HUD Incentives Training Manual

*Prepared by the National Center for Appropriate Technology*

*as a supplemental training reference*

*for the*

*Performance Contracting Training*

*Chicago, IL*

*May 10 - 14, 1999*

The authors gratefully acknowledge support from the U.S. Department of
Housing and Urban Development for the preparation of this document.
Neither the United States Government, nor any Agency thereof, nor any of
their employees, makes any warranty, expressed or implied, for the
accuracy or the completeness of the information contained in this
document. The views expressed herein are those of the authors and do not
state or necessarily reflect the views of the United States Government
or any agency thereof.

DRAFT 5/10/99

**Project Managers**

Catherine M. Muller

Victoria M. Hayes

**Authors**

Catherine M. Muller

Steve Coffel

Victoria M. Hayes

**Editorial and Production Staff and Consultants**

Mike Morris, Writer/Editor

Gerald R. Johnson, Writer/Editor

Jody Krzan, Production Consultant

Valori Mourich, Research Assistant

Maria Biastoch, Production Consultant

![](media/image1.png){width="2.4305555555555554in"
height="0.8194444444444444in"}

The National Center for Appropriate Technology (NCAT) is a private,
non-profit corporation dedicated to resource efficiency and sustainable
community development, especially for low income persons. It was created
in 1976 and has since provided services in

-   resource efficiency research

-   resource efficiency technical transfer

-   sustainable agriculture

-   sustainable communities

NCAT's Multifamily Services Division provides technical assistance on
energy and water usage reduction to multifamily building owners and
managers. NCAT's resource efficiency staff would be pleased to provide
further information regarding its Multifamily Services or other services
related to residential conservation needs. Call 1-800-ASK-NCAT.

Copyright 1999 by the National Center for Appropriate Technology.

All rights reserved.

Printed in the United States of America

Printed on recycled paper.

ACKNOWLEDGMENTS

NCAT would like to extend a hearty thanks to all that helped with this
document. Many besides the authors have provided input on content and
peer review of earlier drafts.

**CONTENTS**

aCKNOWLEDGMENTS i

Authors'
Notes....................................................................................................................vi

Preface vii

UNIT 1. Resource conservation in Public and Indian Housing
[1](#resource-conservation-in-public-and-indian-housing)

Chapter 1 [1](#chapter-1)

Why conservation? [1](#why-conservation)

1\. The Federal Funding Picture for Public Housing
[1](#the-federal-funding-picture-for-public-housing)

2\. Energy Costs of Public Housing [2](#energy-costs-of-public-housing)

Chapter 2 [3](#chapter-2)

History of Conservation funding [3](#history-of-conservation-funding)

1\. HUD Funding for Conservation Improvements
[3](#hud-funding-for-conservation-improvements)

2\. Other Public Funding for Conservation in Housing Authorities
[3](#other-public-funding-for-conservation-in-housing-authorities)

3\. Private Financing for Conservation Improvements
[4](#private-financing-for-conservation-improvements)

4\. An Alternate Way to Fund Conservation
[5](#an-alternate-way-to-fund-conservation)

UNIT 2. Overview of hud INCENTIVES [7](#overview-of-hud-incentives)

The Housing and Community Development Act of 1987
[7](#the-housing-and-community-development-act-of-1987)

Chapter 3 [8](#chapter-3)

Utility reimbursements [8](#utility-reimbursements)

1\. The Performance Funding System [8](#the-performance-funding-system)

2\. The Utility Allowance System [11](#the-utility-allowance-system)

Chapter 4 [15](#chapter-4)

the STANDARD PFS Incentive [15](#the-standard-pfs-incentive)

1\. Funding Conservation Projects with the Standard PFS Method
[15](#funding-conservation-projects-with-the-standard-pfs-method)

2\. The Standard PFS Method and Utility Allowances
[17](#the-standard-pfs-method-and-utility-allowances)

3\. Standard PFS Pros and Cons [17](#standard-pfs-pros-and-cons)

Chapter 5 [19](#chapter-5)

the frozen base incentive [19](#the-frozen-base-incentive)

1\. Guidelines for Using the Frozen Base Incentive
[19](#guidelines-for-using-the-frozen-base-incentive)

2\. Funding the Project [20](#funding-the-project)

3\. Pros and Cons of the Frozen Base Incentive
[28](#pros-and-cons-of-the-frozen-base-incentive)

4\. Summary [31](#summary-1)

Chapter 6 [33](#chapter-6)

THE Additional Subsidy INCENTIVE [33](#the-additional-subsidy-incentive)

1\. Guidelines for Using the Additional Subsidy Incentive
[33](#guidelines-for-using-the-additional-subsidy-incentive)

2\. Funding the Additional Subsidy [35](#funding-the-additional-subsidy)

3\. Pros and Cons of the Additional Subsidy Incentive
[41](#pros-and-cons-of-the-additional-subsidy-incentive)

4\. Summary [43](#summary-2)

Chapter 7 [45](#chapter-7)

the Rate Reduction INCENTIVE [45](#the-rate-reduction-incentive)

1\. Regulated Utility Primer [45](#regulated-utility-primer)

2\. Non-regulated Utilities [48](#non-regulated-utilities)

3\. Fuel Conversions [48](#fuel-conversions)

4\. Guidelines for Using the Rate Reduction Incentive
[48](#guidelines-for-using-the-rate-reduction-incentive)

5\. Pros and Cons of the Rate Reduction Method
[49](#pros-and-cons-of-the-rate-reduction-method)

6\. Summary [50](#summary-3)

UNIT 3. DECISION: wHICH METHOD TO USE?
[51](#decision-which-method-to-use)

Chapter 8 [51](#chapter-8)

PREPARING FOR THE DECISION [51](#preparing-for-the-decision)

1\. Perform the Fuel- and Water-Use Audit
[51](#perform-the-fuel--and-water-use-audit)

2\. Assemble the Project Team [55](#assemble-the-project-team)

Chapter 9 [57](#chapter-9)

making the decision [57](#making-the-decision)

Summary [64](#summary-4)

UNIT 4. PERFORMANCE CONTRACTING [65](#performance-contracting)

Chapter 10 [65](#chapter-10)

Preparing the REQUEST FOR PROPOSALS
[65](#preparing-the-request-for-proposals)

1\. Planning Checklist [65](#planning-checklist)

2\. Components of an RFP [68](#components-of-an-rfp)

3\. Next Steps [75](#next-steps)

CHAPTER 11 [77](#chapter-11)

choosing an ESCO [77](#choosing-an-esco)

1\. Site Visits [77](#site-visits)

2\. Evaluating Written Responses [77](#evaluating-written-responses)

3\. Check References [80](#check-references)

4\. The Short List [80](#the-short-list)

5\. Oral Interviews [80](#oral-interviews)

6\. Final ESCO Selection [81](#final-esco-selection)

CHAPTER 12 [83](#chapter-12)

Contract negotiatIoNs [83](#contract-negotiations)

1\. The Energy Audit [83](#the-energy-audit)

2\. Preliminary Energy Service Agreement Negotiations
[84](#preliminary-energy-service-agreement-negotiations)

3\. Reviewing the ESCO\'s Proposal [84](#reviewing-the-escos-proposal)

4\. After Negotiations [97](#after-negotiations)

CHAPTER 13 [99](#chapter-13)

project IMPLEMENTATION [99](#project-implementation)

1\. Beginning the Project [99](#beginning-the-project)

2\. Final Quality Control and Equipment Check
[99](#final-quality-control-and-equipment-check)

3\. Payments Begin [99](#payments-begin)

4\. Monitoring Conservation Savings
[99](#monitoring-conservation-savings)

5\. Conservation Training [100](#conservation-training)

6\. Capturing the Savings [101](#capturing-the-savings)

7\. Concluding the Contract [102](#concluding-the-contract)

chapter 14 [103](#chapter-14)

HUD'S ROLE [103](#huds-role)

1\. Performance Contracting [103](#performance-contracting-1)

2\. The Additional Subsidy [105](#the-additional-subsidy-1)

3\. The Rate Reduction Incentive [105](#the-rate-reduction-incentive-1)

REFERENCES [107](#references-1)

Glossary [109](#glossary)

Bibliography [115](#bibliography)

**Appendices**

> [Appendix A: Conservation Efforts by HUD and Others]{.smallcaps}
>
> [Appendix B: Fuel Equivalency Table]{.smallcaps}
>
> [Appendix C: Federal Regulations]{.smallcaps}
>
> [Appendix D: HUD Forms]{.smallcaps}
>
> [Appendix E: Sample Request for Proposals]{.smallcaps}
>
> [Appendix F: Sample Technical Section of the RFP]{.smallcaps}
>
> [Appendix G: Sample Evaluation Forms for ESCO Responses]{.smallcaps}
>
> [Appendix H: ESCO Proposal Ranking Score Sheet]{.smallcaps}
>
> [Appendix I: ESCO Reference Form]{.smallcaps}
>
> [Appendix J: Sample Energy Services Agreement]{.smallcaps}
>
> [Appendix K: Sample Gas Purchase RFP]{.smallcaps}
>
> [Appendix L: PRISM]{.smallcaps}
>
> [Appendix M: Case Study]{.smallcaps}
>
> [Appendix N: Sample Energy Analysis Report Agreement]{.smallcaps}
>
> [Appendix O: Oral Interview Questions for Short-Listed
> ESCOs]{.smallcaps}
>
> [Appendix P: Fee Scenario]{.smallcaps}

AUTHORS' NOTES:

This manual is in draft form. It is still a work in progress and subject
to further review by HUD and other industry experts.

In October of 1998, the U.S. Congress passed H.R. 4194, the Quality
Housing and Work Responsibility Act of 1998. As part of this
legislation, the systems by which housing authorities' operating
subsidies and capital funds are allocated are being overhauled Although
the enabling legislation for the HUD incentives that are the topic of
this manual was not repealed, nor explicitly amended, the mechanisms
that are used to fund the incentives will be altered. The new
regulations are due to be in effect in October, 1999 after a negotiated
rulemaking process.

At the time of publication of this draft, it is impossible to tell how
the incentives will be affected, although there is legislative language
instructing that "... a public housing agency shall receive the full
financial benefit from any reduction in the cost of utilities or waste
management resulting from any contract with a third party to undertake
energy conservation improvements in one or more of its public housing
projects." (H.R. 4194).

This manual provides a discussion of how the existing systems for
operating subsidy and capital funds are determined. This discussion is
provided as background in order for the reader to understand the way the
way the incentives are funded. Due the restructuring of these systems,
some of this information will become obsolete. Other Sections,
especially Unit 4, which outlines the process for implementing a
performance contract, will remain pertinent after the new regulations go
into effect.

PREFACE

This guidebook was developed by the National Center for Appropriate
Technology (NCAT) with funds administered by the Department of Housing
and Urban Development. NCAT, through its work with housing authorities,
saw a need to update, expand and clarify the information available on
the financial incentives for utility conservation that were legislated
by the Housing and Community Development Act of 1987 (HCDA of 1987). The
interim rule implementing changes to the Code of Federal Regulations
resulting from this legislation was finalized in September, 1991. Since
that time, the number of housing authorities taking advantage of the
incentives has been increasing steadily. This manual's goal is to make a
comprehensive examination of the issues that have arisen during that
time and outline what the current state of practice is regarding these
incentives.

The incentives allow housing authorities to capture the savings from
steps they take to reduce utility costs. They give housing authorities
an opportunity to reduce reliance on federal funds, both at the time of
conservation retrofits and in the future. This manual attempts to guide
housing authorities through the process of utilizing these incentives.
It gathers in one place the information a housing authority will need to
decide if any of the incentives make sense for them. It introduces the
incentives and outlines steps for determining which one is most
appropriate to their situation. It discusses how to implement each one
once the housing authority has made that choice.

Inside you will find:

-   A discussion of the opportunities for and barriers to conservation
    in public housing;

-   An outline of the methods HUD uses to fund housing authorities;

-   An overview of each of the HUD financial incentives for decreasing
    utility costs;

-   A guide for housing authorities to determine are their best options
    for reducing utility costs;

-   An in depth, step-by-step process for implementing a performance
    contract;

-   A complete set of sample documents needed when using the incentives;
    and

-   An electronic version of these documents.

Note that a glossary of common terms has been included in the
"References" section of the book. The first time these terms are used in
the text, they will be bolded. Citations in the text refer to sources in
the bibliography.

This guidebook is designed such that it can be read from cover to cover,
or picked up at the start of a chapter or unit on a specific topic that
the reader is interested in. Unit 4, in particular, which outlines the
steps necessary to implement a performance contracting project, is
designed to be useable without having read the preceding units.

The use of the incentives legislated by the HCDA of 1987 in order to
achieve efficiency gains and decreased costs in public housing stock is
a promising approach. This redirecting of dollars which are being spent
for utilities into capital and other improvements at the housing
authorities is a win-win situation for the housing authority, the
tenant, the federal government and taxpayers alike. NCAT hopes this
manual, by clarifying and providing guidance to the incentives, will
encourage even more housing authorities to take advantage of these
opportunities.

# Resource conservation in Public and Indian Housing

## Chapter 1

## Why conservation?

### 1. The Federal Funding Picture for Public Housing

Government subsidies for affordable housing for the poor were first
provided under the U.S. Housing Act of 1937. (CLPHA, 1993) Today, more
than 3,300 public and Indian **housing authorities** (HAs) manage more
than 1.3 million public housing units, which are home to approximately
3.15 million people. (Sherwood, 1995) This does not include the
approximately 2.5 million assisted housing units, in programs such as
Section 8 and Section 202. (Ritschard, 1986) It is estimated that there
are at least 1 million households on waiting lists for public housing
and that only 29% of those eligible receive federal housing assistance.
(CLPHA, 1993)

Funding for **public housing** has a long and complicated history.
Because housing authorities have traditionally been unable to enter into
private credit markets, they have had to rely on government funds and
income generated from tenant payments for rent. As the income levels of
the residents of public housing have decreased over the years and
legislation tied the amount of rent that could be charged for shelter
and utilities to tenant income, housing authorities have come to rely
more and more on the contributions from the Federal government to meet
capital improvement and maintenance needs. These and other factors have
led to situations where some housing authorities have deferred
maintenance and energy-related capital improvements.

Funding for housing authorities fall into capital subsidies,
collectively known as modernization funds, and operating subsidy.
Because housing authorities traditionally have been unable to borrow
private capital, the capital subsidies had to cover 100% of the capital
improvements needed in their buildings. A 1992 study for the National
Commission on Severely Distressed Public Housing (NCSDPH) concluded that
the need for modernization funds, of which energy improvements are a
part, was so great that \$4.7 billion per year for the next ten years
would be required to erase the modernization deficit and keep up with
new needs as they occurred. (CLPHA, 1993) The amount of Federal funding
available has varied over the years. Fiscal year (FY) 1993 funding for
modernization was \$3 billion, a \$1.7 billion shortfall over the needs
estimated in the NCSDPH study. (CLPHA, 1993) Although funding for public
housing has recently climbed, as long as housing authorities are heavily
reliant on Congressional appropriations for capital improvement funds,
they will be subject to potential funding decreases from a
budget-conscious Congress looking for more ways to cut spending.

