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HUD’s Energy Incentivesand Performance Contracting
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Revenue from Decreasing Utility Bills
Revenue potential is a function ofthree factors: Consumption - therms of gas, kWh of electricity Cost per unit consumption - cents/therm or cents/kWh Who keeps the savings - HUD or the building owner/manager?
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Revenue from Decreasing Utility Bills
High consumption - decrease through conservation
High cost - decrease through negotiating lower rates
– Transporting gas
– “Wheeling” electricity HUD has established incentives to take advantage of both
of these options
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HUD and Energy Costs
Performance Funding System (PFS) dictates cash flows between HUD and housing authority - utilities are a portion of this
Just underwent revision due to Quality Housing and Work Responsibility Act of 1998
Negotiated Rulemaking completed, Interim Final Rule published 3/29/01 - not many changes.
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Utilities are treated as separate components, due to:–– Volatility of Utility Rates–– Diversity of utility delivery system among PHAs/IHAs–– Diversity of the types of utilities used by PHAs/IHAs–– Lack of Standards for consumption–– Lack of uniformity in condition of utility systems and
equipment Impacts on Performance Contracting
— Some savings won’t show up when evaluating cost-effectiveness of package, e.g. maintenance costs paid from operating fund.
HUD and Energy Costs
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Allowable Utilities Expense Level (AUEL)
Allowed Utility Consumption Level (AUCL)
– 3-year Rolling Base Allowed Utility Expense Level (AUEL)
– Rolling Base * Rate in effect at the time
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Allowable Utilities Expense Level (AUEL) Utility Rates
— PFS uses and adjusts for 100% of rate changes
— Published rates are used; no projections are permitted, except as specifically permitted in 990.107
— HUD’s rate = Total dollar cost / units of consumption, e.g. $/kWh = Rate
—Can lead to HUD defined “savings” being different from the savings the HA sees on their utility bill e.g. demand charges, stepped rates
— Decrease in rate can lead to decrease in dollar savings to the HA.
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Rolling Base Period–– The 36-month period ending at least 12 months prior
to the beginning of the requested budget year (RBY).
Allowed Utility Consumption Level (AUEL)
The Rolling Base of the Standard Performance Funding System
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01
Fiscal Year
Uti
lity
Co
sts
As
su
min
g
Co
ns
tan
t R
ate
Rolling Base at Time of Retrofit One Year lag
RBY RBY RBY 98 98 98
RBY RBY RBY 99 99 99
RBY RBY RBY 00 00 00
RBY RBY RBY 01 01 01
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Utilities used for space heat - past year1. Change Factor2. Heating Degree Day (HDD)3. Applied to meters used for space heating only4. Application of HDD factor to estimated Rolling Base Consumption
Adjustment for rate and consumption - past year1. All PHAs/IHAs receiving subsidy must submit year-end adjustment2. Decreases/Increases in AUCL - 75/25 split HA/HUD3. Rate: paid at 100%4. Equals True-up of AUEL
New Rule - 1 year lag in true-up
Mandatory Post-Year Adjustment
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Modernization Funds
Standard mechanism for capital improvements
Housing authority keeps 75% of the savings (or bears 75% of the liability) until the rolling base catches up (Prior to new rule, this was a 50/50 split).
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Cash Flows from Conservation Projects Using Standard PFS Funding
Savings to Housing Authorities from the Standard Performance Funding System
20,83341,66762,500
62,500125,000187,500
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Fiscal Year
Uti
lity
Co
sts
As
su
min
g
Co
ns
tan
t R
ate
Rolling Base at Time of Retrofit OneYear Lag After Retrofit Savings to HUD Savings to Housing Authorities
RBY RBY RBY
98 98 98
RBY RBY RBY
99 99 99
RBY RBY RBY
00 00 00
RBY RBY RBY
01 01 01
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References Statutory Authority - Section 9 of the United States
Housing Act of 1937, as amended by Section 118 of the Housing and Community Development Act of 1987
Quality Housing and Work Responsibility Act of 1998
Regulatory Reference - The Performance Funding System (PFS) regulations at 24 CFR 990 for Public Housing Agencies.
Notice PIH 91-41 (PHA) - Final Rule - PFS: Energy Conservation Savings, Audit Responsibilities, Miscellaneous Revisions
Performance Funding System (PFS) and Performance Contracting
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References (continued) Notice PIH 94-71 (HA) - Final Rule - Annual
Contributions for Operating Subsidy; Shared Savings for Utility Rate Reductions and Subsidy for Economic Self-Sufficiency and Anti-Drug Activities
Notice PIH 95-26 (HA) - Incentives for PHAs and IHAS to Reduce the Cost of Utilities
Handbook - The Performance Funding System Handbook
Performance Funding System (PFS) and Performance Contracting (cont.)
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HUD’s Energy Incentives
Frozen Base Additional “add-on” subsidy Negotiated rate reductions
Performance contracting may beused with either of the first two incentive methods
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Intent of Legislation: To enable public housing authorities (PHAs) to use energy performance contracting as a mechanism through which non-federal funds can be used to help achieve a government objective:
THE CONSERVATION OF ENERGY
Regulatory Framework for Improving Energy Efficiency In Public Housing
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Our Charge: To achieve the legislation’s objective in a creative way while achieving the objectives of performance contracting.
Regulatory Framework for Improving Energy Efficiency In Public Housing (cont.)
