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The cold reality of high energy costs

by Justin Boyd

June 2001

When R. Steven Landes became executive director at NewBiz Virginia (NewBizVA), he couldn't have imagined that one of his first challenges would be absorbing and containing surging utility costs.

The combination of an especially cold winter with the high cost of oil tripled the fledgling mixed-use incubator's propane bill from about $1,000 per month in the fall to more than $3,000 in February. The Verona, Va., incubator opened last August.

Looking forward to summer, Landes had one thing to say: "We haven't had a full [season] of air-conditioning yet. I'm just hopeful that the electrical costs won't be higher than expected."

Landes' situation reflects a dilemma facing incubator managers across the country when planning budgets and projects for next year – how to deal with higher utility costs when it appears that last winter's prices were just the beginning of a potentially long-term energy squeeze.

The heat is on

The rise in gas prices can be traced to early 1999 when the Organization of Petroleum Exporting Countries (OPEC) decided that the market price for Arab oil was too low at less than $10 per barrel. In response, OPEC enacted a series of cutbacks in oil production that pushed prices to about $25 per barrel by early 2000.

By managing its production, OPEC has been able to keep oil prices at about $25 to $30 per barrel ever since. Less production combined with the demands of the booming U.S. economy in the late 1990s caused skyrocketing prices for oil-derived products such as gasoline, propane and kerosene that show no sign of abating.

For incubators, the result has been a budget line item that's expanding way beyond expectations.

"You never know what's going to happen, but you can usually be in the ball park," says Adele Lyons, executive director of the Gulf Coast Business Technology Center in Biloxi, Miss. "This year, we're way out of the ball park." The Business Technology Center, whose fiscal year runs from Oct. 1 to Sept. 30, had spent its entire $3,500 gas budget by the end of February, she says.

Beating the meter

One way incubators are confronting rising utility costs is by conserving energy. (See 11 Quick [and Cheap] Ways to Save.) Last winter, that meant campaigns to turn down thermostats, to make sure doors and windows were closed tightly and to avoid heating unoccupied sections of buildings where zoned heating had been installed. (Zoned heating and cooling systems control the temperature of different rooms individually.)

For some, the energy crunch inspired greater scrutiny of buildings' insulation and HVAC systems. NewBizVA may rethink the zoning of its heating system after heating unoccupied manufacturing space all winter, Landes says. The incubator has only two clients in its 36,000-square-foot section of a newly renovated factory building with only one zone governing its entire operation. Its facility includes both snug, double-insulated office spaces and airy, wide-open manufacturing bays with 15- to 20-foot ceilings. "If we had to do it again, we would have zoned it a little differently," he says.

However, NewBizVA does have the advantages of a relatively new and efficient heating system and no windows.

Lisa Ison, president of the New Century Venture Center in Roanoke, Va., patted herself on the back for installing some new HVAC units in 2000. "As we are replacing HVAC units, we will replace them with units having economizers which are more efficient than the 15-year-old units we have now," she says.

Les McKenzie took some comfort in the new boilers installed in the Quincy Business & Technology Center in 1998. "It did give us an annual 20 percent cost savings," says McKenzie, executive director of the Quincy, Ill.-based incubator. "If we were using the old system, we'd probably be out on the corner with a tin cup."

Even so, the incubator saw its gas costs rise from 26 cents per therm in its November-December 1999 billing period to 62 cents per therm during the same period in 2000. (A therm is a measure of the heat produced by gas.) Between December 2000 and January 2001, the incubator's rates rose to 92 cents per therm, a month-to-month increase of almost 50 percent.

Pinching pennies

These kinds of increases have incubators pondering how they're going to absorb extra utility costs. For most, the answer lies in redirecting discretionary spending from areas including new equipment, marketing, professional development and physical improvement projects.

Landes considers himself lucky to have put aside more than $24,000 as a discretionary fund for 2001. While he hopes to use that money to augment his $2,500 advertising budget, he is prepared to devote it to propane and electricity if necessary. "I knew we didn't have a full year's experience in the building, so I was pretty conservative," he says.

For the Kansas Entrepreneurial Center in Manhattan, Kan., the hike in gas costs may mean compromises such as not replacing carpets this year, says Ron Sampson, president and CEO. "It is impacting our flexibility, and we'll have to take that money from other projects," he says. "It basically takes away from your discretionary money."

The Gulf Coast Business Technology Center will have to wait and see if it can buy new computers it hoped to purchase out of this year's budget, Lyons says. "We just look at stuff we can live without and push those to the end of the year to see if we're going to do it," she says.

Crunch time

At the more drastic end of the spectrum, some incubation programs that cannot find flexibility in their budgets to absorb higher utilities pass along the costs to clients.

"The bottom line is we can't make it if we have to pay these kinds of charges, so we have to raise rates on clients," says Richard Smith, who manages the Ron Reed Economic Development Center in Brookings, S.D. "Being the kind of tenants they are – start-up tenants – it's tough for them, too. It's hard on everybody."

As of Jan. 1, the incubator raised its annual gas charges to clients from $0.1841 per square foot to $0.316 per square foot – a more than 70 percent jump. That was in response to gas costs that had climbed 72 percent, to $2,460 in 2000 from $1,434 a year earlier.

The Quincy Business & Technology Center notified its clients in a memo that gas costs will affect leases as they are renegotiated throughout the year, McKenzie says. "Based on what we're hearing from the utilities, we've already alerted them that there will be increases based on what we've forecasted in the next 12 months," he says.

Although incubators resist raising clients' rents or adding surcharges, that response to utility costs may become more common if high prices persist, according to many managers.