In 1998, new housing legislation, the Quality Housing and Work
Responsibility Act of 1998, was passed. This bill has restructured the
system for providing modernization funds and mandated an overhaul of the
system that regulates the public housing operating subsidy. The
operating subsidy is being designed through a negotiated rulemaking
process that is due to be complete in October 1999.

### 2. Energy Costs of Public Housing

Energy costs are higher in public housing than in equivalent,
privately-owned apartment buildings. (Ritschard, 1986) Almost two thirds
of the buildings used as public housing were built before 1970, during
an era when little consideration was given to energy efficiency. (CLPHA,
1993) Even structures built since that time generally don't make as
efficient use of energy or water as could be. Public housing uses
approximately 210.4 trillion Btus of energy each year. (EIA, 1995) The
average public-housing apartment uses 58.2-million Btu per year at an
average cost of \$.89 per square foot of living space. (EIA, 1995).)

Utility costs represent 27% of total operating expenses for the average
housing authority. This doesn't count utilities paid by residents,
neither those covered by utility allowances, nor any excess charges for
which the tenants may be responsible. (HUD Office of Inspector General,
1995) A 1985 study commissioned by HUD examined the cost of energy
conservation opportunities. This study estimated that implementing all
of the measures that would provide a 15 year simple payback would
require investing between \$879 million and \$999 million. These
improvements would yield \$211 million per year in energy savings, for
an average simple payback of four and a half years. (Abt Associates,
1988) An earlier study estimated that the investment needed would be
\$2.2 billion, with an annual savings of \$328 million in 1980 dollars.
This would result in a simple payback of 6.7 years. (Perkins & Will,
1980)

It is clearly in the best interests of all to use energy efficiency to
reduce the estimated \$1.5 billion (HUD Office of Inspector General,
1995) in federal funds that each year go to pay utility bills in public
housing projects. It would allow the shifting of resources already being
spent on utility bills into capital improvements, with many long-term
benefits. Taking advantage of the conservation opportunities available
in public housing could reduce operating costs for building owners and
reduce HUD expenditures, while increasing property values and tenant
comfort.

## Chapter 2 

## History of Conservation funding 

While the government provides significant funding for capital
improvements and conservation projects, there is still room for more
cost-effective investment. Generally, private dollars have not been
available to fund conservation projects, and many public conservation
programs have not been available to or been widely used by housing
authorities. This chapter briefly describes several of the funding
mechanisms that have been available to housing authorities.

### 1. HUD Funding for Conservation Improvements {#hud-funding-for-conservation-improvements .unnumbered}

Most public conservation financing for housing authorities has been
provided by HUD. These monies are known as **modernization funds**. They
are granted through either the **Comprehensive Improvement Assistance
Program (CIAP)**, for housing authorities with fewer than 250 units, or
the **Comprehensive Grant Program (CGP)**, for housing authorities with
250 or more units. Eligible projects include structural repairs and
improvements to buildings, conservation retrofits, and others. These
funding mechanisms are also being overhauled by the new Housing
legislation of 1998.

Although HUD spends significant amounts on conservation, e.g. between
1982 and 1991, housing authorities spent \$1.46 billion in CIAP funds on
energy conservation, there is on tracking of pre- and post-consumption.
It is unknown how much energy was saved by these measures, nor those
funded through the CGP.

HUD does require housing authorities to perform energy audits in all
buildings every five years. These audits are known as "**compliance
audits**." During the 1980s, HUD required that all conservation measures
with a payback of less than 15 years were to be installed in housing
authority buildings where modernization funds were requested, *when
funding became available***.** Currently, the rule requires only that
audits be performed and that cost-effective measures be installed --
once again, "within the funds available to the PHA." (24 CFR 965.304,
May 1, 1996)

### 2. Other Public Funding for Conservation in Housing Authorities

Some housing authorities have benefited from public funds made available
by the **Low-Income Weatherization Assistance Program (WAP)**. WAP was
created by the Energy Conservation and Production Act of 1976 and is run
by the Department of Energy (DOE). This program, administered by the
states, provides energy conservation services, also known as
**weatherization**, to low-income people. Between 1978 and 1989, almost
4 million of the approximately 17 million qualifying low-income
households in the United States were weatherized with federal funds.

There is a potential for bringing WAP funding into housing authority
conservation projects, but it has not been done on a widespread basis.
While WAP plays an important role in providing energy efficiency
retrofits to low-income households, the bulk of weatherization under
this program has been done in single family homes. Less than 10% of the
4 million households weatherized under WAP in 1989 were in apartment
buildings with five or more units. About half of those were located in
New York City (MacDonald, 1993). Few of those units were in housing
authorities. Some states assign the use of WAP funds for work at housing
authority properties a low priority. Their rationale is that PHA tenants
already have federal help with housing and utility costs, so they prefer
to direct their funds toward those whose rent and utilities are not
subsidized. So DOE-sponsored weatherization has not been a large source
of public funds for conservation in housing authority properties.

### 3. Private Financing for Conservation Improvements

#### Bank Financing

Housing authorities are permitted to borrow only with HUD approval. The
passage of the Housing and Community Development Act of 1987 provides
for specific circumstances where housing authorities may borrow funds
from non-HUD sources to finance conservation projects. Since housing
authorities are prohibited from encumbering their properties by using
them as collateral by the Annual Contributions Contract they sign with
HUD (HUD Form 53012A, 1995) the provisions of the HCDA of 1987 allowed
the vast majority of housing authorities to borrow funds from
non-federal sources for the first time.

#### Bonds {#bonds .unnumbered}

Housing authorities can issue bonds through an affiliate partner. A
number of factors combine to discourage the use of bonds for funding
conservation projects. **General purpose bonds**, which are backed
financially by the entity issuing the bond, are seldom used because of
the uncertainty of achieving the predicted energy savings over the life
of the bond. **Tax exempt revenue bonds** offer attractive interest
rates, but a good credit rating is necessary to obtain them. The high
cost of issuing any type of bond usually dictates that they be issued
for large amounts of money -- larger than the amounts typically needed
for conservation projects. For this and other reasons, bonds have rarely
been used for funding projects.

#### Utility Demand-Side Management Programs {#utility-demand-side-management-programs .unnumbered}

Some utilities operate **demand-side management (DSM**) programs. These
programs aim to reduce demands on the utility's generation,
transportation and distribution systems by improving the efficiency with
which their customers use energy. Relatively few DSM programs have been
geared toward use by housing authorities, although some utilities have
been willing to provide a free energy audit and/or zero interest loans
to pay for the installation of conservation measures.

Some housing authorities have used DSM funds to finance limited
conservation projects, but the funds available have generally been too
limited to pay for major conservation improvements. With the
restructuring of the utility industries, DSM is in decline. It is
unlikely that DSM programs will ever be a major source of funding for
conservation measures in public housing, although housing authorities
should investigate whether their local utility has any funding or
services available to them as they investigate potential funding
sources.

### 4. An Alternate Way to Fund Conservation

Despite the overwhelming evidence that improving the efficiency of
public housing through conservation can help everyone involved, the
issue of how to fund such measures to their full potential has been
difficult to resolve. Because housing authorities are not traditionally
financed, implementing conservation through traditional funding
mechanisms, such as going to private capital markets, has not been
possible due to regulatory and statutory restrictions. HUD has always
had incentives for conservation, but often more pressing needs would vie
for the limited pot of funds available for capital improvements and
maintenance. In 1987, Congress passed the **Housing and Community
Development Act of 1987 (HCDA of 1987)** in order to allow housing
authorities to take advantage of the opportunities for utility savings.
The Act provided additional financial incentives for housing authorities
to decrease their utility costs and allowed them to borrow from non-HUD
sources to finance resource conservation retrofits. The next unit
introduces the incentives legislated by the HCDA of 1987.

# Overview of hud INCENTIVES

#  {#section .unnumbered}

# The Housing and Community Development Act of 1987 {#the-housing-and-community-development-act-of-1987 .unnumbered}

The financial incentives of the **Housing and Community Development Act
of 1987** **(HCDA of 1987**), as promulgated in 24 CFR 990 and 905 (See
Appendix C for a copy of the rule.) offer housing authorities a way to
finance needed improvements to their buildings, thereby increasing
property values and improving the condition of the public housing stock,
through the stream of savings generated by the installation of
energy-efficiency retrofits. Some of these financing mechanisms can
allow work to be done without increasing the liability on a housing
authority's financial statements. (Hansen, 1993). They allow federal
modernization funds to be directed to other needed repairs. In addition,
some of the incentives allow any extra savings to be kept by the housing
authority, provided they go toward other eligible expenses.

One goal of the HCDA of 1987 is to reduce HUD's payments to public
housing authorities for fuel bills. The Act includes incentives for
housing authorities to reduce both the amount of energy used in their
buildings and the rate that is paid for that energy. In order to promote
increased energy efficiency in public housing, the Act allows two new
methods for funding energy conservation measures: the **frozen base**
incentive and the **additional subsidy** incentive. These methods do not
override the standard PFS treatment of savings from conservation
measures, but rather offer additional options that supplement the
standard PFS method of funding for conservation projects and allocating
savings. Projects not taking advantage of these incentives are still
subject to the standard PFS rules. To spur housing authorities to look
for better prices for their energy than might be available from their
local utility, the HCDA also provides that savings from rate reductions
will be split between a housing authority and HUD, under certain
circumstances.

The higher-than-average energy use in public housing makes
savings-dependent financing mechanisms especially attractive. A wide
variety of conservation measures will pay for themselves through
conservation savings within a decade or less. The new incentives make it
possible for housing authorities to undertake the large-scale
conservation projects necessary to tap the significant conservation
savings that are available. Housing authorities, the federal budget and
the residents of public housing can all benefit in the process.

The new funding methods rely on utility bill savings to fund
improvements. As background, Chapter 3 will explain how utility bills
are paid in housing authorities. Each of the new methods contains
specific criteria that conservation projects must meet, and each option
has its own risks, benefits and implications for the housing authority's
finances. The remaining chapters in this unit (Chapters 4, 5, and 6)
will introduce the standard PFS method of financing conservation in
housing authority properties and the new funding options available under
the HCDA of 1987.

##  {#section-1 .unnumbered}

## Chapter 3 

## Utility reimbursements {#utility-reimbursements .unnumbered}

**Note: The Quality Housing and Work Responsibility Act of 1998 is
overhauling this system. When the new regulations go into effect, some
of the information in this chapter will be obsolete. The following
discussion has been kept now because the incentives of the HCDA of 1987
are so intricately tied to the past system of reimbursing housing
authorities for their utilities. Understanding that system will help you
understand the incentives. How the incentives will work with the system
currently under development will not be known until the negotiated
rulemaking process is complete.**

Utility costs can be either **project-based** or **tenant-paid**. With
project-based utilities, housing authorities are responsible for
maintaining the utility account in their name and for paying the bills.
With tenant-paid utilities, the tenant is responsible for maintaining
the account in their name and for paying the utility bills. In the case
of tenant-paid utilities, or when utilities are furnished by the
authority, but consumption is monitored by the use of check meters, the
tenant is allocated a certain amount of money to cover the bill. This
amount is called the **utility allowance** and is deducted from the
amount the tenant owes the housing authority. In each case, HUD will
reimburse the housing authority for the utility expenditures through the
**Performance Funding System (PFS)**, subject to certain eligibility
requirements that are discussed in this chapter. Utilities include gas,
heating oil, electricity, water and sewer. Garbage collection isn't
considered a utility under the PFS. (HUD Office of Inspector General,
1995).

**Note**: the Quality Housing and Work Responsibility Act of 1998
contains language that will allow garbage collection to be considered
for the incentives. Details are unavailable at the time of publication.

Additional information on the PFS can be found in 24 CFR Part 990 for
public housing authorities, in 24CFR 950 for Indian housing authorities,
and in HUD Handbook 7475.13 REV. Utility allowances are covered by 24
CFR 965.

It should be noted that the Performance Funding System is not the same
thing as performance contracting, which occurs under the terms set forth
in an **energy services agreement**. Funds for performance contracting
are, however, delivered to housing authorities using formulae that are
part of the PFS. Performance contracting is discussed in detail later in
this unit and throughout the manual.

### 1. The Performance Funding System {#the-performance-funding-system .unnumbered}

The Brooke Amendments to the United States Housing Act of 1937, passed
in 1968 and 1969, stipulated that low-income residents of public housing
pay no more than 25% of their monthly adjusted income for rent.
Reasonable utilities are considered a part of rent. The Housing Act of
1981 raised the maximum percentage to 30%. (PHADA, 1995) This amount is
known as **total tenant payment** and must include costs for both
shelter and utilities (24 CFR 5.613). (There are also two other options,
in addition to the 30% of adjusted income, but this is most often the
criterion that is used. See 42 US Code 1437A(a)(1) for further
discussion.)

**Ceiling rents** also impact the amount of money HAs can charge
tenants. These ceilings, which reflect reasonable market value, are a
limit on the amount of total tenant payment required for an apartment.
(Public Law 104-99, 110 Stat. 40, Sec. 402. (b)) They are used in order
to decrease the rent burden of working families in public housing, in
the case that the total tenant payment owed by the family exceeds the
market value of the housing. For instance, if a family's total tenant
payment was calculated at \$400, but the ceiling rent was \$350, the
family would only be responsible for paying \$350. Ceiling rents may not
be set lower than the monthly costs to operate the housing of the agency
and to make a deposit to a replacement reserve. A housing authority must
receive approval from HUD in order implement ceiling rents.

In 1969, Congress authorized HUD to make payments to housing authorities
to help cover decreases in income resulting from the Brooke Amendment
and shifts that were occurring in housing authority resident populations
to lower-income tenants. In 1975, HUD initiated the Performance Funding
System (PFS), which includes the mechanism by which a housing
authority's annual operating subsidy eligibility is determined. (24 CFR
990.101(b), May 1, 1995) Housing authorities are eligible for
reimbursement through the PFS for utilities, building maintenance and
other expenses when such expenses exceed income. Two mechanisms are used
to calculate the housing authority\'s eligibility: the **Allowable
Expense Level (AEL)** and the **Allowable Utility Expense Level
(AUEL)**. Both of these are discussed in greater detail below. The PFS
deals with utility expenses through a different mechanism than it uses
for other operating expenses due to the greater volatility of utility
prices, the absence of consumption standards and the diversity of
utility deliver systems (HUD Office of Inspector General, 1995).

The amount of operating subsidy for which a housing authority is
eligible depends on a number of factors. The basic formula for
reimbursement is **Allowable Expense Level (AEL)** plus **Allowable
Utility Expense Level (AUEL)** minus **Projected Operating Income
Level**. Projected operating income consists mostly of **Dwelling Rental
Income,** which is computed by multiplying the average charge to tenants
for rent times the **allowable occupancy percentage**. (A detailed
discussion of projected operating income level and dwelling rental
income can be found in 24CFR 990.109.) When authorized expenses outpace
income, the housing authority is eligible for operating subsidy. If
appropriations during a given federal fiscal year don\'t cover all
eligible PFS costs, subsidies are pro-rated with each housing authority
receiving the same percentage of total needs.

