect the performance ($) of your program.
‘What’ is being billed is the other reoccurring piece of data the billing company needs. This is simple. Just make sure they are sent the utility bills as they come in. Try to avoid letting the billing company default to the previous bills as that can lead to over or under charging, back billing, and poor performance.
We determine ‘how’ we are going to bill residents during the set up phase. We need to check state and local laws to make sure the method we are going to use is legal. Some jurisdictions prohibit RUBs or require specific formulas, there are caps to billing fees, and, maybe the most overlooked, there are nuisances with utility rate schedules that can make submetering very difficult or unfair. Because of some utility rate schedules, submetering can sometimes be a means of RUBs or allocation because you cannot multiply the submeter usage by the utility rates and you end up allocating the property bill. If your local utility company uses a tiered rate schedule or base fees take extra care in determining how to bill. Make sure you understand exactly how the billing is going to work especially before you invest in submeters.
The most important component of creating a successful program is the collection process. It is your money and you should collect it. DO NOT LET YOUR BILLING COMPANY DO THE COLLECTIONS! Billing companies do not have any incentive to ensure you get all your money. Remember, they get paid on the number of bills they send and not on the collections. Billing companies love to do the collections because that ensures they get their money as they take their fees then send you what is left over. You already have, hopefully, a very good system of collecting money monthly from your residents (rent). Further, when the billing companies do the collections it hard to determine how much your residents owe. You need each resident’s balance in your property management software that way when you run your delinquency reports you can tell how much you are owed. You don’t want to run your delinquency reports and then have to log on to your billing company’s website to run more reports. When the charges/balances are in your software you and your staff can now using existing processes to get your money. I also recommend a payment application hierarchy – apply resident payments to “other” charges first and rent last so that you can sue for rent. To do this, you need to get the charges or the amounts the billing company billed your residents into your software. When the bill company sends the bills to your residents, they will send you a file showing all those charges and they will send you an invoice for their fees. Those charge amounts need to be entered into your software. Because of the volume of charges, I recommend creating and import function so that the charges do not have to be manually entered. I cannot overstress the importance of you collecting your own money.
Don’t let the billing company charge excessive new account fees. It’s not a great way to welcome a new resident by sticking them with those fees ESPECIALLY is you are not getting a large percentage of the fee. When you do the collections, the late fees go away but if you are not then make sure you get 100% of the late fees charged – no reason the billing company should get the late fees. Of course, make sure your lease accurately defines exactly how the resident is going to be charged and make sure your staff can explain it to residents. I find when the staff doesn’t understand the exact method they will convey a sense of error to the resident which makes matters worse.
Make sure that you maintain your meters. If meters aren’t working correctly that means residents aren’t paying what they should be paying. Also, when meters don’t work correctly and you are allocating the property’s bill, residents with working meters are over paying or compensating the resident’s whose meters aren’t working. Lastly, I recommend using the submeter usage information to provide customer service to your residents with high bills. Take the meter reading reports your billing company provides and send your maintenance staff to the units with the highest consumption to fix the problems. Reducing consumption in the worse performing units will reduce your bills, improve collections, demonstrate customer service, and, because of certain utility rate schedules, can benefit all the residents.
Monday, February 15, 2010
Sunday, November 8, 2009
Utility Rate Audits for Multifamily
It is very likely that you or someone at your company has been approached by a firm conducting rate audits. Rate audits should absolutely be a part of an energy management program. In fact, overtime, they should be conducted again and again. However, not all rate audits are the same and you should avoid the firms offering this service if they do not meet your needs (hint: see our recommendations below).
If you’ve worked in multifamily for some time then you know there are many special nuisances with which we must deal. This definitely applies to utility accounts at multifamily properties. Apartment communities have lots of accounts – more on average than many other business types. We have residential accounts for models, leasing offices, and maintenance shops. There are commercial accounts for buildings, pools, elevators, community centers, and private area lights. There are lots of classifications, thus several possible rate schedules thus possible opportunities to reduce costs.