"We'll probably have to increase the kitchen rent and office rent by about 5 percent to cover those increased costs," says Laurie Katana, manager at the Bonner Business Center, a mixed-use incubator in Sandpoint, Idaho. The 10,648-square-foot incubator expects its gas cost this year to come in at $20,000 – about 25 percent higher than the $16,000 it budgeted.

The New Century Venture Center has avoided charging clients for higher gas rates so far, but doesn't rule out taking that step in the future, Ison says. "If gas prices remain, we will have to look at either a rent increase or a surcharge to clients for the gas bill increase," she says.

Raising rates may put incubator managers in a bind if the cost of leases exceeds what new businesses are willing or able to pay. "The hard part is to try to make it cost-effective for someone to come in and still cover our costs," Landes says.

In the end, incubator managers largely are taking a wait-and-see approach to energy costs, with many reporting they can absorb extra expenses as long the increase is short-term.

With the U.S. Department of Energy forecasting no significant drop in oil or gas prices in 2001, however, incubators are unlikely to find quick relief from higher utility costs. It may be that incubator budgets will have to make room for those extra costs well into 2002 and beyond.

Californians keep their fingers crossed

As temperatures rise and air conditioners rev up in California, incubator managers and their clients are waiting anxiously to see if blackouts will affect their operations this summer.

Although the state has implemented a conservation program and is buying electricity on behalf of its major utilities, no one knows how much power people will use or if power plants will break down. The result is pervasive insecurity about California's power supply, says Tyler Orion, executive director of the Pacific Incubation Network in San Jose.

"The atmosphere is very uncertain," she says.

Since June 2000, California has been in a power emergency as the soaring demand of a booming economy has tapped out existing energy supplies. In addition, California's two largest utilities are on the brink of insolvency, putting the state's power grid in jeopardy. Pacific Gas & Electric Co. filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code April 16, while Southern California Edison's financial stability remains in question.

The source of all this turmoil is California's deregulation of its electricity industry in 1996. The law prohibited utilities from passing along all increases in wholesale electricity prices to consumers. As usage jumped, the prices utilities paid to buy power from generators skyrocketed.

Unable to recover the costs of buying power by charging customers more, California's utilities couldn't expand to meet increased demand and began defaulting on loans and contracts. Suspicious of the utilities' creditworthiness, power generators in late 2000 refused to supply power to California.

By mid-January, the state experienced its first rolling blackouts, ordered by state regulators to avoid a total collapse of California's power grid. The blackouts lasted about 90 minutes and affected millions of Californians. They were followed by more blackouts in spring.

So far for incubators, the blackouts have been little more than a nuisance, says Barbara Harley, executive director of the International Business Incubator, a technology incubator situated on the 10th floor of a downtown San Jose office building. The incubator works with established international companies that want to expand into the United States.

"Visitors have had to walk up and down stairs and so have we [because the elevator is not available during blackouts]," she says. "It doesn't look great with our visitors from overseas. They sort of wonder what sort of emerging economy we've become, which isn't the greatest public relations."

As electricity problems continue, however, the potential for lasting damage to the perception of northern California incubators grows, Harley says.

"Silicon Valley is incredibly expensive," she says. "If you add to it the indignity of the lights going out, you're going to persuade people that Austin suddenly seems like a pretty nice place."

Texas and Minnesota already are advertising to lure technology companies away from California, Orion says. "The marketing of alternative locations to high-tech companies is in full swing," she says. "Uninterrupted sources of power are critical to the new economy."

Another unfortunate consequence of the electricity debacle is that some California incubators and their clients are losing support. "[Pacific Gas & Electric and Southern California Edison] were major champions of incubators in California, for sure," Orion says. Because of the utilities' financial problems, they have no money to support incubation, she says.

For their part, incubators are doing their best to pitch in and support conservation efforts, says Joe Rodriguez, arts officer at the San Jose Arts Incubator. "Everything gets shut off when it's not in use," he says.

After almost a year of electricity problems, California incubators will be ready for blackouts if they do occur, Harley says: "We have all gotten very careful about backing up our work and saving, saving, saving."—JB

11 quick (and cheap) ways to save

Here are 11 no- and low-cost ideas to get you started saving energy and money today:*

  1. Watch that thermostat: Turn down the heating thermostat and turn up the cooling thermostat, especially when the incubator is unoccupied.
  2. Set it and forget it: Programmable thermostats are inexpensive and can help you heat or cool your incubator more efficiently – and you won't need to remember to change thermostat settings every time you open or close the building.
  3. Hit the lights: Remove lamps where you have more than enough light, and turn off lights when they're not in use.
  4. Set it and forget it, part II: Automatic lighting controls turn lights on or off depending on occupancy or time of day.
  5. Stick to the schedule: Regular maintenance on furnace and air-conditioning equipment is important. Clean air filters create less resistance to airflow, thus reducing the electricity needed to run a blower motor.
  6. Bundle up: Wrap the hot water tank with jacket insulation to reduce standby heat loss. Be sure to leave the air intake vent uncovered when insulating a gas water heater.
  7. Tune in, turn off: Turn off unused computers, monitors, printers and copiers.
  8. Look, Ma, no cracks: Install weather stripping and caulking to stop air leaks through cracks in walls, windows, doors, ceilings and floors.
  9. Always use sunscreen: Shade sun-exposed windows and building walls with window coverings, awnings, trees and bushes wherever possible to cut air-conditioning costs.
  10. It's like Dad used to say: Keep exterior doors closed; it's expensive to heat or cool the outdoors.
  11. Positive reinforcement: Encourage clients to be energy conscious, because their cooperation can make or break your energy-saving efforts. Consider offering a small incentive for the client that saves the most energy.

*This information was adapted from a document produced by the Technical Information Program of the U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy.

Keywords: budget -- incubator, facility management, financial management -- incubator, utilities

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