Bottom of theBARREL

32 UNITS M a r c h 2 0 1 5 w w w. n a a h q . o r g

BY LAUREN BOSTON

As energy prices hit recent lows this winter, apartment managementcompanies reevaluated their energy management strategies.

w w w. n a a h q . o r g M a r c h 2 0 1 5 UNITS 33

his winter felt like a blast from the past for most Americans. The price of crude oil fell below $50 a barrel for the first time since the Great Recession. Gas prices also dipped below the $2-per-gallon mark in many markets andreached lows not seen in a decade, minus a few months in 2009 when everything—including the cost to fill up your tank—was crashing to the ground.It’s a time machine that most consumers were more than happy to drive into,

but plunging energy prices also left many in the apartment industry reevaluatingtheir energy management strategies.There are two common approaches to energy supply purchasing—a fixed-price

strategy or an index-price strategy. Fixed-price solutions enable apartment manage-ment companies to secure a set price-per-kWh for a designated contract term—often12, 18 or 24 months. It’s a seemingly low-risk strategy with protection against marketvolatility and unexpected spikes, yet doesn’t allow for companies to benefit frompotential energy price dips, either. What may seem like a low price one day could behigh two weeks—or two days—later.Conversely, companies using an index price option pay the varying market price of

energy for each given hour. Companies have more flexibility to adjust usage based onprice and take advantage of market dips, yet often struggle to accurately manage costswithout a fixed rate.“We have always floated with the market,” says Tom Beaton, Senior Vice President

of Management for Boston-based The Dolben Company. “It’s similar to our approachwith a snow removal company. If we lock in a flat service fee for the entire season andget no snow that year, what are we paying them for? We’d prefer to pay for what weget [snow removal or energy], as it happens. That’s been our philosophy for yearswith most contracts.”Regardless, Beaton says there’s no easy answer. (And don’t even ask him how snow

removal is going this winter in New England.)“If you follow the market and perform better than if you’d locked in, that’s

great—but you don’t get credit for it. If you lock in and the market drops, you’re criticized. You can’t win either way.”For Bob Lee, Director of Technical and Safety Services at Harbor Management

Company, it’s a matter of continuously weighing both strategies. “If fixed pricing is lower than our historical rate—the past two years—then we

lock in a fixed rated,” he says. “Otherwise, index pricing is our strategy—barring anywarning signs that it may spike in the short term.” This winter, of course, landed in the ‘historic’ camp. With prices seemingly falling

every day, Lee says he summarized all of Harbor Management’s energy contracts andreviewed expiration dates. For contacts approaching expiration naturally, Lee happilyrenewed at the lower rates. For those with several months left on the contract term, Harbor Management

pursued “blend and extend” opportunities that take rates locked up prior to price

T

‘‘A one-cent

price differencecould meana $20,000savings—or extra

expense.’’

drops and refresh them with a new, extended term.“Spring and fall are typically when we would lock rates, when

they are usually at their lowest, so this was unusual,” Lee says.

How Low Can You GoBetween skyrocketing gas prices and a Polar Vortex most

won’t soon forget, winter 2013-2014 was the poster child for notlocking in energy rates during the cold season. “For years and years and years our clients have learned that

you do not lock gas in the winter because supply is high,” saysRhonda Kreitz, President and COO of Energy Advisory Service.“This winter we saw record lows, combined with unusually mildtemperatures, but many of our clients were nervous to pull thetrigger because the past has taught them that the price shouldbe even lower in the summer.”Despite the general rule, Kreitz says she told clients for several

months to take advantage of the exception and lock in the win-ter when the rates were so low.“In the past when we say that, it is only for a week and the

market turns again, but this went on for months and kept get-ting lower,” she says. “We had those clients who saw the lowerrate, understood it was fantastic and who were truly trying tomanage their risk. They understood there was a chance the ratewould go down, but a greater chance it would go up, so they

locked the rate—and locked it fast—and were thrilled thattheir numbers compared to last year will be much, muchlower.” Vicki Parrish, Director of Advantage Services Energy for

Greystar, says her clients took advantage of—and locked in—lower pricing in late January when they’d likely seen the bottomand prices had already begun rising again some markets.“Even though the future pricing is likely to be volatile for a

while, our sites are comfortable knowing that they are benefit-ting from the current market conditions,” she says. Although Dolben typically rides the market, Beaton says this

winter’s prices were too good to pass up. “We didn’t jump in too early and were fortunate because the

rates kept dropping, but eventually got to a point where we felt itwas time to lock in,” Beaton says.Where available, Dolben went so far as to extend typical 12-

month contracts to three-year agreements—a decision Beatonsays will likely save the company at least 10 percent in energyexpenses annually.Although most companies looked over their contract terms

more carefully this winter to try and lock in lower rates, somesay they can’t lose sight of their overall strategy.“As a budget-based organization, we want some certainty of

costs over a fiscal year,” says Mike Beirne, Executive Vice Presi-

34 UNITS M a r c h 2 0 1 5 w w w. n a a h q . o r g

w w w. n a a h q . o r g

dent at The Kamson Corporation. “The gas business can be com-plicated and risky. We tend to be conservative and lock-in forterm contracts based on past usage so that we know what our rel-ative nut is. In other words, the bottom line on any given propertyand how the energy prices fit into the expense side of the ledger.”Others are riding on an index price—which, superficially,

makes sense. Compared side by side, Kreitz says index pricing isalways lower than a fixed rate for that day. However, with pric-ing changing every 15 minutes on the open market, she saystime is of the essence. Getting a contract approved and to thecorrect contract executor takes a day or two at best—thoughmore typically a week. In that time, Kreitz says the market couldturn up and the apartment industry could lose.

What the FrackIn the past five years, shale-heavy ghost towns in areas like

North Dakota and parts of Texas and Pennsylvania have becomebooming work centers for thousands, all thanks to the introduc-tion of a drilling technique called fracking. The entire landscape of the energy business has since

changed, with fracking and shale responsible for the surplus offuels that have led to lower prices. “As we use natural gas to heat our buildings and buy electric

from power plants that use natural gas to drive their steam tur-

bines, the savings are coming directly to us,” Lee says. “That’swhy we are reviewing all contracts to take advantage of it andnot let this opportunity pass us by.” Beirne agrees, but remainscautious about long-term price drops.“Foreign energy competitors are looking to take back their

share of the business pie, but I see that as volatile,” he says. “Sixmonths from now, that could be totally reversed. From a rentalstandpoint, I worry that the current state of affairs affects ournational economy, good or bad.”Kreitz says the key is educating clients about the ways in

which fracking and shale have changed the industry, andencouraging them to act while the market is on their side.“On average, a master-meter property will use over 2 million

kWh annually,” Kreitz says. “A one cent price difference couldmean a $20,000 savings—or extra expense. Spread over anentire portfolio, those pennies can make or break a company’sperformance. We know energy pricing is a dull subject at best, but energy is in the top three expenses for our clients.Maneuvering incorrectly in this market could cost hundreds of thousands of dollars.”

Lauren Boston is NAA’s Staff Writer & Manager of Public Relations. She can be reached at 703-797-0678 or lauren@naahq.org.

M a r c h 2 0 1 5 UNITS 35