Imagine what it was like for utility companies in times before computers, to keep track of all the data related to billing their customers. Utility companies are not small – they have thousands and thousands of names, addresses, meters, readings, service periods, rate schedules, etc. Before computers, it was common for utilities to make many mistakes. With the advent of computers, the situation substantially improved as computers enabled companies to more accurately manage lots of data. Computers aren’t perfect nor are the representatives you’ve dealt with that must enter the information into the utility’s computer. Absolutely there will be mistakes and problems, but more importantly, opportunities. Your goal with a rate audit is to fine the discrepancies that leads to less utility expense.
First, beware of any binding contracts where the contractor acts as an agent, receives refunds, and establishes rights to future savings on all your properties and/or accounts. Avoid contractors asking for a large percentage of savings.
You need to understand precisely what your rate auditor is looking for. You also need to know for what utility companies your rate auditor works with. Utility companies are very different. Some can easily provide historical data and others can’t. Some rate auditors work with some, but not all utility companies. Restrict your contract specifically to the accounts or the utility companies in which the auditor intends to analyze.
Some of the utility billing mistakes that are found in rate audits cause your bill to be higher than what it should. The converse of that is true too! They do make mistakes that cause your bill to be lower. And some mistakes really won’t make a difference at all. The purpose of a rate audit is to fine the opportunities that lead to a decrease in your bill amount. No point in wasting time or resources looking for utility billing mistake that don’t yield any savings.
There are many anomalies that occur in utility billing. Some rate audit contractors simply look to exploit one or more of these anomalies. This is great if there is an opportunity that you can take advantage of, but what about any other opportunities? For example, several jurisdictions provide for multifamily properties to be exempt from sales tax for various common area uses. That is significant and certainly an opportunity you must pursue. However, if that is all the contractor checks for you might very well be missing other, possibly better, opportunities. You aren’t looking for a rate auditor that simply checks to see if you are paying sales tax that you shouldn’t, tell you that you shouldn’t, and then take 50% of the savings achieved for term of the contract. If sales tax is 5% and the auditor takes half they are essentially taking 2.5% of your utility bill for the term of their contract. Pretty good return for an auditor doing minimal work, and not providing the full rate audit service you were expecting.
Some rate auditors are simply looking for deregulated energy buying opportunities. Not a good idea to lock up your properties with a contractor that is simply looking for commodity opportunities under the disguise of a rate audit. And worse, you definitely don’t want your rate auditor to have a stake or claim to any savings created from other energy brokers/suppliers you may wish to choose.
Your bill amount is essentially the utility rate times your usage. Therefore, one area we want to look at for problems would be where the usage you are billed is being overstated. Doing that involves trending and benchmarking the account’s usage history. Ideally, you should be able to do this for lots of utility historical usage data – as much as possible. And, you need to know how to benchmark. In benchmarking, for example, you would want compare electric meters serving very similar buildings’ hallway lighting. Of course, you need to ensure there are no problems or additional equipment in the buildings. We are looking for the outliers – the accounts that have more usage then the bulk of the population of accounts. With regards to a rate audit, a potential problem could be that the meter multiplier or the unit of measure the utility uses for a meter is incorrect. For example, the utility may have recorded that one of the meters has a meter multiplier of 10 whereas the others have a 1 or there is a water meter measuring in CCF versus gallons. So, for similar account types of the example, respectively, we would see one account that has about 10 times the usage of the other accounts or 748 times the usage of the other accounts. You can probably reason that there aren’t too many of these situations that do not go unnoticed.
The other area to investigate is the rate(s) charged by the utility company. All sorts of things can cause the rate you are charged to be too much. As with usage, we will want to trend and benchmark the rate to other like kind accounts, but also with accounts that use the same amount of energy/water. So, for example, let’s say we have 20 electric meters for a couple properties. We would want to compare the rates for each of these meters to one another. If 17 of the meters had rates between $.122 and $.128, but three had a rates from $.183 to $.196 we only want to look into the three.