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The Frozen Base Incentive
HUD will freeze the three-year rolling base at the current consumption level
As housing authority costs go down, the authority keeps 100% of the difference
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Cash Flows from Conservation Projects Using the Frozen Base Incentive
Savings to Housing Authorities from the Frozen Base Incentive - 10 year contract
250,000.00
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Fiscal Year
Uti
lity
Co
sts
As
su
min
g
Co
ns
tan
t R
ate
Rolling Base at Time of Retrofit OneYear Lag After Retrofit Savings to HUD Savings to Housing Authorities
RBY RBY RBY 98 98 98
RBY RBY 08 08
RBY09
RBY RBY 09 09
RBY08
RBY RBY RBY10 10 10
125,0062,50
20,841,66
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The Frozen Base Incentive
Rules
– Non-HUD funding
– Obtain a savings guarantee
– At least 50% of the savings for debt service
– The HA may retain up to 50% of the savings to train employees or pay for other eligible costs (cash incentives to residents are not permitted)
– 12 years maximum contract
– Restrictions on savings calculations
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• PHA is responsible for debt amortization if the projected savings do not materialize.• ESCOs must guarantee that a shortfall in savings will not cause the PHA to default on the debt services if projected savings do not take place.
The Frozen Base Incentive
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The Additional “Add-On” Subsidy Incentive
The Additional Subsidy
– Rolling base does not freeze, so…
– HUD keeps most savings, but...
– HUD increases the subsidy in the amount of the loan payment and fees
This is the “Additional Subsidy”
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Cash Flows from Conservation Projects Using the Add-On Subsidy Incentive
Savings to Housing Authorities from the Additional Subsidy Method
62,500
41,667 20,833
187,500125,000
62,500
0100,000200,000300,000400,000500,000600,000700,000800,000900,000
1,000,000
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Fiscal Year
Uti
lity
Co
sts
As
su
min
g
Co
ns
tan
t R
ate
Rolling Base at Time of Retrofit OneYear Lag After Retrofit Savings to HUD Savings to Housing Authorities
RBY RBY RBY
98 98 98
RBY RBY RBY
99 99 99
RBY RBY RBY
00 00 00
RBY RBY RBY
01 01 01
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The Additional “Add-On” Subsidy Incentive
Rules
– Non-HUD funding
– No savings guarantee required, but...
– Savings must at least equal the loan payment or next year’s operating subsidy is docked, so...
– Savings guarantee is still a smart move
– Loan length is limited to 12 years max
– Standard PFS incentives apply
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HUD Energy Incentives
Both incentive methods deal with cash flows between a housing authority and HUD
Alters how does the housing authority have the funds to pay back the loan
Note: There are other cash flows to consider when evaluating a project
– Housing Authority /Utility
– Housing Authority/ESCo (Contract)
– Housing Authority/Lender
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Performance Contracting
Performance contracting is a method used to implement the projects
– Turnkey services from audit to monitoring
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Existing Energy Use
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
Fu
el C
os
ts in
$$
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Pre-Retrofit Expenses
Pre-Retrofit
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After Performance Contracting
0
10000
20000
30000
40000
50000
60000
70000
Do
llars
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Post-Retrofit Expenses
To Hsng Auth
Debt
Fuel Cost
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“The frozen base incentive provides money that is not available under the normal Performance Funding System. It provides a way to leverage federal construction dollars with outside dollars to get the work done.” Russell Bubb, Energy Manager, Atlanta Housing Authority, GA
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“My recommendation to housing authority executives is that HUD’s incentive plan can be a very important part of improving housing operations. Failing to take advantage of these HUD incentives does not make any sense.” Ken Garret, Executive Director, Hendersonville Housing Authority, NC
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“Without a performance contract, I don’t know how we would ever get the work done. We would not be able to manage the project, nor could we afford it.” David Kaufman, Executive Director, Monticello Housing Authority, NY
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“We haven’t looked back. We haven’t had second thoughts in any way!” Don Stancil, Chief Financial Officer, Kinston Housing Authority, NC
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HUD Approval Points
RFP
Energy and Water Audit Agreement
Fuel Baseline
Energy and Water Services Agreement
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Utility Restructuring and Rate Negotiations
Natural gas industry has deregulated Electric industry is deregulating state by state Provides opportunities to purchase utilities from alternative
sources and save money
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Rate Reduction Incentive
Rate Reductions
If a PHA takes specific actions to reduce the utility rates it pays, such as through administrative appeals or legal actions, the PHA may share in the savings, on a 50/50 matching basis
Purchasing fuel from a supplier other than your local distribution company qualifies for this incentive— E.g. Transporting gas or “retail wheeling” of electricity
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– 50% of the decreases may be kept by the PHA; 50% must be returned as part of each PHA’s post-year utility settlement.
– Actions must be specific to the PHA and must represent greater action than general participation in a rate-setting proceeding.
– PHA must monitor and document savings– Currently, no time limit on the duration of savings kept
by the housing authority
Rate Reduction Incentive
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Rate Reduction Incentive
For best price, need to track utility usage
Many options for purchasing - simple to complex
Options vary by state and local utility
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Summary
Allows HA to leverage private capital and expand budgets Allows implementation of capital projects that might not
otherwise be affordable at the time Provides mechanism to bring extra non-capital funds to the
HA
– excess savings from a performance contract – savings from the rate reduction incentive
Encourages HAs to be proactive on savings energy