#### The Allowable Expense Level 

The Allowable Expense Level is a per unit per month amount that
approximates the cost of operating a well-managed housing authority of
similar characteristics, excluding utility costs. (24 CFR 990.101(a),
May 1, 1996) The AEL is determined by a number of steps that are
outlined below.

The initial level of the AEL, for the first year that a project becomes
eligible for operating subsidy under the PFS, is computed from a formula
which considers a number of weighted factors. These factors include the
number, age, size and type of units in the housing authority's
portfolio; local government wages; and a local inflation factor. This is
known as the **Formula Expense Level**. The operating expenses of the
housing authority in the previous year, the **base year expense level**,
is compared to this formula-derived amount. If the base year expenses
fall within a proscribed range around the Formula Expense Level, the AEL
is set equal to the amount arrived at by the formula, plus any allowed
increases for inflation or other factors. If the base year expenses are
less than the established range, the bottom of the range is used as the
base for determining the AEL. If it is above the top amount in the
range, the top of the range is used as the base.

Each year after the establishment of the Formula Expense Level, the AEL
is computed per 24 CFR 990.105 (d)(4-7), which allows for adjustments
due to inflation, changes in the number of units at a project and costs
attributable to changes in Federal law or regulations. The actual
operating costs of the housing authority are considered only in as much
as they may affect where the initial base for the AEL was set. Current
operating costs do not affect the AEL. More details on computing the AEL
can be seen in 24 CFR 990.105.

#### The Allowable Utilities Expense Level {#the-allowable-utilities-expense-level .unnumbered}

The **Allowable Utilities Expense Level (AUEL)** is the amount of
utility costs that housing authorities are eligible to be reimbursed for
through the PFS. It is used in cases where the housing authority pays
the utility bills and is not reimbursed by charging tenants for utility
usage monitored by check meters. Several of the incentives from the HCDA
of 1987 are based on altering the methods of determining the AUEL. The
standard method is discussed below.

The AUEL is estimated when preparing a budget for the housing
authority's new fiscal year, the **Requested Budget Year (RBY)**, using
**HUD form 52722-A**. (See Appendix D.) This amount is not necessarily
the amount that the housing authority will budget for utilities, but
rather the amount for which they are eligible to be reimbursed. (E.g.
the housing authority may anticipate a rate increase or decrease, and
budget accordingly, even though the AUEL is projecting a different
number.) The AUEL is based on an average of utility consumption over
three years (the **Allowable Utility Consumption Level -- AUCL**) times
the utility rates in effect when the budget is requested. At the end of
the fiscal year, the AUEL is adjusted to reflect actual utility prices
and differences between actual consumption and the AUCL. This adjustment
is done using **HUD form 52722-B**. (See Appendix D.) This process is
illustrated in Figure 1 above. HUD and the housing authority share
savings or expenses resulting from the year-end adjustment. How these
savings are shared depends on the incentive being used. In most cases,
adjustments to take into account variations in weather are not allowed,
although some of the incentives of the HCDA of 1987 do permit such an
adjustment to take place.

Figure 1. AUEL and Rolling Base Example

Fiscal year (FY) = October 1 -- September 30

+--------+---+--------+---+--------+--------+--------+----------+----------+
|        |   | R      |   |        |        | P      | '99-'00  | Adjust   |
|        |   | olling |   |        |        | repare | RBY      | for      |
|        |   | Base   |   |        |        | Budget |          |          |
|        |   | Period |   |        |        | R      |          | '99 -    |
|        |   | for    |   |        |        | equest |          | '00      |
|        |   | '      |   |        |        | for    |          |          |
|        |   | 99-'00 |   |        |        |        |          | Budget   |
|        |   | RBY    |   |        |        | '99    |          | Year     |
|        |   |        |   |        |        | -'00   |          | using    |
|        |   |        |   |        |        | RBY    |          | Rate 3   |
|        |   |        |   |        |        | using  |          | and f    |
|        |   |        |   |        |        | Rate 2 |          | therms   |
|        |   |        |   |        |        |        |          | gas      |
+--------+---+--------+---+--------+--------+--------+----------+----------+
| R      |   |        |   |        | P      | '98    | Adjust   |          |
| olling |   |        |   |        | repare | -'99   | for      |          |
| Base   |   |        |   |        | Budget | RBY    |          |          |
| Period |   |        |   |        | R      |        | '98 -'99 |          |
| for    |   |        |   |        | equest |        |          |          |
| '      |   |        |   |        | for    |        | Budget   |          |
| 98-'99 |   |        |   |        |        |        | Year     |          |
| RBY    |   |        |   |        | '98    |        | using    |          |
|        |   |        |   |        | -'99   |        | Rate 2   |          |
|        |   |        |   |        | RBY    |        | and e    |          |
|        |   |        |   |        | using  |        | therms   |          |
|        |   |        |   |        | Rate 1 |        | gas      |          |
+--------+---+--------+---+--------+--------+--------+----------+----------+
|        |   |        |   |        |        |        |          |          |
+--------+---+--------+---+--------+--------+--------+----------+----------+
|        |   |        |   |        | cost   | cost   | cost of  |          |
|        |   |        |   |        | of gas | of gas | gas =    |          |
|        |   |        |   |        | =      | =      |          |          |
|        |   |        |   |        |        |        | Rate 3   |          |
|        |   |        |   |        | Rate 1 | Rate 2 |          |          |
+--------+---+--------+---+--------+--------+--------+----------+----------+
| a      | b |        | c |        | d      | e      | f therms |          |
| therms | t |        | t |        | therms | therms | gas      |          |
| gas    | h |        | h |        | gas    | gas    | consumed |          |
| co     | e |        | e |        | co     | co     |          |          |
| nsumed | r |        | r |        | nsumed | nsumed |          |          |
|        | m |        | m |        |        |        |          |          |
|        | s |        | s |        |        |        |          |          |
|        | g |        | g |        |        |        |          |          |
|        | a |        | a |        |        |        |          |          |
|        | s |        | s |        |        |        |          |          |
|        | c |        | c |        |        |        |          |          |
|        | o |        | o |        |        |        |          |          |
|        | n |        | n |        |        |        |          |          |
|        | s |        | s |        |        |        |          |          |
|        | u |        | u |        |        |        |          |          |
|        | m |        | m |        |        |        |          |          |
|        | e |        | e |        |        |        |          |          |
|        | d |        | d |        |        |        |          |          |
+--------+---+--------+---+--------+--------+--------+----------+----------+

![](media/image2.wmf){width="2.125in" height="0.3888888888888889in"}Oct.
1, '94 Oct. 1, '95 Oct. 1, '96 Oct. 1, '97 Oct. 1, '98 Oct. 1, '99 Oct.
1, '00

'98-'99 AUEL = '98-'99 AUCL Rate 1 '99-'00 AUEL = '99-'00 AUCL Rate 2

'98-'99 Adjusted AUEL = e therms Rate 2 \[actual '98-'99 consumption
actual '98-'99 rate\]

'99-'00 Adjusted AUEL = f therms Rate 3 \[actual '99-'00 consumption
actual '99-'00 rate\]

#### The Rolling Base {#the-rolling-base .unnumbered}

The rolling base period is the three year interval used to figure
baseline utility use when computing the Allowable Utility Consumption
Level (AUCL) for a public housing facility. This process is outlined in
Figure 1. When preparing the budget for an upcoming fiscal year, the
housing authority must average the energy used over the last three
complete fiscal years. For instance, the rolling base period for a
fiscal year beginning October 1998 would include consumption from fiscal
years 1994, 1995, and 1996. This period would run from October 1, 1994,
through September 30, 1997. Since budgets are prepared mid-year, there
is a one year lag between the end of the rolling base period and the
beginning of the fiscal year for which the budget is being prepared.
This lag allows the collection of three full fiscal years of consumption
data. The "rolling" in rolling base reflects the fact that the
three-year period over which utility use is averaged is moved forward
each year ("rolled" forward).

### 2. The Utility Allowance System {#the-utility-allowance-system .unnumbered}

The utility allowance system is the mechanism by which federal
assistance is provided to low-income, public-housing tenants who have
individual accounts with utility companies and pay their own bills.
Allowances are also used when the housing authority pays the utility
company but check meters monitor individual tenants' consumption and
they are billed for their use. (24 CFR 965.502). About 60% of the
residents of public housing are subject to an allowance for at least one
utility. Utility allowances average between \$50 and \$70 per month, and
typically make up 30% to 50% of average total tenant payment. HUD paid
an estimated \$400 million to reimburse housing authorities for rent
reductions resulting from tenant-paid utilities during 1994. These
statistics strictly deal with what was set as the utility allowance and
do not include consumption over and above that amount. (HUD Office of
Inspector General, 1995)

Utility allowances are set based on the \"reasonable consumption of
energy by an energy-conserving household of modest circumstances.\" (24
CFR 965.505(a), May 1, 1996) They are designed to cover all of what a
tenant would owe, if they were "reasonable" in their use In this way,
the total tenant payment is not increased above the 30% of adjusted
income mark. The allowance makes the tenant whole, so that there is a
complete subsidization of the utility payment for the tenant with
reasonable use. If, though, tenants are excessive in their consumption,
they must use their own money to pay the difference to the utility
company, in the case of **individual metering**, or to pay the housing
authority an **excess use charge**, in the case that their use is being
measured by check meters. (24 CFR 965.506, May 1, 1996) Surcharge
schedules may also be established for housing authority-furnished
utilities to estimate consumption for resident-owned major appliances,
such as air conditioning. (24 CFR 965.501(b) Total tenant payment does
not include charges for excess use, so the total amount of rent burden
owed by a non-conserving tenant may exceed 30% of adjusted income. (24
CFR 5.613(b), January 1, 1997) . HUD recently published a "Utiltity
Allowance Guidebook" to help housing authorities determine the level of
utility allowances. (Hebret and Nolden, 1998)

A number of factors are to be evaluated when setting the utility
allowance. These are outlined in 24 CFR 965.505 and include: the type of
utility and equipment covered by the allowance, as well as the function
for which it is used, e.g. whether the allowance is for natural gas to
cover cooking, hot water, heating, or a combination of the three; the
climatic location of the apartments; the size of the units and the
number of occupants; the energy efficiency of the appliances and
equipment; the physical condition and amount of insulation in the
building; the temperature levels to be maintained in the apartment and
the domestic hot water; and the type of structure. A consultant is
usually hired to analyze energy use in each building and to determine
what baseline energy use should be for each type and size of residence
unit. The above data are combined with historical use data to determine
the utility allowance.

#### Challenges to Setting Utility Allowances

Setting utility allowances is not without its problems. The formula used
can produce assessments that are too high or too low. One source of
inaccuracy occurs when the sample used to establish average utility
usage does not accurately characterize the building in question. Energy
use can vary widely, even for buildings of the same general style and
age. Accurate results require monitoring and analysis for each building,
with a representative sample of the various types of apartments.

The location of a specific apartment within a building can also make a
big difference in its energy consumption. Much of the heat from
first-floor apartments, for instance, passes through the ceiling to heat
the unit above. An apartment located at the outside corner of a building
will typically have a larger heat loss in winter and heat gain in summer
than will a unit with only one outdoor wall. Utility allowances seldom
take such variations into account, however. As a result, some tenants
will benefit from a utility allowance that is larger than necessary,
while others will consistently use more energy than the utility
allowance would indicate.

Housing authorities should also be aware of the impacts of re-setting
utility allowances as part of a conservation project. The level of
allowances are set using engineering estimates, and there is no direct
feedback to the housing authority on actual usage, as the tenant has the
bill in their name (unless check metering is used). It is possible that
the measures are not performing as they should, but all the while the
project appears to be meeting savings goals. Tenants may be shouldering
the burden of poorly performing measures by paying bills or excess use
charges for consumption greater than their newly set allowance. It is
important, therefore, for housing authorities to track whether the
allowances appear to be reasonable, and whether, after a "breaking in"
period, large numbers of tenants are not able to pay for their utility
usage out of the amount established in the new allowance.

*[Interactions between Utility Allowances and the Operating
Subsidy]{.underline}*

Note that utility allowances are not part of the Allowable Utility
Expense Level. They are part of the housing authority's operating
subsidy, which is determined by the formula operating subsidy = (AEL +
AUEL) - Income. The level of the utility allowance affect the income of
the housing authority by altering dwelling rental income. Total tenant
payment includes the cost of utilities. **Tenant rent** is what the
tenant is charged after he or she is credited for the amount of the
utility allowance. This decrease in rent charged decreases dwelling
rental income and increases the amount of operating subsidy for which
the housing authority is eligible (24 CFR 5.603) The following example
shows how these factors interact. If a tenant's income for the month is
\$400, he or she is responsible for paying \$120 toward rent and
utilities. Assuming a utility allowance of \$50, the accounting would
look like this:

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Credit for Utility Allowance: \$50

Tenant Rent: \$70 (tenant pays housing authority)

Tenant pays utility company: \$50 (estimated bill)

So although total tenant payment is \$120, the housing authority only
collects \$70. It is assumed that the remaining \$50 of the 30% of
adjusted income, which they are to contribute, is needed to pay the
utility bill.

If the amount of the utility allowance changes, the amount of dwelling
rental income received by the housing authority will also change. For
instance, in the example above, if the utility allowance increased to
\$75, tenant rent would decrease to \$45 (\$120 - \$75). If (AEL + AUEL)
remains constant, an increase in income will result in a decrease in
operating subsidy. In this example, income decreased by \$25, so
operating subsidy would increase by a like amount. An increase in income
will result in a decrease in operating subsidy. So changes in utility
allowances do not affect the amount of money the housing authority is
eligible to collect, just from whom they are collecting it (HUD vs.
tenant).

In some cases, the utility allowance is higher than total tenant
payment. In this case, the housing authority pays the tenant a **utility
reimbursement**. (24 CFR 5.603) Using the tenant in the example above,
the results would look like this for a case where the utility allowance
was \$150:

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Credit for Utility Allowance: \$150

Tenant Rent: \$-30 (Housing authority pays tenant)

Tenant pays utility company: \$150 (estimated bill)

As this example demonstrates, altering the rent or utility allowances
will affect whether money is flowing from the tenant to the housing
authority or vice versa.

There are several reasons why a utility allowance may shift up or down.
Changes in utility rates will affect the amount of money a tenant owes
to a utility, even if consumption remains constant. When the rate paid
for any one utility, including fuel cost adjustments, changes 10% or
more, the utility allowance must be revised. (24 CFR 965.507 (b)).
Tenants' utility bills can also decrease when conservation measures are
installed.

Because changes in utility allowances are decoupled from the housing
authority's financial picture by the altering of operating subsidy
whenever utility allowances shift, they do not have a monetary incentive
to conserve. Note that this decoupling is tempered somewhat in that
operating subsidy is guaranteed by HUD, subject to pro-rating in years
where there is not a full appropriation, while tenant payments are
subject to difficulties in collection. This would seem to further
decrease a housing authority's incentive to conserve, in that collecting
from HUD is far more reliable than collecting from tenants.