There are many (way too many) utility rate schedules in this country. Some of the rate schedules have a penalizing tier structure - meaning the more you use the more you pay. Since the idea behind a rate audit is to find opportunities where you are paying too much, very often results of analyssi identify accounts in the higher tiers. So, great, you make the rate schedule change and save real money. But, why was the account at the higher tier in the first place? Did something change with the consumption to put it there? Has the account always been in the higher rate tiers? Maybe something changed with the consumption that should be addressed. Simply changing the rate schedule doesn’t solve the problem.
Utility rate schedules are applied to accounts based on several criteria. An account usually gets classified into a rate schedule based on what it services (residential, large commercial, time of use, private area lights, etc.) and how much the account consumes. There can certainly be situations where an account is incorrectly classified. Sometimes, accounts can be placed in a more expensive rate classes, but then consumption changes (as a result of some sort of conservation or equipment replacement initiative) and the utility does not change the rate schedule to a lower cost schedule – thus depriving the conservation project its total value.
Also, utilities can be required to refund any overages that were incorrectly billed. So, not only would you get the savings going forward, you may be able to get a refund on previous bills. Keep in mind, there are often limitations set that govern how far back the utility must pay refunds.
There is a lot of analysis that can be done to check rates. We can often find ourselves in situations of diminishing returns – more detailed and time consuming analysis doesn’t yield returns worth the additional work. I am a big believer in the best bang for your buck. If your company has lots and lots of accounts, don’t get wrapped up in checking everything to precision. You will find that your greatest opportunities are the true outliers – the ones that really stand out. Address the accounts that really stand out first, make the changes, and check the results. Repeat. However, keep in mind the most effective means of a rate audit is checking every bill every month – use a system. Utility rate schedules change frequently as can the usage of an account which further substantiates the need of a reoccurring rate audit. If you are with a management company that has many properties, you will have many accounts. Trying to obtain data from all the utility companies when rate audits are done as a project versus being done in practice makes the analysis much more difficult.
If you’ve worked in multifamily for some time then you know there are many special nuisances with which we must deal. This definitely applies to utility accounts at multifamily properties. Apartment communities have lots of accounts – more on average than many other business types. We have residential accounts for models, leasing offices, and maintenance shops. There are commercial accounts for buildings, pools, elevators, community centers, and private area lights. There are lots of classifications, thus several possible rate schedules thus possible opportunities to reduce costs.
Imagine what it was like for utility companies in times before computers, to keep track of all the data related to billing their customers. Utility companies are not small – they have thousands and thousands of names, addresses, meters, readings, service periods, rate schedules, etc. Before computers, it was common for utilities to make many mistakes. With the advent of computers, the situation substantially improved as computers enabled companies to more accurately manage lots of data. Computers aren’t perfect nor are the representatives you’ve dealt with that must enter the information into the utility’s computer. Absolutely there will be mistakes and problems, but more importantly, opportunities. Your goal with a rate audit is to fine the discrepancies that leads to less utility expense.
First, beware of any binding contracts where the contractor acts as an agent, receives refunds, and establishes rights to future savings on all your properties and/or accounts. Avoid contractors asking for a large percentage of savings.
You need to understand precisely what your rate auditor is looking for. You also need to know for what utility companies your rate auditor works with. Utility companies are very different. Some can easily provide historical data and others can’t. Some rate auditors work with some, but not all utility companies. Restrict your contract specifically to the accounts or the utility companies in which the auditor intends to analyze.
Some of the utility billing mistakes that are found in rate audits cause your bill to be higher than what it should. The converse of that is true too! They do make mistakes that cause your bill to be lower. And some mistakes really won’t make a difference at all. The purpose of a rate audit is to fine the opportunities that lead to a decrease in your bill amount. No point in wasting time or resources looking for utility billing mistake that don’t yield any savings.
