This document discusses how plunging energy prices over the winter of 2015 caused apartment management companies to reevaluate their energy management strategies. It describes the two main approaches to energy supply purchasing - fixed-price contracts that provide price protection but don't allow companies to benefit from drops, and index-based pricing that fluctuates with the market. With prices hitting decade lows, many companies took the opportunity to lock in lower fixed rates through contract extensions. However, some remain cautious given the volatility of energy markets.

1. Bottom of the
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BY LAUREN BOSTON
As energy prices hit recent lows this winter, apartment management
companies reevaluated their energy management strategies.

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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 and
reached 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 reevaluating
their 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—often
12, 18 or 24 months. It’s a seemingly low-risk strategy with protection against market
volatility and unexpected spikes, yet doesn’t allow for companies to benefit from
potential energy price dips, either. What may seem like a low price one day could be
high 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 on
price and take advantage of market dips, yet often struggle to accurately manage costs
without 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 approach
with a snow removal company. If we lock in a flat service fee for the entire season and
get no snow that year, what are we paying them for? We’d prefer to pay for what we
get [snow removal or energy], as it happens. That’s been our philosophy for years
with 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 any
warning 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 and
reviewed expiration dates. For contacts approaching expiration naturally, Lee happily
renewed 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
difference
could mean
a $20,000
savings—
or extra
expense.’’

3. 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 Go
Between skyrocketing gas prices and a Polar Vortex most
won’t soon forget, winter 2013-2014 was the poster child for not
locking 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,” says
Rhonda Kreitz, President and COO of Energy Advisory Service.
“This winter we saw record lows, combined with unusually mild
temperatures, but many of our clients were nervous to pull the
trigger because the past has taught them that the price should
be 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 lower
rate, understood it was fantastic and who were truly trying to
manage their risk. They understood there was a chance the rate
would go down, but a greater chance it would go up, so they
locked the rate—and locked it fast—and were thrilled that
their numbers compared to last year will be much, much
lower.”
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 bottom
and 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 it
was 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 Beaton
says will likely save the company at least 10 percent in energy
expenses annually.
Although most companies looked over their contract terms
more carefully this winter to try and lock in lower rates, some
say 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-
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dent at The Kamson Corporation. “The gas business can be com-
plicated and risky. We tend to be conservative and lock-in for
term contracts based on past usage so that we know what our rel-
ative nut is. In other words, the bottom line on any given property
and 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 is
always lower than a fixed rate for that day. However, with pric-
ing changing every 15 minutes on the open market, she says
time is of the essence. Getting a contract approved and to the
correct contract executor takes a day or two at best—though
more typically a week. In that time, Kreitz says the market could
turn up and the apartment industry could lose.
What the Frack
In the past five years, shale-heavy ghost towns in areas like
North Dakota and parts of Texas and Pennsylvania have become
booming 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 of
fuels 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’s
why we are reviewing all contracts to take advantage of it and
not let this opportunity pass us by.” Beirne agrees, but remains
cautious 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. “Six
months from now, that could be totally reversed. From a rental
standpoint, I worry that the current state of affairs affects our
national economy, good or bad.”
Kreitz says the key is educating clients about the ways in
which fracking and shale have changed the industry, and
encouraging 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 could
mean a $20,000 savings—or extra expense. Spread over an
entire portfolio, those pennies can make or break a company’s
performance. 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.
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