## Chapter 4  {#chapter-4 .unnumbered}

## the STANDARD PFS Incentive

HUD had mechanisms in place, prior to the enactment of the Housing and
Community Development (HCD) Act of 1987, for allocating costs when
utility consumption varied from the projection made in the rolling base.
These regulations are outlined in 24 CFR 990.110(c )(2)(I). At the end
of the year, every HA which receives subsidy (except for those only
receiving subsidy to cover annual audit costs) must submit a year end
reconciliation using the 52722-B form. In this reconciliation, the
projected consumption is re-valued at current rates and compared to the
value of actual consumption times current rates. The HA is only
compensated 50% of excess consumption and is allowed to keep 50% of any
consumption savings. These methods are still in use today for any time
actual consumption varies from the rolling base projection, unless the
change in consumption is due to a conservation project using the frozen
base incentive for funding. The standard PFS method is what is used if
the housing authority uses modernization funds to implement conservation
projects.

It is important to understand how this standard incentive works, in
order to compare the differences the housing authority will see from
using private financing and one of the incentives from the HCDA of 1987,
and what they realize when using modernization funds to do a
conservation project. That being said, the choice of whether to pursue
non-HUD funding for such a project should be based on a number of
factors, including whether sufficient modernization funds exist to
implement the desired project. The financial incentives are only part of
the decision-making picture.

### 1. Funding Conservation Projects with the Standard PFS Method

Figure 2 illustrates how savings would be split in a project using the
standard PFS incentive. In this example, a housing authority implements
efficiency measures in January 1998 using modernization funds. The
efficiency measures result in a 25% savings. The rolling base in place
at the beginning of the performance contract is calculated from the
consumption in 1994, 1995 and 1996. For simplicity, this example assumes
that the rate paid for the utilities stays constant. This makes the cost
of utilities directly proportional to changes in consumption, so the
illustration shows changes in dollars. At this assumed rate, the rolling
base for 1998 is \$1 million.

After the efficiency measures are installed, the cost of utilities
decreases 25% to \$750,000, a savings of \$250,000 which is split evenly
between the housing authority and HUD. As the base rolls forward each
year, it begins to reflect this decreased consumption. In 1999, the
first year after the measures are installed, the rolling base is
comprised of data from 1995, 1996 and 1997. It is still using
consumption information from the time before measures were installed.
Savings are still \$250,000. In the year 2000, the base period has
rolled forward another year, so that the data used is from 1996, 1997
and 1998. This is the first time the rolling base reflects consumption
from a year after the measures are installed. The rolling base amount
has decreased to \$916,667. The difference between the rolling base
estimate and actual consumption has decreased from \$250,000 to
\$166,667. HUD and the housing authority each keep \$83,333.50. In the
third year, the rolling base period is 1997, 1998 and 1999. Two out of
the three years used to establish the rolling base are from years after
the

![](media/image4.jpeg){width="5.445833333333334in"
height="8.04513888888889in"}

measures were installed. The new rolling base is now set at \$833,333.
The difference between actual use and that estimated by the rolling base
is \$83,333. HUD and the housing authority each keep \$41,666.50. By the
fourth year, all the data used to calculate the rolling base is from
after the measures were installed. There is no difference between the
rolling base and actual consumption.

The total savings over the four years since the retrofits were completed
is \$750,000. Since HUD splits this with the housing authority, each
gets \$375,000. The project is still producing savings, in that utility
costs remain lower than before the retrofits were installed, but the
mechanism for projecting energy use has adjusted to this new lower rate.
At this point, the housing authority sees no more savings from the
project.

In the example above, the rate was held constant. When rates change,
they affect the cost savings that are generated from a given amount of
consumption savings. In the standard PFS incentive, HUD adjusts the
dollar cost savings for changes in rates from that used at the time the
budget was requested. The rate that was actually charged per unit of
energy or water is used in determining what dollar amount the housing
authority may keep.

### 2. The Standard PFS Method and Utility Allowances

There are no incentive mechanisms to allow the housing authority to
capture conservation savings from conservation projects that address
items involving utility allowances. The interaction between utility
allowances and operating subsidy, when using the standard PFS method, is
discussed in Chapter 3, "Determining Eligibility for Utility
Reimbursements."

### 3. Standard PFS Pros and Cons 

Many factors should be considered when deciding how to fund a retrofit
project at a housing authority. In many cases modernization funds are
available and are the best alternative. Here are some factors to
consider when deciding whether to pursue another incentive, or stick
with the standard PFS incentive.

#### Advantages to Using Modernization Funds for Conservation Projects

-   **Easy, standard procedure.** The process for funding a project with
    modernization funds is well known and easy to follow. There is no
    need to learn a new process. The conservation project can be planned
    and implemented as part of the housing authority's regular
    modernization work.

-   **No requirement that project be cost-effective.** Modernization
    funds are designed to provide housing authorities with a means of
    funding capital improvements in their facilities. There is no
    requirement that these projects be cost effective. For example, a
    boiler system may be at the end of its useful life. The reason for
    the project is replacement, not conservation, although some savings
    may accrue from it, and the housing authority may want to consider
    buying a model that is more efficient that the lowest cost option.
    Even if it appears that the project savings will cover project
    costs, the use of modernization funds allows the housing authority
    to avoid the **monitoring and verification (M&V)** requirements that
    are involved in an additional subsidy or frozen base project.

-   **No risk to the housing authority for performance of measures.**
    With the standard PFS method, there is no risk to the housing
    authority if the measures do not perform. There is no loan whose
    repayment is dependent on savings. If the measures do not perform as
    expected, the savings retained by the housing authority will be
    smaller than predicted, but they are not liable for covering loan
    payments that they may be unable to meet.

-   **Standard timetable for completion of projects.** The other methods
    may require longer lead times and more staff time than a standard
    modernization project. If conservation measure is needed
    immediately, or the housing authority does not have time to shepherd
    a project through the other processes, sticking with the standard
    PFS treatment may be the best option.

#### Disadvantages to Using Modernization Funds for Conservation Projects {#disadvantages-to-using-modernization-funds-for-conservation-projects .unnumbered}

-   **Conservation projects compete with other capital improvement
    needs.** A housing authority have more work that needs to be done
    than it has modernization funds to pay for. If a conservation
    project is done with these funds, they are not available for other
    work. The frozen base incentive and the additional subsidy are ways
    to do conservation work with sources of money that are unavailable
    for any other type of capital improvement. If these options are not
    used, the opportunity is lost to ever tap into these pots of money.
    A potential resource is lost.

-   **Retained savings are lower than incentives from the HCDA of
    1987.** With this option, the housing authority is only able to
    retain 50% of cost savings from decreases in consumption in any
    year. Because of the way the rolling base functions, even that 50%
    is eroded away until, at the end of 4 years, the housing authority
    sees no more savings. Conservation measures that produce
    significant, verifiable savings, are not rewarded proportionately.
    It must be noted, though, that while the retained savings are lower,
    the housing authority also is not responsible for paying for the
    energy retrofits out of those savings.

#### Summary

The standard PFS method is a well-known, low-risk option if
modernization funds are available. It is the only method that can be
used if there are not sufficient, verifiable savings from a retrofit to
cover the cost of the project. It is not as advantageous in some ways as
the other methods that will be discussed in the following chapters, but
in many circumstances the standard PFS method may still be the best
option for a given housing authority.

## Chapter 5 

## the frozen base incentive 

The frozen base incentive is one of the options legislated by the
Housing and Community Development Act of 1987 (HCDA of 1987) for
financing conservation projects. This was precipitated by a successful
HUD pilot program in several public housing complexes in the
mid-eighties, which used performance contracting to leverage non-HUD
funding for conservation projects. (See Appendix M for a case study of
one of these projects.) Performance contracting is a separate concept
from the frozen base incentive. It is a method of procuring energy
management services and a obtaining a guarantee of savings. It can be
used with both the frozen base incentive, and the additional subsidy
incentive. It is generally accepted that a housing authority *must* use
performance contracting when using the frozen base method. Under this
incentive, housing authorities are allowed to keep all of the utility
savings resulting from a conservation retrofit over a contract period of
up to 12 years, provided at least half of the savings are used to retire
the associated debt. Rules for the legislation are in 24 CFR 990 and
905.

### 1. Guidelines for Using the Frozen Base Incentive {#guidelines-for-using-the-frozen-base-incentive .unnumbered}

HUD regulations spell out specific criteria that a project using the
frozen base incentive must meet. These are outlined below.

**Financing/Funding Sources.** The project *must use non-HUD funding*.
This can be obtained through an ESCO, utility or private bank. (See the
"Funding the Project" section below for a discussion of these options.)
If HUD funds are mixed into the project, the savings generated by the
measures paid for with HUD dollars must be separated out from the
savings claimed in the performance contract. This is done using
engineering estimates and must be approved by the local HUD field
office.

**Allocation of Savings.** *At least 50% of the savings must be used to
pay the project's debt service.* Frequently, these projects are written
so that more than 50% of the savings are used for financing the project,
even up to 90% or more. Dedicating a higher proportion of the savings to
payments allows an increase in the size and scope of the project, which
is often a primary goal of housing authorities using the frozen base
incentive. Any remaining savings may be used to train housing authority
employees, counsel tenants, manage the program or other eligible costs.
Savings may also be used to pre-pay the contract.

**Savings Guarantee.** When utilizing the frozen base incentive, the
payment of the debt service *must be dependent on the savings being
realized.* This has been interpreted by HUD to mean that the housing
authority must obtain a guarantee that the estimated savings in
consumption will materialize. The guarantee must at least equal the
amount of the debt service. These guarantees may be in the form of an
escrow account, line of credit, insurance policy, or bonding. (See
Chapter 12, "Contract Negotiations," for a discussion of these
alternatives.)

**Length of Contract.** The financing for a project using the frozen
base method *may not exceed 12 years in length*. Most contracts are
between 6 and 10 years long. Contracts generally don't extend to the
maximum of the allowable time in order to build in a safety factor in
case the contract needs to be extended for any reason. Contracts may not
be extended, according to the regulations, for misjudgments on
performance of savings, but there may be circumstances where usage
changes for reasons that are not within the control of the ESCO or the
housing authority.

In addition to the requirements that must be met to satisfy HUD
regulations, there are other factors a housing authority may wish to
consider when deciding if using the frozen base is the best method for
their project. These include:

**Types of Projects.** The frozen base incentive may be used for any
project that will reduce utility consumption such that project savings
will cover project costs, although some projects are better suited to
them than others. (See Chapter 10 for a discussion of how to choose a
project for performance contracting.) Trash removal costs are not
treated as a utility in the PFS, but are instead reimbursed through the
allowable expense level and are not eligible. (**Note:** language in the
Quality Housing and Work Responsibility Act of 1998 has now added in
trash expenses as eligible for performance contracting. Details are not
yet available on how this will be handled.) Typical measures include:
the addition of insulation to a building\'s shell; the installation of
new heating, cooling or domestic hot water plants; the replacement of
appliances, such as refrigerators, with more energy efficient models;
the installation of more efficient lighting; or the purchase of
water-conserving toilets.

**Size of Project.** HUD does not limit the size of eligible projects.
But in order to attract an energy services company, projects must be
relatively large, i.e. \$200,000 or up. On the other hand, projects that
are too large may prove difficult to manage, especially the first time a
housing authority attempts performance contracting. (See Chapter 10 for
discussion of how to choose a project for performance contracting.)

### 2. Funding the Project  {#funding-the-project .unnumbered}

#### Freezing the Rolling Base {#freezing-the-rolling-base .unnumbered}

For a performance contract to work, there must be a mechanism to capture
the savings generated by the retrofit. For housing authorities with
project-based utilities, this is done by freezing the rolling base. HUD
stops shifting forward the three year base period that is used to
establish the allowable utility consumption level (AUCL) at the
beginning of each fiscal year. (See Chapter 3 for discussion of the
rolling base.) Instead, HUD continues to reimburse the housing authority
for utility costs at the pre-retrofit consumption level used in the
budget year in which the measures were installed. The housing authority
keeps 100% of the savings that result from the decreased consumption due
to the work done under the performance contract (although at least 50%
must go toward paying the debt service of the project). The base remains
frozen for the length of the project financing. Once the contract is
completed, the base is unfrozen.

An example of how this is done is illustrated in Figure 3. In this
example, a housing authority implements efficiency measures through a 10
year performance contract beginning in January 1998 and ending in
December 2007. The efficiency measures result in a 25% savings. The
rolling base in place at the beginning of the performance contract is
calculated from the consumption in 1994, 1995

and 1996. The freezing of the rolling base only freezes consumption, not
the cost per unit of the utilities used to calculate the dollar value of
that consumption. For simplicity, though, this example assumes that the
rate paid for the utilities stays constant. This makes the cost of
utilities directly proportional to changes in consumption, so the
illustration shows changes in dollars. At this assumed rate, the rolling
base for 1998 is \$1 million. After the efficiency measures are
installed, the cost of utilities decreases 25% to \$750 million. For
each of the ten years of the contract, the housing authority saves and
keeps \$250,000, totaling \$2.5 million at the end of the contract
period.

The housing authority will continue to retain some of the savings even
after the end of the contract, because of the way the base is unfrozen
and because of the standard PFS regulations for splitting costs or
savings from variations in consumption away from the amount projected by
the rolling base. The process used to unfreeze the base is as follows.
For 2008, the first year after the completion of the contract, the base
is calculated using the energy consumption levels from 1996, 1997 and
2006. These are the two years prior to the installation of the energy
improvements and the year before the contract ended. In the second year,
2009, the rolling base is calculated using the energy consumption levels
from 1997, 2006 and 2007 -- the year before the measures were installed,
the year before the contract ended and the year the contract ended. In
the third year, 2010, the consumption from years 2006, 2007 and 2008 are
used to calculate the base. These are the year before the contract
ended, the year the contract ended and the year after the contract
ended. At this point the calculations for the base are back to the
normal pattern of beginning four years prior and ending one year prior
to the requested budget year. The project is still producing savings, in
that utility costs remain lower than before the retrofits were
installed, but the mechanism for projecting energy use has adjusted to
this new lower rate. At this point, the housing authority sees no more
savings from the project.

The dollar amount of the rolling base for 2008, still assuming a
constant cost for utilities, is \$916,667. For 2009, it is \$833,333.
And for 2010, the base is set at \$750,000. Note that for 2008 and 2009
the cost for actual consumption, \$750,000, is still less than the
amount of the rolling base. This results in a savings of \$166,667 in
2008 and \$83,333 in 2009 -- a total of \$250,000. The housing authority
may keep a part of these savings, but because the performance contract
is over, they do not keep 100%. The split reverts to the formula that is
used whenever actual consumption diverges from the estimate provided by
the rolling base and no performance contract is in effect -- HUD splits
the difference with the housing authority, each keeping 50%. So, for the
first two years after the performance contract is over, the housing
authority is still accruing savings from the efficiency measures that
were installed. In this example, that amounts to an additional
\$125,000.

The total savings retained by the housing authority, over and above the
costs of the project, are the excess savings during the contract period
(\$500,000) plus the savings retained as the base unfreezes (\$125,000),
for a total of \$625,000.