There are many anomalies that occur in utility billing. Some rate audit contractors simply look to exploit one or more of these anomalies. This is great if there is an opportunity that you can take advantage of, but what about any other opportunities? For example, several jurisdictions provide for multifamily properties to be exempt from sales tax for various common area uses. That is significant and certainly an opportunity you must pursue. However, if that is all the contractor checks for you might very well be missing other, possibly better, opportunities. You aren’t looking for a rate auditor that simply checks to see if you are paying sales tax that you shouldn’t, tell you that you shouldn’t, and then take 50% of the savings achieved for term of the contract. If sales tax is 5% and the auditor takes half they are essentially taking 2.5% of your utility bill for the term of their contract. Pretty good return for an auditor doing minimal work, and not providing the full rate audit service you were expecting.
Some rate auditors are simply looking for deregulated energy buying opportunities. Not a good idea to lock up your properties with a contractor that is simply looking for commodity opportunities under the disguise of a rate audit. And worse, you definitely don’t want your rate auditor to have a stake or claim to any savings created from other energy brokers/suppliers you may wish to choose.
Your bill amount is essentially the utility rate times your usage. Therefore, one area we want to look at for problems would be where the usage you are billed is being overstated. Doing that involves trending and benchmarking the account’s usage history. Ideally, you should be able to do this for lots of utility historical usage data – as much as possible. And, you need to know how to benchmark. In benchmarking, for example, you would want compare electric meters serving very similar buildings’ hallway lighting. Of course, you need to ensure there are no problems or additional equipment in the buildings. We are looking for the outliers – the accounts that have more usage then the bulk of the population of accounts. With regards to a rate audit, a potential problem could be that the meter multiplier or the unit of measure the utility uses for a meter is incorrect. For example, the utility may have recorded that one of the meters has a meter multiplier of 10 whereas the others have a 1 or there is a water meter measuring in CCF versus gallons. So, for similar account types of the example, respectively, we would see one account that has about 10 times the usage of the other accounts or 748 times the usage of the other accounts. You can probably reason that there aren’t too many of these situations that do not go unnoticed.
The other area to investigate is the rate(s) charged by the utility company. All sorts of things can cause the rate you are charged to be too much. As with usage, we will want to trend and benchmark the rate to other like kind accounts, but also with accounts that use the same amount of energy/water. So, for example, let’s say we have 20 electric meters for a couple properties. We would want to compare the rates for each of these meters to one another. If 17 of the meters had rates between $.122 and $.128, but three had a rates from $.183 to $.196 we only want to look into the three.
There are many (way too many) utility rate schedules in this country. Some of the rate schedules have a penalizing tier structure - meaning the more you use the more you pay. Since the idea behind a rate audit is to find opportunities where you are paying too much, very often results of analyssi identify accounts in the higher tiers. So, great, you make the rate schedule change and save real money. But, why was the account at the higher tier in the first place? Did something change with the consumption to put it there? Has the account always been in the higher rate tiers? Maybe something changed with the consumption that should be addressed. Simply changing the rate schedule doesn’t solve the problem.
Utility rate schedules are applied to accounts based on several criteria. An account usually gets classified into a rate schedule based on what it services (residential, large commercial, time of use, private area lights, etc.) and how much the account consumes. There can certainly be situations where an account is incorrectly classified. Sometimes, accounts can be placed in a more expensive rate classes, but then consumption changes (as a result of some sort of conservation or equipment replacement initiative) and the utility does not change the rate schedule to a lower cost schedule – thus depriving the conservation project its total value.
Also, utilities can be required to refund any overages that were incorrectly billed. So, not only would you get the savings going forward, you may be able to get a refund on previous bills. Keep in mind, there are often limitations set that govern how far back the utility must pay refunds.
