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.