#### Utility Rate Changes

In the example above, the rate was held constant. When rates change,
they affect the cost savings that are generated from a given amount of
consumption savings. Utility rate changes can affect whether the
decrease in consumption generates enough dollar savings to cover the
debt service for any particular year. It will also affect the amount of
dollar cost savings that are split between HUD and the housing
authority. HUD uses form 52722-B (see Appendix D) to determine
divergences in energy consumption from that projected by the rolling
base. The changes in consumption are multiplied by the rate in effect
that year to assign cost savings, which are split according to which
incentive is being used. The amount of the cost savings depends on two
factors: consumption and price. If prices change, the amount of money
saved from a set decrease in consumption may go up or down, depending on
the direction of the price change.

EXAMPLE

Assume an energy performance contract guarantees a savings of 25% from a
pre-retrofit consumption of 1,000 **MCF** of gas use per year. This
would result in a post-retrofit consumption of 750 MCF of gas. If at the
time of the contract implementation, gas costs were \$6.00 per MCF, the
savings would be as follows:

(1,000 MCF- 750 MCF) \$6.00 =

250 MCF \$6.00 =

\$1500

If gas costs went up to \$7.00 per MCF, savings would alter as follows:

(1,000 MCF - 750 MCF) \$7.00 =

250 MCF \$7.00 =

\$ 1750

If gas costs decreased to \$5.00 per MCF, savings would be altered as
follows:

(1,000 MCF - 750 MCF) \$5.00)

250 MCF \$5 =

\$1250

So, an increase in energy costs above the cost in effect at the time the
contract is signed will lead to an increase in savings retained by the
housing authority. A decrease in energy costs will have the opposite
effect. This impacts the dollars that are available for repaying the
debt service.

Since performance contracts extend over many years, it is virtually
certain that energy and water costs will change. In order to deal with
this fluctuation, performance contracts often specify that the rate in
effect at the time the contract goes into affect will be set as a
**floor rate**. With this type of arrangement, the parties agree that
for calculating savings, a lower rate will never be used, even if the
actual rates fall below that rate. In the example above, the floor rate
would be set at \$6.00 per MCF of gas. With a floor rate in effect,
dollar savings counted toward the project may go up beyond what was
estimated (if rates increase), but will not go down. This way, an ESCO
knows the minimum savings which will accrue to the project, assuming
that consumption savings projections are met. Note that the change in
consumption is computed first, and then the appropriate rate is applied.
This methodology is driven by the use of HUD form 52722-B, the form
which is used to calculate savings. See Chapter 12 for a deeper
discussion of savings calculation methodologies and the limits HUD has
set as to what can be claimed as savings.

If the contract a housing authority is considering contains a floor rate
provision, they should examine the provision carefully in the context of
what the regulations allow. These state that the base usage
(990.107(b)(1) and the savings (24 CFR 990.110(c)(2)(ii) must adjust for
any utility rate changes. A housing authority may chose to sign a
contract with a floor rate provision, and take the risk of rate
fluctuations on themselves. In this case, it would be wise to have the
ESCo provide them with a "sensitivity analysis", i.e. look at the range
of possible rates and determine how much exposure the housing authority
will have. An alternative strategy is to seek a waiver to institute a
floor rate to be used in the annual utility reconciliations. There are a
number of circumstances under which HUD has not granted such waivers.

#### The Frozen Base Method and Utility Allowances  {#the-frozen-base-method-and-utility-allowances .unnumbered}

A complicating factor arises when utility allowances are used, instead
of the rolling base. Utility allowances may be paid to tenants under two
scenarios. The first is **project-based utilities**, where **check
meters** are used to determine the tenants' usage. In this case, housing
authority is responsible for paying the utility bill, but charge the
tenants based on a utility allowance and any excess use over that
amount. The check meters allow the housing authority to charge tenants
for excessive usage, or for major appliances such as air conditioners
that aren't included in the allowance. In the second instance,
**tenant-paid utilities**, utilities are billed through **individual
meters** and the tenant is responsible for paying the bill to the local
utility company. Allowances are based on "reasonable consumption of
energy." (See Chapter 3, "Determining Eligibility for Utility
Reimbursements.")

In the cases where utility allowances are used, and there is no rolling
base, there are two options for capturing savings for a performance
contract. Both require a waiver from HUD, since the current regulations
do not deal with incentives in cases with utility allowances. The
options are to: 1.) change to **master metering** with no utility
allowance set or 2.) to set a "frozen baseline" for the utility
allowance.

Master metering should be given serious consideration, now that the
utility industries are deregulating. In addition to paying a far lower
amount for **customer charges**, i.e. the fixed cost the utility charges
per meter, a housing authority can also save significant amounts by
purchasing bulk fuel from alternate suppliers. (See Chapter 7 for
details in the rate reduction incentive.) In order to obtain price
breaks from suppliers, a customer must purchase large quantities of
energy. If the buildings have individual meters with tenant-paid
utilities, bulk fuel purchase is not feasible, due to the many
individual utility accounts. If a housing authority wants to consider
changing to master metering, the individual meters may still be kept in
place as **check meters**. This would allow the housing authority to
take advantage of the bulk purchase of fuels. Unfortunately, if it used
the check meters and established allowances, it still would be in the
gray area, which the current regulations do not address, of how to
capture savings from utility allowances.

The other option is to reset utility allowances for calculating tenant
rent and set a frozen baseline for the utility allowances used to
calculate dwelling rental income. This was first done at the Oakland
Housing Authority, through a waiver from the local HUD office. The
solution was based on the formula for calculating operating subsidy:
Operating subsidy = Expenses (AEL + AUEL) minus income. Utility
allowances affect the housing authority's rent rolls through altering
tenant rent -- the amount tenants are charged by the housing authority
after being credited for their utility allowance. (See Chapter 3,
"Determining Eligibility for Utility Reimbursements.") If the utility
allowance levels go up, dwelling rental income goes down. If utility
allowance levels go down, dwelling rental income goes up. This change is
reflected directly in the Authority's operating subsidy. Holding
expenses constant, a decrease in dwelling rental income will be offset
by an increase in operating subsidy. An increase in dwelling rental
income will be offset by a decrease in operating subsidy. Therefore,
under normal circumstances, if a housing authority performs conservation
measures which result in decreased utility allowances, that savings is
passed on directly to HUD.

In the Oakland case, the value HUD uses for utility allowances when
determining dwelling rental income was established at a frozen baseline
level equal to its pre-conservation retrofit level. The tenants were
credited a revised utility allowance when calculating tenant rent. This
served to decouple the change in utility allowances from the Authority's
eligibility for operating subsidy. Because operating expense is computed
by taking expenses (AEL-AUEL) minus income, if the income remained
constant, operating subsidy remained constant. In actuality, the housing
authority will collect a new, higher tenant rent. This differential
funded the retrofit. This is very similar to freezing the rolling base,
except that instead of freezing an expense at a higher level than
post-retrofit reality, it is freezing income at a lower level. The end
result of both is the housing authority can keep savings from a retrofit
in order to pay for the work.

The following is an example of how this would work in the case of one
tenant.

[Before performance contract:]{.underline}

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Credit for Utility Allowance: \$50

Tenant Rent: \$70 (tenant pays housing authority)

Tenant pays utility company: \$50 (estimated bill)

Operating subsidy = (AEL+AUEL) - \$70

Housing authority receives tenant rent (\$70) and operating subsidy

[During the performance contract:]{.underline}

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Credit for Utility Allowance: \$30

Tenant Rent: \$90 (tenant pays housing authority)

Dwelling Rental Income: \$70 (calculated using frozen baseline utility
allowance)

Tenant pays utility company: \$30 (estimated bill)

Operating subsidy = (AEL+AUEL) - \$70

Housing authority receives tenant rent (\$90) and operating subsidy.

The housing authority keeps an extra \$20 for this apartment for the
duration of the performance contract.

If utility allowances must be adjusted during the term of the contract,
those adjustments would be made to the pre-conservation baseline level
of the utility allowance. At the end of the contract, the baseline would
be unfrozen. The difference between the original revised allowance and
the frozen baseline allowance would be added to the utility allowance
currently used for calculating dwelling rental income. From this point
forward, HUD would retain all savings from the conservation measures.

The process of revising utility allowances for calculating tenant rent
must be done carefully to ensure that they are set accurately.
Overestimating the savings potential of measures may result in adjusting
allowances too low. In this case, it will appear that tenants are
consuming excessive amounts of energy or water, when in reality the
conservation measures are not performing as predicted. This ends up
transferring the burden of non-performing measures from the ESCO to the
tenant.

#### The Savings Guarantee  {#the-savings-guarantee .unnumbered}

The frozen base incentive requires that repayment of the debt service be
dependent on savings being obtained. This has generally been interpreted
by HUD to mean that there must be a guarantee of savings. This protects
the housing authority in the event of a shortfall in savings. This is
especially critical due to the contractual and regulatory restrictions
that limit a housing authority to using savings and other non-HUD funds
for repaying these loans (HUD Form 53012A, Annual Contributions
Contract, Part A, July 1995).

It is for this reason that performance contracting is used when a
housing authority is doing a project under the frozen base incentive.
The heart of a performance contract, whether used with the frozen base
or the add-on subsidy, is a savings guarantee in which the ESCO
guarantees that the average consumption savings resulting from the
conservation retrofit will cover loan payments. The guarantees are
designed to cover any shortfall that may occur between actual savings
and those that were estimated by the ESCO and to satisfy the provision
in 24 CFR 990.107(f)(1) that payment be dependent on savings. The
**guaranteed savings** are usually slightly less than the **estimated
savings** the ESCO projects it can achieve -- often in the range of 80%
to 90% of estimated saving. Guaranteeing less than the estimated amount
is fine, as long as the guaranteed amount is sufficient to cover the
debt service on the project. It is a good strategy to structure the loan
and other payments so that they are less than the estimated savings by
10% or so.

There is a fee involved for providing the guarantee, which will vary
with the type of guarantee, the percentage of estimated savings that is
being guaranteed and how the ESCO perceives its risk. This fee will
affect the cost of the project. The higher it is, the more likely that
some longer-payback measures may need to be dropped in order for the
package to be paid for with savings within 12 years. See Chapter 12,
"Contract Negotiations," for a deeper discussion of the various savings
guarantee options.

#### Splitting Excess Savings {#splitting-excess-savings .unnumbered}

**Excess savings** are the difference between the amount needed to cover
the debt service and other fees involved in the project (usually the
amount of the guaranteed savings) and **actual savings.** HUD
regulations for the frozen base incentive allow a housing authority to
keep 100% of the savings generated during the life of the energy
services agreement. At least 50% must go toward paying the debt service
of the contract. This is different than when a housing authority uses a
performance contract with the additional subsidy. In those cases, the HA
retains savings using the standard PFS formula. As the rolling base
progresses, the excess savings revert to HUD.

Generally, in order to finance a comprehensive package of measures,
75%-90% of the estimated savings are needed to cover the costs involved
with the contract. The remainder of the savings may be kept by the
housing authority, although some housing authorities may opt to split
the excess savings with the energy services company. This sharing of
excess savings provides the ESCO with incentive to search for all
possible ways to wring savings out of a project. This is true not only
on the front end, when choosing measures, but also after the measures
are installed. Many retrofits need to be commissioned, i.e. inspected
and tested upon installation to make sure they are performing as
specified, or need continued maintenance to ensure optimal performance.
A shared savings strategy provides ESCOs excellent motivation to stay on
top of all aspects of the project.

An ESCO's fees may also be made contingent upon achieving a certain
level of savings. See Chapter 12, "Contract Negotiations," for a
detailed discussion of options for structuring ESCO fees.

#### Financing Methods {#financing-methods .unnumbered}

Financing for a project can be obtained from a number of sources. Often,
the ESCO arranges the financing, either backing the loan itself or
arranging a package through a third-party financier. A good ESCO will
help the housing authority find the best financing that is available for
the project, not just propose a single alternative. The housing
authority may also arrange the financing itself.

Several types of financing are appropriate for performance contracting.
These include tax-exempt bonds, general revenue bonds, tax-exempt
lease-purchase agreements, low-interest loans from utilities, loans from
conventional lending institutions and loans from state or government
agencies. Currently, the most popular form of financing for performance
contracting is tax-exempt leasing. Due to the tax-exempt nature of the
interest on the financing, the interest rates are generally lower than
other feasible alternative. They can be arranged through many banks, so
a housing authority can work with a local lender. With tax-exempt
leasing, the housing authority may not own the equipment until such time
as all of the lease payments are made. At that point, ownership is
transferred from the bank to the housing authority. Conventional loans
are more expensive than tax-exempt leasing, so are not utilized as
often.

Another alternative is to issue a bond to finance the project. Although
the interest rates for bonds are very attractive, the cost of issuing a
bond is generally high, and doesn't vary much with the size of the bond.
This dictates that bonds are usually issued for large sums -- much
larger than the costs of most conservation projects. For this reason and
others, bonds are seldom used to finance energy performance contracts.

Occasionally, a local government or utility may have a program offering
low- or no-interest loans to housing authorities for conservation work.
These deals are perhaps the most attractive of all, but are fairly rare
and vary regionally and over time. Still, when shopping for financing,
it is worth approaching the local utilities and government agencies to
see if any such programs exist.

It is vitally important to shop for the lowest interest rate possible.
The difference of a percentage point or two may determine whether a
package of measures will be cost-effective or not. Rates will vary
depending on the size of the project (dollars borrowed), the length of
the financing and the strength of the housing authority (as measured by
credit rating, **PHMAP scores**, etc.). As of early-1998, interest rates
for a 10 year, \$2 million project with a strong housing authority fall
in a range of 5.5% to 6.0% for bonds, 5.5% to 6.0% for tax-exempt
leasing and prime + 1/4% for conventional loans. These rates may
fluctuate significantly over time.

### 3. Pros and Cons of the Frozen Base Incentive

####  {#section-2 .unnumbered}

Note that the choice of whether to use the frozen base incentive is
composed of a number of steps. First, is a cost-effective conservation
project possible? Second, should the housing authority seek outside
financing for the project or use modernization dollars? Third, if using
non-HUD financing, should the housing authority accept the risk of
managing the project itself, or should it use a performance contract
with a savings guarantee? If using a performance contract, the choice of
incentive - either frozen base or additional subsidy - will depend on
many factors as well, and will probably not be decided until contract
negotiations for the energy services agreement. (See Unit 3 - "Decision:
Which Method to Use?" for a deeper discussion of this process.) That
being said, the characteristics of a project using the frozen base
incentive need to be understood in order to make the other decisions
listed above. The discussion of pros and cons below can help with those
decisions.

Note that anything in the discussion below that deals specifically to
performance contracting will also apply to a performance contract that
is funded using the additional subsidy incentive.