There is a lot of analysis that can be done to check rates. We can often find ourselves in situations of diminishing returns – more detailed and time consuming analysis doesn’t yield returns worth the additional work. I am a big believer in the best bang for your buck. If your company has lots and lots of accounts, don’t get wrapped up in checking everything to precision. You will find that your greatest opportunities are the true outliers – the ones that really stand out. Address the accounts that really stand out first, make the changes, and check the results. Repeat. However, keep in mind the most effective means of a rate audit is checking every bill every month – use a system. Utility rate schedules change frequently as can the usage of an account which further substantiates the need of a reoccurring rate audit. If you are with a management company that has many properties, you will have many accounts. Trying to obtain data from all the utility companies when rate audits are done as a project versus being done in practice makes the analysis much more difficult.
Thursday, September 10, 2009
Its Budget Season!
I have seen all sorts of methods and approaches to doing multifamily energy budgets. They are difficult to do, but they are very important. In this article, I am will describe what I believe is the best approach to doing multifamily energy budgets, as well as some general energy management concepts. I hope there is something you can take from this article to make the budget process a bit easier and more accurate.
First, everyone knows that energy budgets (like most things we budget) are a best guess. We want our budget to very close to the actual expense, but, more importantly, we want our budget to be based on something quantifiable. Quantifiable because you know the question is coming “Why are we over budget in…” In simplest terms a quantifiable energy budget is based simply on Usage X Effective Rate = Expense or Budget. For example, we would budget $120 for electricity in April 2010 based on using 1,000 kWh at a $.12 effective kWh rate. Pretty simple. Now when that over/under budget question is asked, we can easily answer or explain the variance by showing the difference in either the Usage or the Effective Rate. So using quantifiable budgets gives us a means to simplify the variance or monthly reporting every month in the future. This does mean an end to Year over Year budgets which should be used as a comparison tool and not a budget method. If it’s quantifiable, you can explain it, and they can understand it.
Looking at the Usage X Effective Rate = Budget formula, we should probably look at each variable in that equation. Usage is the total usage from each account in a budget period. The Effective Rate is more complicated. The Effective Rate is a rate that INCLUDES all the “other” charges (base fees, taxes, etc.) and is calculated by dividing Total Cost by Usage. There are many things that affect Usage or the Effective Rate and worse, many of those things are hard to predict or simply unknown. I should tell you here that you don’t need to kill yourself digging into the minute details of the variables – do what you can. You can always improve or dig in further in the years to come.
Utility Rates. Unless you are in a deregulated energy state, you are stuck with the rates you got. Great news for properties in states that are deregulated – your electric and gas rates should be dropping LIKE A ROCK this year (unless you locked in long-term during the market peak). For properties in regulated states, you should expect your rates to go up (contact me directly if you want to know why that is – too much to go into here). Most water & sewer rates will be going up too. Unfortunately, there is no national database or service that stores all the utility companies’ rates and their expected changes. You can be sure that your local utility company does have rate increases filed, but it is very hard to predict when and how much of a rate increase the public service commissions or state/local governments will approve. If you or the property staff know of any rate increases coming, use those numbers. Else, it’s best to look at and stay consistent with trends. Most rate increases have trends, which usually reveal not only how much the increases typically are, but when they occur. For example, you may have noticed that your utility company seems to raise its rates every July 1st by about 5%. If so, budget for a 5% rate increase next July. Utility rates are the primary component of the Effective Rate in our formula. If you’ve looked at a bill, you probably noticed that there isn’t just one rate – there are lots of rates and taxes too. Keep it simple and don’t try to break them all out. Simply calculate the Effective Rate (Total Amount Billed / Total Usage Billed) and use that.
Weather. Not too much we can do about the weather. But, weather has a huge impact on the amount of energy we consume, and thus, a property’s expense. Since our goal is to create budgets that will be close to the actual expense, we certainly cannot do flat-lined budgets (same amount each month) we have to budget based on weather trends. Of course in very cold winters, we expect increases in heating fuels. Hot summers mean more electricity consumed for air conditioning. Heating costs for domestic hot water (which are substantial) vary seasonally as well. In the winter, the water coming into the building is much colder and thus requires more energy to heat it up. The converse of that is true in the summer. Be aware of and make reasonable adjustments to any extreme weather or temperatures that would have affected historical numbers. My best advice is to budget for normal weather. Don’t try to predict harsh winters (more expense) or mild summers (less expense). Budgeting the consumption for each month based on historical consumption in the Usage X Effective Rate = Expense/Budget formula gives use the seasonal curves you need to budget for the changing seasons.