####  {#section-3 .unnumbered}

#### Advantages of the Frozen Base {#advantages-of-the-frozen-base .unnumbered}

-   **Allows housing authority to retain savings.** HUD regulations
    allow a housing authority to keep 100% of the savings that are
    generated by a project using the frozen base incentive for the life
    of the financing. Although at least 50% of the savings must go
    toward repaying the debt service, there may be savings beyond what
    is needed to cover the costs of the project. These may be spent on
    other housing authority needs. The frozen base incentive is the only
    funding option approved by HUD that allows housing authorities to
    keep all of the savings from conservation measures. It is also the
    only option for funding conservation projects that freezes the
    rolling base. This allows the housing authority to keep savings for
    a much longer period than other funding methods. It should be noted,
    though, that all of the costs of the project must come out of these
    savings.

-   **Increases funds available for capital improvements.** This option,
    like the additional subsidy incentive, allows the housing authority
    to use non-HUD funds to pay for the project. This increases the
    amount of capital improvements that may be done at the housing
    authority. Housing authorities won't be faced with the choice of
    allocating scarce modernization funds between resource-efficient
    improvements and other needed capital improvements.

-   **Decreases risk to housing authority compared to the additional
    subsidy if using no savings guarantee.** Payment must be dependent
    upon savings being achieved. This is not a requirement with the
    additional subsidy. Since payment must be dependent upon savings,
    HUD has required a savings guarantee (whereby an ESCO takes
    responsibility for covering any shortfall in savings) to approve a
    contract under the frozen base incentive. Therefore, the risk of
    estimated savings not materializing, and possibly falling short of
    the savings needed to cover the debt service, is passed from the
    housing authority to the ESCO. This shifting of risk is one of the
    strongest reasons to consider a performance contract if using
    non-HUD funds, whether you're using the frozen base or the
    additional subsidy,.

-   **Requires no up-front capital.** Although the savings to be
    realized can be significant, private financing for a large
    conservation project in public housing has not been allowed prior to
    the HCDA of 1987. By allowing housing authorities to enter into
    long-term financing agreements based on future energy and water
    savings, the Act opened the door to conservation financing. Housing
    authorities can now sign a contract with an ESCO which will provide
    financing to improve the efficiency of existing equipment and/or
    install new resource-conserving measures on a scale that has not
    before been possible.

-   **Increases the value and functionality of housing.** Capital
    improvements such as a new boiler or heat pump, additional
    insulation or upgraded heating and cooling controls add to the value
    of the property, as does the increased resource efficiency. Tenant
    comfort is also often improved. These benefits can accrue from a
    conservation project funded by any means, but the option of
    obtaining private financing, using either the frozen base or the
    add-on subsidy, expands the potential number of projects by
    expanding the monetary resources beyond modernization funds.

-   **Allows alternate procurement process.** With a performance
    contract, the procurement process is much different than in a
    standard capital improvement project. The only portion subject to
    competitive bidding is for choosing the ESCO. The process used is
    that for competitive proposals, as outlined in 24 CFR 85.36(d)(3).
    Even that process is unusual in that it is proposal-based and not
    subject to requirements to chose the lowest bidder. Technical
    factors may be weighed more heavily than the price of the audit.
    Once the ESCO is chosen, it is responsible for the remainder of the
    project and the housing authority is not required to do more
    bidding, unless they decide (for cause) not to use their original
    ESCo choice after the audit phase. (24 CFR 965.308(a))

-   **Provides turnkey conservation services.** Project design,
    financing, construction management, loan guarantee -- all can be
    provided by the ESCO. This minimizes the housing authority\'s
    administrative involvement in the project. Once the energy services
    agreement is signed, the housing authority's role consists primarily
    of issuing approvals and monitoring the progress of the project.
    (See Unit 4 for information on the process leading the signing an
    energy services agreement.)

#### Disadvantages of the Frozen Base Incentive {#disadvantages-of-the-frozen-base-incentive .unnumbered}

-   **Long lead time.** Arranging a performance contract involves a
    series of steps by the housing authority and approvals by HUD, a
    process that can take some time. This longer lead time can be a
    drawback, especially where badly needed measures with a short
    payback are concerned.

-   **More paperwork.** The process of procuring a performance contract
    generates a sizable volume of paperwork, and includes numerous
    procedural hurdles. All the paperwork must be done correctly, and
    the legal and procedural requirements must be carefully observed for
    the project to be successful. (See Unit 4 for a discussion of this
    process.) A housing authority will invest a considerable amount of
    staff time and effort to bring a performance contract on-line, but
    these expenses can be reimbursed through energy and water savings.

-   **Higher total project costs.** Costs are increased because the ESCO
    charges for its overhead in planning the project, for arranging and
    guaranteeing financing and for monitoring the project after
    construction. On the other hand, many of these activities would have
    to be done by housing authority staff. So much of the increased cost
    is merely a shifting of those costs into the contract.

-   **"Married" to one contractor.** There is a negative side, as well
    as a positive one, to the convenience of dealing with a single
    contractor. Once an energy services agreement is signed, the
    performance contract commits the housing authority to a long-term
    agreement that is not easy to back out of. If ESCO employees are not
    responsive to problems or do not work well with housing authority
    staff, it can at best make the housing authority's job more
    difficult. Therefore, the RFP, evaluation and interviewing processes
    for selecting an ESCO are extremely important. (See Chapter 10 for a
    discussion of "Choosing an ESCO.")

-   **Cost of the energy audit.** The first task for the ESCO that wins
    the contract is to perform a thorough energy audit. The ESCO then
    puts together a proposed package of conservation measures and a
    financing package. If the housing authority and the ESCO are unable
    to come to an agreement on the conservation measures proposed, or on
    the financing package, and fail to produce a signed performance
    contract, the housing authority is still responsible for the cost of
    the ESCO's audit. This type of audit generally costs significantly
    more than housing authority "compliance" audits (those done every
    five years to satisfy 24 CFR 965.302), due to their greater depth
    and complexity. Although costly, these audits may serve as a
    compliance audit and can be paid for from modernization funds. If
    the housing authority proceeds with a performance contract with
    another ESCo, the cost of both audits is allowed to be rolled into
    the financed project costs, if the project will bear the expense.

### 4. Summary {#summary-1 .unnumbered}

The keys to success with the frozen base incentive, as with any
performance contract, are to attain a predictable income stream from
conservation savings, to fund the installation of conservation measures
at the lowest-possible interest rate and to fund the improvements over a
long-enough term to take advantages of all the savings possible in the
building. Unit 3 "Decision: Which Method to Use?" discusses how to
determine whether the frozen base method is the appropriate route for
your housing authority. Unit 4, "The Performance Contracting Route,"
spells out details of the process leading to a successful performance
contracting experience.

## Chapter 6 

## THE Additional Subsidy INCENTIVE

An alternative to the frozen base incentive for funding conservation
projects is to use the **additional subsidy** method, which is also
known as the **add-on subsidy**. The defining characteristic of this
incentive is an alteration in the cash flow between HUD and the housing
authority. This alternate reimbursement methodology enables the housing
authority to obtain funds to repay the debt service on the non-HUD
financing. Because the rolling base is not frozen, another method is
needed to allow the housing authority to cover the debt service. HUD
increases the housing authority's operating subsidy by the amount needed
to amortize the loan for the length of the financing contract. Although
a savings guarantee is not required using this method, HUD does require
that utility cost savings be large enough to pay for the debt service.
The additional subsidy HUD provides is subject to a maximum equal to the
amount of savings for that year. If savings do not cover the amount due
on the financing, the deficit will be offset from the housing
authority's eligibility for operating subsidy the following year. This
means that with the additional subsidy method, the housing authority
assumes the risk for the project rather than an ESCO. Because of these
factors, the housing authority may want to consider using an ESCO for a
performance contract and obtaining a savings guarantee when using the
add-on subsidy for conservation projects. (See Chapter 5, "Frozen Base
Incentive" for more details on performance contracting, especially the
"Savings Guarantee", "Splitting Excess Savings", "Pros and Cons" and the
"Summary" sections.)

Savings from the project are dealt with by the standard PFS rules, i.e.
the housing authority only keeps 50% of the savings for the first four
years as opposed to the 100% for the length of the financing allowed
with the frozen base method. At first glance it may appear that this
differentiation in retention of savings would automatically make the
frozen base incentive the better alternative. But with the frozen base,
the housing authority does not receive any additional operating subsidy.
Unit 3, "Decision: Which Incentive to Use?" provides more detail on how
to evaluate the various incentives to determine which is the best option
for the particular circumstances of individual housing authorities.

### 1. Guidelines for Using the Additional Subsidy Incentive

A project utilizing the additional subsidy incentive must meet specific
criteria spelled out in HUD regulations. These factors are outlined
below.

**Financing/Funding Sources:** The project *must use non-HUD funding*.
This can be obtained through a utility, private bank or through an ESCO
if the housing authority has opted to use a performance contract. (See
the "Funding Additional Subsidy Projects" section below for a discussion
of these options.) If HUD funds are mixed into the project, the savings
generated by the measures paid for with HUD dollars must be separated
out from the savings claimed for the project. It is important to
remember this when evaluating the feasibility of a project, for the
reasons outlined in the discussion of the savings guarantee. The
separation of savings is done using engineering estimates and must be
approved by the local HUD field office. If the housing authority is not
using a performance contract for their conservation project, they will
have the responsibility for developing this methodology.

**Allocation of Savings:** There is no predetermined way that any
savings retained by the housing authority must be spent, as there is
with the frozen base incentive. See below, "Funding the Additional
Subsidy," for a deeper discussion of savings.

**Savings Guarantee:** When using the add-on subsidy, there is **no**
requirement for a savings guarantee. But HUD does require that the
repayment of the debt service *must be covered by the savings of the
project.* If there is a shortfall in savings, the discrepancy will be
offset from the housing authority's eligibility for operating subsidy
the following year. This means that the housing authority must be very
certain that the savings will occur in the amounts projected or opt to
use an ESCO and obtain a savings guarantee. Mutually agreeable
verification procedures should be developed between HUD and the housing
authority. (See the discussion of "Monitoring Conservation Savings" in
Chapter 13.)

**Length of Contract:** An additional subsidy project *may not exceed 12
years in length*. This incentive is often used for relatively short
projects, whose savings are very well assured, or for projects where HUD
has allowed the use of **stipulated savings**. Contracts may only be
extended, if HUD determines it is needed due to "changed circumstances
rather than miscalculation or misrepresentation by the contractor or
PHA." (24 CFR 990.110(e)(3)) If the housing authority doesn't have a
savings guarantee and is bearing the risk for whether the project
performs, it may be wise to use the additional subsidy only for these
"safer" types of projects.

In addition to the requirements that must be met to satisfy HUD
regulations, there are other factors a housing authority may wish to
consider when deciding if using the additional subsidy is the best
method for their project. These include:

**Risk:** A housing authority may opt to manage the project itself,
without obtaining a savings guarantee from an ESCO. The housing
authority should be aware, though, that there is a possibility that it
will not receive the full amount needed to amortize the loan. If the
savings ever fall short of projections and below the loan payment
amount, HUD will decrease the housing authority's operating subsidy in
the following year. This may cause financial hardship for the housing
authority if it does not have access to other funds to re-pay the loan.
Because the loan is considered an operating expenditure, comprehensive
grant and CIAP dollars may not be diverted from other modernization
projects to repay debt service. On a positive note, though, the housing
authority still has tapped funds that would not have been available to
it otherwise, even if it must delve into its operating funds or other
pots of money to repay a loan when the additional subsidy amount is cut
due to savings being too low.

**Types of Projects:** The additional subsidy may be used for any
project that will reduce utility consumption. (See Unit 3 for
discussions of how to choose conservation projects and evaluate which is
the best type of funding.) There are instances where a performance
contract is impractical and the additional subsidy is a better choice
due to the flexibility the housing authority has to manage its own
project. One example of this would be cases where measures must be
installed quickly (e.g. a central boiler system that is frequently
breaking down) and the relatively long lead time required to implement a
performance contract would impose a hardship. Single retrofit projects
with assured, quick paybacks, such as replacing heating systems with
new, more efficient models or switching to a less expensive fuel might
also be good candidates for using the additional subsidy. Longer, more
complicated projects, which have greater possibilities of the savings
not meeting projections, are better left to performance contracting,
using either the frozen base or the add-on subsidy.

**Size of Project:** HUD does not limit the size of eligible projects.
If the housing authority wishes to manage the project themselves and
assume the risk that savings will be achieved, it may be best to use the
additional subsidy for relatively small projects. If they chose to use a
performance contract, any size project is suitable for the additional
subsidy, although larger projects will better attract ESCo interest.

### 2. Funding the Additional Subsidy {#funding-the-additional-subsidy .unnumbered}

There are two aspects to the additional subsidy that help fund
conservation projects and give housing authorities an incentive to
undertake these projects. These two benefits are discussed below.

#### The Increased Subsidy {#the-increased-subsidy .unnumbered}

When using the additional subsidy, projects are not directly funded from
savings, as in a performance contract. Instead, the operating subsidy
received by the housing authority is increased by the amount needed to
amortize the financing used for the improvements. In order to be
eligible for this increased subsidy, though, the housing authority must
demonstrate that savings in an amount at least equal to the loan
payments were achieved. If the savings do not cover the loan amount, HUD
will decrease the operating subsidy the following year. This increase in
subsidy remains in effect during the life of the financing contract used
for the project. Housing authorities benefit from increasing the pool of
money that is available to them from capital projects.

#### Savings  {#savings .unnumbered}

It is important at this point to differentiate between two definitions
of savings. When determining operating subsidy for an add-on project,
HUD looks at the energy that would have been expected to be used if the
measures had not been installed, and compares that to the actual usage.
This consumption is adjusted for any rate changes and may be adjusted
for a heating degree day factor. (Heating degree days are discussed more
in Chapter 8, "Steps to Choosing the Incentive.") It is this type of
savings that is used to determine the cap on additional subsidy for
which a housing authority is eligible.

The other type of savings is that done by comparing the usage estimated
by the rolling base against actual usage. Once again, consumption is
adjusted for changes in rates, but there is no heating degree day
adjustment. For decreases in consumption resulting from conservation
measures installed using the additional subsidy, savings are split
between the housing authority and HUD using the standard PFS formula for
allocating savings. The rolling base is not frozen and any savings
between consumption projected by the rolling base and actual use is
split evenly between the housing authority and HUD. As energy
consumption decreases after the measures are installed, the rolling base
will adjust and the amount of utility subsidy a housing authority
receives will decrease. After four years, the rolling base has adjusted
to take into account the new, lower utility usage and the housing

authority retains no more savings. The project is still producing
savings, but the mechanism used to project energy use for budgeting
purposes does not see them anymore.

Figure 4 illustrates how this process works. In this example, a housing
authority implements efficiency measures in January 1998 using
modernization funds. The efficiency measures result in a 25% savings.
The rolling base in place at the beginning of the performance contract
is calculated from the consumption in 1994, 1995 and 1996. For
simplicity, this example assumes that the rate paid for the utilities
stays constant. This makes the cost of utilities directly proportional
to changes in consumption, so the illustration shows changes in dollars.
At this assumed rate, the rolling base for 1998 is \$1 million.