Occupancy & Population. Two completely different measurements, but both can certainly have an impact on the consumption. Domestic water has a direct correlation to the number of people living at a property whereas water used in pools or for irrigation will not be affected by population. Natural gas (or any fuel type) used to make hot water will be impacted by changes in occupancy. Utilities servicing systems like hallway lights, community centers, exterior lighting, etc. should consume the same amount of energy regardless of occupancy. If the property is budgeting for increased occupancy, be sure to reflect that change in the utility budgets. Be aware of the affect on utilities when situations like over-occupied units are common in a property.
The Physical Asset. Equipment usually losses efficiency before it fails. Typically, we wait until equipment fails before we replace it. Remember that all energy consuming equipment on your property is getting older, losing its efficiency, and heading toward failure. This means we need to allow for increases in consumption due to the fact it is getting older and losing efficiency. I have found that allowing a 3% increase in consumption over a year’s time is reasonable to account for this. Properties also fix and replace equipment that fails and most properties do various forms of maintenance and preventive maintenance. Usually, we focus the improvement efforts on the worst offenders. Bottom-line with the physical asset side of consumption is to not budget for improvements unless you know where, when, how ($), those improvement are going to be achieved. If anything, budget for increased consumption…Sorry.
Lastly, now that you have calculated the amount to budget, what month do you put the budget number in? You use the energy or water in one month and pay for it the following month. If you use a cash based accounting system then put the budget number in the month you expect to pay the bill. That can be difficult especially where the utility might bill quarterly. If you use an accrual based accounting system, budget the expense in the month that the utility is used.
The vast majority of the data you need to prepare utility budgets AND variance reporting comes from the utility bills. It does not come from your financial statements. This is difficult because multifamily properties get lots of utility bills. Hopefully you already have most of the utility bill data entered into a database or a spreadsheet. If not, you definitely want to consider a very simple method of recording utility bill data going forward. From our Usage X Effective Rate = Expense/Budget formula you may notice that we simply need the Usage and the Total Cost from each utility bill. Tracking utility bills…more on that to come.
First, everyone knows that energy budgets (like most things we budget) are a best guess. We want our budget to very close to the actual expense, but, more importantly, we want our budget to be based on something quantifiable. Quantifiable because you know the question is coming “Why are we over budget in…” In simplest terms a quantifiable energy budget is based simply on Usage X Effective Rate = Expense or Budget. For example, we would budget $120 for electricity in April 2010 based on using 1,000 kWh at a $.12 effective kWh rate. Pretty simple. Now when that over/under budget question is asked, we can easily answer or explain the variance by showing the difference in either the Usage or the Effective Rate. So using quantifiable budgets gives us a means to simplify the variance or monthly reporting every month in the future. This does mean an end to Year over Year budgets which should be used as a comparison tool and not a budget method. If it’s quantifiable, you can explain it, and they can understand it.
Looking at the Usage X Effective Rate = Budget formula, we should probably look at each variable in that equation. Usage is the total usage from each account in a budget period. The Effective Rate is more complicated. The Effective Rate is a rate that INCLUDES all the “other” charges (base fees, taxes, etc.) and is calculated by dividing Total Cost by Usage. There are many things that affect Usage or the Effective Rate and worse, many of those things are hard to predict or simply unknown. I should tell you here that you don’t need to kill yourself digging into the minute details of the variables – do what you can. You can always improve or dig in further in the years to come.
Utility Rates. Unless you are in a deregulated energy state, you are stuck with the rates you got. Great news for properties in states that are deregulated – your electric and gas rates should be dropping LIKE A ROCK this year (unless you locked in long-term during the market peak). For properties in regulated states, you should expect your rates to go up (contact me directly if you want to know why that is – too much to go into here). Most water & sewer rates will be going up too. Unfortunately, there is no national database or service that stores all the utility companies’ rates and their expected changes. You can be sure that your local utility company does have rate increases filed, but it is very hard to predict when and how much of a rate increase the public service commissions or state/local governments will approve. If you or the property staff know of any rate increases coming, use those numbers. Else, it’s best to look at and stay consistent with trends. Most rate increases have trends, which usually reveal not only how much the increases typically are, but when they occur. For example, you may have noticed that your utility company seems to raise its rates every July 1st by about 5%. If so, budget for a 5% rate increase next July. Utility rates are the primary component of the Effective Rate in our formula. If you’ve looked at a bill, you probably noticed that there isn’t just one rate – there are lots of rates and taxes too. Keep it simple and don’t try to break them all out. Simply calculate the Effective Rate (Total Amount Billed / Total Usage Billed) and use that.
Weather. Not too much we can do about the weather. But, weather has a huge impact on the amount of energy we consume, and thus, a property’s expense. Since our goal is to create budgets that will be close to the actual expense, we certainly cannot do flat-lined budgets (same amount each month) we have to budget based on weather trends. Of course in very cold winters, we expect increases in heating fuels. Hot summers mean more electricity consumed for air conditioning. Heating costs for domestic hot water (which are substantial) vary seasonally as well. In the winter, the water coming into the building is much colder and thus requires more energy to heat it up. The converse of that is true in the summer. Be aware of and make reasonable adjustments to any extreme weather or temperatures that would have affected historical numbers. My best advice is to budget for normal weather. Don’t try to predict harsh winters (more expense) or mild summers (less expense). Budgeting the consumption for each month based on historical consumption in the Usage X Effective Rate = Expense/Budget formula gives use the seasonal curves you need to budget for the changing seasons.
Occupancy & Population. Two completely different measurements, but both can certainly have an impact on the consumption. Domestic water has a direct correlation to the number of people living at a property whereas water used in pools or for irrigation will not be affected by population. Natural gas (or any fuel type) used to make hot water will be impacted by changes in occupancy. Utilities servicing systems like hallway lights, community centers, exterior lighting, etc. should consume the same amount of energy regardless of occupancy. If the property is budgeting for increased occupancy, be sure to reflect that change in the utility budgets. Be aware of the affect on utilities when situations like over-occupied units are common in a property.
The Physical Asset. Equipment usually losses efficiency before it fails. Typically, we wait until equipment fails before we replace it. Remember that all energy consuming equipment on your property is getting older, losing its efficiency, and heading toward failure. This means we need to allow for increases in consumption due to the fact it is getting older and losing efficiency. I have found that allowing a 3% increase in consumption over a year’s time is reasonable to account for this. Properties also fix and replace equipment that fails and most properties do various forms of maintenance and preventive maintenance. Usually, we focus the improvement efforts on the worst offenders. Bottom-line with the physical asset side of consumption is to not budget for improvements unless you know where, when, how ($), those improvement are going to be achieved. If anything, budget for increased consumption…Sorry.
Lastly, now that you have calculated the amount to budget, what month do you put the budget number in? You use the energy or water in one month and pay for it the following month. If you use a cash based accounting system then put the budget number in the month you expect to pay the bill. That can be difficult especially where the utility might bill quarterly. If you use an accrual based accounting system, budget the expense in the month that the utility is used.
The vast majority of the data you need to prepare utility budgets AND variance reporting comes from the utility bills. It does not come from your financial statements. This is difficult because multifamily properties get lots of utility bills. Hopefully you already have most of the utility bill data entered into a database or a spreadsheet. If not, you definitely want to consider a very simple method of recording utility bill data going forward. From our Usage X Effective Rate = Expense/Budget formula you may notice that we simply need the Usage and the Total Cost from each utility bill. Tracking utility bills…more on that to come.
Subscribe to:
Posts (Atom)