After the efficiency measures are installed, the cost of utilities
decreases 25% to \$750,000, a savings of \$250,000. As the base rolls
forward each year, it begins to reflect these savings. In 1999, the
first year after the measures are installed, the rolling base is
comprised of data from 1995, 1996 and 1997. It is still only using
consumption information from the time before measures were installed.
Savings are still \$250,000. In the year 2000, the base period has
rolled forward another year, so that the data used is from 1996, 1997
and 1998. Now, the first year's consumption reflecting savings from the
measures is averaged in. The rolling base amount has decreased to
\$916,667. The difference between the rolling base estimate and actual
consumption has decreased to \$166,667. In the third year, the rolling
base period is 1997, 1998 and 1999. Two thirds of data are from after
the measures were installed and it is now set at \$833,333. The
difference between actual use and that estimated by the rolling base is
\$83,333. By the fourth year, the rolling base is only using data from
after the measures were installed. There is no difference between the
rolling base and actual consumption. The total savings over the four
years since the retrofits were completed are \$750,000. Since HUD splits
this with the housing authority, each gets \$375,000. The project is
still producing savings, in that utility costs remain lower than before
the retrofits were installed, but the mechanism for projecting energy
use has adjusted to this new lower rate. At this point, the housing
authority sees no more dollar cost savings from the project, but does
still continue to receive the additional subsidy amount.

The total benefit that the housing authority realizes will depend on the
dollar amount of the loan, and whether they received the full additional
subsidy amount every year (i.e., did savings in any year fall below the
amount needed to amortize the loan?) In addition, unlike in our example
above, utility rates will change over time. HUD accounts for changes
from projected to actual utility rates to adjust the dollar cost savings
before comparing actual utility costs to the AUEL when determining what
dollar amount the housing authority may keep. (See below)

#### Demonstrating Savings and Utility Rate Changes {#demonstrating-savings-and-utility-rate-changes .unnumbered}

With the additional subsidy incentive, the project costs are not paid
for from retained savings \[(pre-consumption multiplied by current
rate) - (post-consumption multiplied by current rate)\]. Instead, the
housing authority receives an additional subsidy in the amount needed to
pay the debt service and annual fees of the project. The one caveat is
that the project cost savings must equal or exceed the amount of the
additional subsidy.

The crux of the issue relating to rates is how the project consumption
savings are demonstrated to HUD, and how the dollar savings are
computed. In order to protect themselves, whether using a performance
contract or managing the conservation project themselves, the housing
authority should make provisions for demonstrating the level of
consumption savings from which dollar savings are derived. With a
performance contract, this can be done by the energy services company
providing monitoring and verification (M&V) services. If there is no
ESCo involved, the housing authority must develop it's own M&V strategy.
In either case, the system for demonstrating consumption savings should
last throughout the term of the loan , should meet HUD approval and
should be defendable to HUD and others.

Once a strategy for determining pre- and post-consumption has been
nailed down, rate interactions must be considered. Cost savings are
calculated by multiplying the consumption expected without the retrofit
by the current rate and doing the same for actual consumption. The
difference is the cost savings. Heating degree day adjustments are also
allowed, with HUD's approval. (24 CFR 990.110 (e)(1) and (2)). For a
given amount of consumption savings, the dollar savings will vary up
with a higher rate, and down with a lower rate. (See "Utility Rate
Changes" in Chapter 5.) So it is possible that the provision for
decreasing the subsequent year's operating subsidy due to shortfall in
savings could be invoked due to a lowering of rates. This is known as
**rate risk**.

If the housing authority manages the project, there is no one to shift
this risk to. The housing authority should evaluate what their exposure
may be if the rates decrease. If using a performance contract, it may be
possible to shift some of the risk to the ESCo. Often, though, an ESCo
will require a floor rate to be in the contract, in order to mitigate
the risk to themselves. This is a negotiable point that the housing
authority can take up with the ESCo. With the frozen base incentive, HUD
has in limited circumstances granted floor rates for use in calculating
the savings the housing authority may retain. (See "Utility Rate
Changes" in Chapter 5.) It is possible that they may consider this for
an additional subsidy, but unlikely.

#### The Additional Subsidy and Utility Allowances {#the-additional-subsidy-and-utility-allowances .unnumbered}

As with the frozen base incentive, there is no mechanism for capturing
savings for the additional subsidy in the case of tenant-paid utilities.
In addition, the incentive structure of keeping 50% of the decrease in
consumption from the rolling base estimate for the first four years of
the project does not work in the case of tenant-paid utilities.

The options for capturing savings are the same as for the rolling base.
Both require a waiver from HUD, since the current regulations do not
deal with this situation. The options are to change to **master
metering** with no utility allowance set or to set a frozen baseline for
the utility allowance. the master metering option is discussed in
Chapter 5 under "The Frozen Base Incentive and Utility Allowances". As
with the frozen base incentive, master metering should be given serious
consideration, now that the utility industries are deregulating.

The authors are aware of at least one project (at Stark Metropolitan
Housing Authority in Canton, OH) where HUD allowed the use of the
additional subsidy incentive on a project with tenant paid utilities.
The strategy used was similar to what was done with the frozen base
method for the Oakland Housing Authority. Utility allowances were reset
for calculating tenant rent and a frozen baseline *for the utility
allowances* was set and used to calculate dwelling rental income. In
this case, the savings would not be used to meet a loan payment, but to
serve as the cap on the amount that HUD would pay in additional subsidy.
The increase in operating subsidy was used to cover the debt service. A
housing authority could also ask that the incentive mechanism of
splitting savings for the first 4 years of the contract be mimicked in
its waiver request, although this was not done in the case cited above.

The Oakland solution used with the frozen base incentive was based on
the formula for calculating operating subsidy: Operating subsidy =
Expenses (AEL + AUEL) minus income. Utility allowances affect the
housing authority's rent rolls through altering tenant rent -- the
amount the tenant is charged by the housing authority after being
credited for their utility allowance (See Chapter 3, "Determining
Eligibility for Utility Reimbursements"). If the utility allowance
levels go up, dwelling rental income goes down. If utility allowance
levels go down, dwelling rental income goes up. This change is reflected
directly in the Authority's operating subsidy. Holding expenses
constant, a decrease in dwelling rental income will be offset by an
increase in operating subsidy. An increase in dwelling rental income
will be offset by a decrease in operating subsidy. Therefore, under
normal circumstances, if a housing authority performs conservation
measures which result in decreased utility allowances, that savings is
passed on directly to HUD.

In the Oakland case, the value HUD uses for utility allowances when
determining dwelling rental income was established at a frozen baseline
level equal to its pre-conservation retrofit level. The tenants were
credited a revised utility allowance when calculating tenant rent. This
served to decouple the change in utility allowances from the Authority's
eligibility for operating subsidy. Because operating expense is computed
by taking expenses (AEL-AUEL) minus income, if the income remained
constant, operating subsidy remained constant. In actuality, the housing
authority will collect a new, higher tenant rent. This differential
funded the retrofit. This is very similar to freezing the rolling base,
except that instead of freezing an expense at a higher level than
post-retrofit reality, it is freezing income at a lower level. The end
result of both is the housing authority can keep savings from a retrofit
in order to pay for the work. In the case of the additional subsidy,
this extra amount would be used to determine the cap on extra operating
subsidy eligibility.

The following is an example of how this could work in the case of one
tenant for one month. In actuality, this would occur for all of the
housing authority tenants and savings would be annualized.

Before the additional subsidy:

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Credit for Utility Allowance: \$50

Tenant Rent: \$70

Tenant pays utility company: \$50 (estimated bill)

Operating subsidy = (AEL+AUEL) - \$70

Housing authority receives tenant rent (\$70) and operating subsidy

Amount for determining additional subsidy cap (savings amount):

Tenant's Income: \$400

Total Tenant Payment: \$120 (\$400 30%)

Frozen baseline utility allowance: \$50

Credit for Utility Allowance: \$30

Savings: \$20

Tenant Rent: \$90 (\$120 - 30)

Tenant pays utility company: \$30 (estimated bill)

Operating subsidy = (AEL+AUEL) - \$90 + amount of additional subsidy (=
amount of debt service payment, subject to savings cap).

Housing authority receives tenant rent (\$90), operating subsidy and
additional subsidy amount. Note that the operating subsidy is now \$20
lower than before the additional subsidy conservation project, but
tenant rent collected is \$20 higher. The housing authority and the
tenant break even, and the savings go to HUD. The savings from the
project, which cap the amount that the housing authority can receive for
additional subsidy, would be equal to the difference between the old
utility allowance and the revised allowance

Because there is no change in the calculation of operating subsidy with
the additional subsidy, as there was with the frozen base incentive,
there is no "unfreezing" of the baseline. At the end of the additional
subsidy period, there is no need to continue to track savings from the
project, and the baseline becomes moot.

As with the frozen base incentive, the process of revising the utility
allowances for calculating tenant rent must be done carefully, to ensure
that they are set accurately. The savings potential of measures are
overestimated and allowances are adjusted too low, the tenants will be
responsible for excess use charges, when in reality the conservation
measures are not performing as predicted. This ends up passing unearned
savings on to HUD at the expense of the tenants. The housing authority
benefits by having its additional subsidy cap set higher than it should,
passing the burden of non-performing measures from the housing authority
to the tenant.

#### Financing Methods {#financing-methods-1 .unnumbered}

Financing for a project can be obtained from a number of sources. Since
there may be no ESCO involved, the housing authority may end up
arranging its own financing.

Several types of financing are appropriate for the additional subsidy.
These include tax-exempt bonds, general revenue bonds, tax-exempt
lease-purchase agreements, low-interest loans from utilities, loans from
conventional lending institutions and loans from state or government
agencies. (See the "Financing" discussion in Chapter 5 "The Frozen Base
Incentive" for more information on these options.) Because the housing
authority may be arranging its own financing, without the help of an
ESCO, their choices for financing vehicles may be more limited. The
interest rates paid may also be higher. ESCOs usually arranged financing
through a third party financier, who shops a national network of
contacts for the best financing package available. A housing authority's
more limited search may lead to a higher rate. On the other hand, some
housing authorities have shopped their proposal around a number of local
banks and obtained extremely competitive rates.

Remember, as with the frozen base incentive, it is vitally important to
shop for the lowest interest rate possible. The difference of a
percentage point or two may determine whether a package of measures will
be cost-effective or not. Although interest rates for loans under the
additional subsidy may be higher than those for a performance contract,
some or all of that difference may be made up from not having to pay any
ESCO fees, nor fees for a savings guarantee.

### 3. Pros and Cons of the Additional Subsidy Incentive {#pros-and-cons-of-the-additional-subsidy-incentive .unnumbered}

As with the frozen base incentive, there are several levels of decisions
to make before determining that the additional subsidy is the right
route for a housing authority. Once it is determined that the HA wishes
to seek non-HUD financing for a project, a key decision is whether to
pursue a performance contract. If the housing authority decides to use a
performance contract, the question of which incentive to use is put off
until the energy services negotiations. But if it decides to manage the
project itself, it must use the additional subsidy. (See Unit 3 -
"Decision: Which Method to Use?" for a deeper discussion of this
process.) Outlined below are some of the characteristics of a project
using the add-on subsidy, a review of which will help in making the
decisions listed above.

For additional subsidy projects that use a performance contract, please
also see the discussion under "Pros and Cons of the Frozen Base
Incentive" in Chapter 5 for additional factors to consider that are
specific to performance contracting. The discussion below deals with any
project funded by the add-on, whether using performance contracting or
not, unless specifically stated otherwise.

#### Advantages of the Additional Subsidy {#advantages-of-the-additional-subsidy .unnumbered}

-   **Increases funds available to the housing authority:** By allowing
    the use of non-HUD funding for conservation projects, the HCDA of
    1987 enlarges the pot of funding available to housing authorities.
    If there are more projects than the modernization budget can
    support, the HA can access private capital and not be forced to
    chose between resource efficiency improvements and other capital
    needs. Even in cases where the housing authority manages its own
    project and savings fall short, the housing authority still has
    tapped sources of funds that it couldn't have otherwise utilized. Of
    course, to avoid financial hardship, the housing authority must have
    funds available from sources it is authorized and financially able
    to tap to pay for such shortfalls.

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-   **Requires no up-front capital.** As with the frozen base incentive,
    the potential to use savings to repay a private loan now allows
    housing authorities to enter into long-term financing agreements.
    Although a performance contract with a guarantee of savings is not
    necessary, it does help protect the housing authority if savings are
    not achieved.

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-   **Ease of financing:** Although the savings to be realized can be
    significant, arranging private financing for a large conservation
    project in public housing was restricted in the past. Now with
    regulatory changes and the process where HUD will increase the
    operating subsidy to cover the amortization of a loan, it may be
    easier to obtain private financing for projects than it was prior to
    the enactment of the HCDA of 1987. Lenders are especially attracted
    to projects where the additional subsidy is the reimbursement
    method, although there is some dispute among tax counsel at some
    lenders have raised issues of whether such projects should be
    eligible for tax-exempt leasing.

-   **Increases the value and functionality of housing:** Similar to the
    frozen base incentive, when modernization funds are insufficient to
    cover all of the capital needs of the housing authority, the add-on
    allows the tapping of private capital. Capital improvements such as
    a new boiler or heat pump, additional insulation or upgraded heating
    and cooling controls add to the value of the property, as does the
    increased energy efficiency. Tenant comfort is also often improved.

-   **Shorter lead time:** Because the additional subsidy does not
    require that loan payments be dependent on savings, the housing
    authority may opt not to use a performance contract. In these cases,
    arranging a project using the additional subsidy requires less lead
    time than that needed for one using the frozen base incentive, where
    a performance contract is required. In cases where the need for new
    equipment or repairs is immediate, the additional subsidy may be
    more practical.

-   **Less paperwork:** If the additional subsidy does not involve an
    ESCO, there is no need to prepare, distribute or evaluate a Request
    for Qualifications. However, the project will still need HUD
    approval prior to implementation, and the savings must be calculated
    annually.

-   **Lower total project costs:** In cases where no ESCO involved, the
    costs that would be incurred if using one for a performance
    contract, such as its overhead in planning the project, arranging
    financing and monitoring the project after construction, are
    avoided. On the other hand, many of these activities will have to be
    done by housing authority staff. So much of the decreased expense is
    merely a shifting of those costs from consulting to labor costs.
    Additionally, the money saved by not paying for a savings guarantee
    must be balanced against the increased risk borne by the housing
    authority, on whose shoulders it falls to ensure that savings cover
    the debt service.

-   **Cost of the energy audit:** There is no requirement for an energy
    audit, so this cost may be avoided, if not using an ESCO. This is
    highly unwise, though, because the housing authority must be
    absolutely certain that the measures it chooses will pay for
    themselves. If they do not pay for themselves, the housing
    authority's operating subsidy for the following year will be
    decreased. Because of this, it is best to have a thorough audit done
    of the buildings to be retrofitted.

#### Disadvantages of the Additional Subsidy {#disadvantages-of-the-additional-subsidy .unnumbered}

There are a number of disadvantages to the additional subsidy. These
include:

-   **Treatment of savings:** With the additional subsidy, the rolling
    base is not frozen, so the housing authority doesn't capture any
    more savings than it would have traditionally using the standard PFS
    incentives. (See Chapter 4 for a discussion of standard PFS
    savings.) Because HUD regulations allow a housing authority to keep
    100% of the savings that are generated by a project using the frozen
    base method, for the life of the financing, it may be better to go
    this route than the additional subsidy. On the other hand, the
    housing authority does not have to repay their debt service out of
    the savings they do retain -- they receive additional operating
    subsidy for this. Cash flows from the various incentives and factors
    to consider when determining which route is best for a particular
    housing authority are discussed in Chapter 9, "Making the Decision".

-   **Risk:** HUD requires that the savings must meet or exceed the
    payments for the debt service every year. If there is no ESCO
    providing a savings guarantee, the entire burden of risk for the
    project not performing to expectations falls on the housing
    authority. If HUD will not allow a floor rate to be used when
    calculating savings from the add-on subsidy, the housing authority
    also assumes the rate risk of the project. There are contractual and
    regulatory limits on what money can be used to pay for these loans
    if there is a shortfall. Only savings and non-HUD funds may be paid
    to repay these private loans. This can severely limit a housing
    authority's options in the case of a shortfall. (HUD Form 53012A,
    Annual Contributions Contract, Part A, July 1995). Because of these
    risks it is often best to use a performance contract when doing a
    conservation project.

-   **Standard procurement rules:** When financing a project without
    using a performance contract, the housing authority must follow
    standard procurement processes, not the streamlined method used for
    performance contracting. This can add time and risk. The lowest
    bidder may not be the best alternative when trying to make sure that
    savings meet expectations.

-   **Project management:** The housing authority, rather than an ESCO,
    may be responsible for all phases of the project -- design,
    financing, construction management, troubleshooting and monitoring
    savings. This can take a significant chunk of housing authority
    staff time.

### 4. Summary

The additional subsidy is a valuable option in the variety of incentives
HUD allows for funding conservation projects in housing authority
properties. The biggest differences between it and the frozen base
method are: 1.) how the housing authority is reimbursed for the project
costs, and 2.) that the housing authority does not *have* to use an
energy services company, although it may want to seriously consider that
option to shift risk away from itself. Unit 3, "Decision: Which Method
to Use?" helps you decide where to go from here. If using a performance
contract with the additional subsidy, refer to Unit 4, "The Performance
Contracting Route" for more details on implementing this type of
project.

## Chapter 7 

## the Rate Reduction INCENTIVE

Utility bills are a function of two components: consumption and the cost
per unit of the resources being consumed. The HCDA of 1987 makes
provisions to encourage shopping for better rates, in addition to the
incentives to lower consumption that were previously discussed. Some
buildings may have relatively low consumption -- where conservation
measures would be difficult to get results -- but still have high bills
due to high costs for energy or water. In these cases, the rate
reduction method may be the best course to pursue.

With the advent of deregulation in the gas and electric industries,
there are more opportunities for lowering the cost of utilities than
ever before. In order to understand the opportunities available for
decreasing utility costs through shopping for better prices, it is
helpful to understand the process that brings utilities to the
buildings. In addition, it is important to be aware of all of the
components that make up charges on a utility bill.

### 1. Regulated Utility Primer

#### Deregulation

Much of the natural gas industry was deregulated with FERC Order 636 in
November, 1994. The distribution of natural gas within a state is still
regulated by state public utility commissions (also known as public
service commissions, state corporation commissions and other similar
titles). In most localities, though, commercial and industrial customers
(as determined by the volume of gas consumed) can purchase gas from an
independent **broker** or **marketer**, using the **local distribution
company (LDC)** only to deliver the gas. This is known as **transporting
gas**. Some areas are now piloting programs to allow residential
customers to choose their gas supplier too, but at the time of
publication, this is still of scattered availability.

Deregulation of the electric industry is proceeding on a state-by-state
basis. There is the potential for federal action that would deregulate
the industry nationwide, but this has not yet occurred. The analog for
electricity to transporting gas is "wheeling." **Wholesale wheeling**,
authorized by the Energy Policy Act of 1992, opened access to the
electric grid so utilities could sell excess power to other utilities.
Wholesale wheeling is not relevant to most housing authorities, although
at least one housing authority known to the authors is pursuing
purchasing electricity from an alternate supplier using wholesale
wheeling. **Retail wheeling**, on the other hand, enables utility
customers to purchase electricity from someone other than the local
utility. At the time of publication, about 10 states have passed
legislation allowing retail wheeling, and a few pilot programs are
beginning in California, New England and elsewhere at the time of
publication. If your state has retail wheeling, you may be able to
reduce your costs by purchasing electricity from a third party.

With deregulation, the market has become **unbundled**. Before
deregulation, the gas or electric company provided a "bundled" package
of services, including everything necessary to bring the utility to the
building. With unbundling, each of these services can be purchased
separately, so a customer (or a customer's representative, such as a
broker) can shop for the best prices available for each component. The
options available vary significantly from area to area. Shop around to
find out what options are available to your housing authority.

#### Natural Gas

The process of getting natural gas from the ground to the **burner tip**
is more complicated than many people realize. Once the gas is located
and extracted by a producer, it is transported to the local distribution
company by a **transportation company**. The local distribution company
delivers it to the consumer. Due to the seasonal nature of natural gas
usage, it is often extracted at times of low demand and stored until it
is needed.

Prior to deregulation, the transportation company would buy the natural
gas from the producers, the local distribution company would buy it from
the transportation company and the customer would buy it from the local
distribution company. Since FERC Order 636, the transportation company
simply moves the gas. It is the distribution company's responsibility to
purchase the gas from the producer. And it is possible for a housing
authority to bypass the distribution company as well. They can purchase
gas directly from the producer, using a broker, or purchase the gas from
a marketer. In these cases, the distribution company simply delivers the
gas that the housing authority purchases through a third party.

#### Electricity

The ease of flipping a switch to turn on an electric appliance belies
the complexity of the process involved with getting the electricity to
that switch. It is similar to the process by which natural gas is
delivered. Electricity can be generated by a number of methods ranging
from large nuclear or coal-fired plants to small, home-based solar or
wind generation. There are numerous power producers in the business,
including independent producers and utility-owned production facilities.
After electricity is produced by the generation company, a
transportation company delivers it to the local utility, which is known
as a distribution company. The distribution company delivers it to the
end customer. There are no widely used methods to store electricity, so
it is more sensitive to changes in demand than natural gas.

#### Utility Charges

With both gas and electric usage, the utility bill total is composed of
a number of parts. Some of these are dependent on the amount of fuel
used while others are not. The fuel-based costs include a **fuel
charge** and a **meter rate**. The fuel charge is based on the actual
amount the utility had to pay for the gas or electricity the customer
used. They are not allowed to make a profit on this portion of the bill
and must simply pass through their costs to the consumer. Generally, it
is this portion of the bill that a housing authority may reduce by going
to a broker or marketer. Energy is purchased from a variety of producers
and is bought using short- and long-term contracts, as well as spot
markets. A savvy marketer or broker may be able to offer a lower fuel
cost than the local utility, even though the utility isn't marking up
their costs at all.

The meter rate covers the utility's cost of providing service. Often
times, this rate will vary in what are called **blocks** or **steps** --
i.e. the usage is billed at one rate up to a certain limit, after which
another rate kicks in. It includes such things as operating expenses,
taxes, depreciation and the company's allowed rate of return.

Other charges include a **meter charge** or **customer charge, demand
charges** and **reactive charges**. The meter charge is a flat rate
assigned to each meter. It is generally set to cover the fixed costs of
servicing the customers account, such as meter reading, and therefore
does not vary with the volume of resource that is used.

Demand charges are based on the amount of capacity the utility must have
to service that customer. In the case of a natural gas company, for
example, capacity depends on how much pipeline space must be reserved
(MCF capacity vs. MCF). For an electric company, capacity depends on how
much generation and line capacity is needed (KW vs. kWh). This charge is
based on **peak demand**. On the hottest day of summer, or the coldest
day of winter, the utility may meet restrictions in the amount of its
product that it can deliver. Demand charges serve to encourage consumers
to shift their usage away from peak times, and also to reimburse the
utility for any extra capacity it needs to build.

**Reactive charges** are specific to electric utilities. They are
charges to a user of electricity whose equipment introduces wave
distortion (harmonic shifts) into the power system. The \"normal\" power
factor for an account is 0.85; power factors less than that are
considered low and need correction. The perfect power factor is 1.0.
Inductive loads are the source of power factor problems. Large motors
are the largest contributor to power factor problems. Large air handler
motors, compressor motors, cooling tower motors and pump motors are the
usual problem source in large commercial and industrial buildings;
especially those with variable drives. Fluorescent lamp ballasts are a
minor contributor to power factor problems relative to motors. Resistive
loads have a power factor of 1.0 and are not a contributor to power
factor problems. Power factor problems are corrected by installing
capacitors on the incoming power lines. They \"dampen\" the wave
distortion. There is no rule of thumb to capacitor power factor
correction; although the higher the load, the more capacitance is needed
to correct the problem. When considering conservation retrofits, the
affect of the measures on alleviating or exacerbating power factor
problems, and the associated charges, should be considered. (Heiss,
1998)

Rates charged are also differentiated depending on whether the customer
wants **firm** or **interruptible** service. With firm service, the
customer is contracting for service at all times, even during peak usage
periods such as very hot or cold weather. This requirement means the
utility must be sure to have enough capacity and commodity to serve the
customer during these peak periods. Consequently, the rate charged for
firm service is generally much higher than that charged for
interruptible service. With interruptible service, the utility may issue
**curtailment** notices during periods of peak demand. During these
periods, interruptible customers must stop using that fuel source in
order that the utility may have enough capacity and product to serve
their firm customers. This increase in price may affect both the meter
rate that is charged by the local distribution company and the price per
unit of energy when going through a marketer. In both cases, the added
charge is due to higher costs during times of peak demand and to charges
for reserving transportation and distribution capacity.

Utilities usually require "human needs" accounts, such as residential
heating, to contract for delivery using firm rates. This may negate the
savings that are available by purchasing gas or electricity from a
broker or marketer. A strategy to avoid having to pay the higher tariff
is to utilize heating plants with dual fuel capabilities, so that, for
instance, a boiler could be switched from gas to oil during curtailment
periods.

The above rates are based on the amount the local public utility
commission has determined is fair and reasonable. The rates vary
depending on the customer's class of service, which is generally
determined by the volume of energy they purchase. Rates are published in
what is known as a **tariff**. When a utility has a rate case, the
tariff is what is being determined. And when a utility speaks of its
"rates" increasing or decreasing, it is only talking about these
portions of the charges -- not the fuel charge. Generally, these rates
are non-negotiable. But the tariff can sometimes be negotiated down in
the case of a large customer with a choice of an alternative fuel or
provider, where the utility is worried about losing the business
altogether. In these cases it is possible for a housing authority to
reduce costs in two ways: reducing the fuel charge by buying from a
marketer and reducing the tariff charged by the LDC for delivering the
energy.

As deregulation proceeds, the relative proportion of these rates'
contributions to the utility's bottom line may change. This is important
for housing authorities, especially if more costs are shifted from
volume-dependent rates to fixed-rates, like meter charges. It could
impact the utility costs of housing authorities and their tenants if
there are a large number of individual meters in their complexes.

### 2. Non-regulated Utilities

In most states fuel oil and propane are not regulated by the state
public utility commission. They are sold on the free market. If your
housing authority uses these fuels, you may bargain for a better price
with your local distributor. Because there are no published, regulated
rates for these fuels, trying to document savings to take advantage of
HUD's rate reduction incentives may be difficult.

### 3. Fuel Conversions

In some instances, there is the option of changing over from a high cost
fuel source to a lower cost option. Fuel conversions involve capital
intensive retrofits, and this makes them good candidates for using the
frozen base or the additional subsidy in order to cover the capital
investment. Changing fuels is not mentioned specifically in relation to
these incentives, although there is guidance on establishing the AUCL
for a project that has "experienced conversion from one energy source to
another outlined in 24 CFR 990.107 (c)(3)(B). Because of the lack of
direct regulatory guidance, any project that involves changing from one
energy source to another will mostly likely need to go to HUD's
Washington, D.C. offices for a waiver.

### 4. Guidelines for Using the Rate Reduction Incentive

HUD regulations spell out specific criteria that a project using the
rate reduction method must meet \[in 24 CFR 990.107(b)(2)\]. The HUD
requirements are outlined below.

**Action outside normal participation in rate-making procedures:** In
order to keep the savings from the reduction in utility charges it
negotiates, the housing authority must take steps beyond participating
in a rate case. Examples such as this would include purchasing gas or
electricity through a third party, or negotiating individually with the
utility for a lower rate than the published tariff for their rate class.
At the time of publication, it is unclear whether rates that are reduced
through switching to a lower cost fuel, as part of a performance
contract, will fall under the rate reduction incentive, or whether the
housing authority can use the frozen base to keep 100% of the savings
for the length of the contract. (See Chapter 15 for details on how to
structure this type of arrangement)

**Level of retained savings:** The housing authority is allowed to keep
50% of the savings it negotiates. The other half goes to HUD. In the
past, any change in cost per unit for utilities was factored into the
computation of utility reimbursements. This resulted in HUD keeping 100%
of any reduction in rates.

HUD will not automatically give the 50% of the savings to the housing
authority. *The housing authority must demonstrate to HUD the amount of
savings it has negotiated*. This can be done by comparing the fuel
charge and rates with the local distribution companies' fuel charge and
published tariff. (Note that the tariff is public record and the utility
should be able to provide it to the housing authority. If the utility is
resistant, the tariff can be obtained from the state public utility
commission.)

**Length of retained savings:** There is no limit to the period of time
during which the housing authority may claim this type of savings, as
long as the housing authority can continue to demonstrate them.

In addition to HUD requirements, there are a number of other factors to
consider.

**Types of projects:** In general, projects with high utility rates are
most suited to utilizing the rate reduction method. If a project has
both high consumption and high utility rates, it is often advisable to
address the conservation measures first, assuming it is possible to
obtain a floor rate from HUD. Decreasing the level of consumption makes
the housing authority less susceptible to fluctuating prices in the
future. If the housing authority wants to use a performance contract to
make conservation improvements in the future, decreasing the rate paid
prior to signing the contract will decrease the potential savings.
Decreasing the rate may also make some measures that would otherwise
have been cost-effective into measures that are not so.

### 5. Pros and Cons of the Rate Reduction Method

#### Advantages of the Rate Reduction Method

-   **Retain 50% of the savings:** The housing authority may keep half
    of the saving it negotiates from decreased utility charges. This
    money can help supplement other work that needs to be done to
    housing authority properties or pay for projects such as anti-drug
    programs.

-   **Speed of Implementation:** This is the quickest method for
    realizing savings from decreased utility costs.

-   **Less paperwork and staff time:** Although there is some legwork to
    be done by housing authority staff, in general, this approach is the
    least burdensome for housing authorities to implement.

-   **Method for addressing high-cost buildings with low consumption:**
    Without this option, housing authorities would have no options for
    retaining savings if their buildings were efficient, but still
    expensive to operate due to high utility charges.

#### Disadvantages of the Rate Reduction Method

-   **Purchasing is complex process:** In order to navigate all of the
    options and make the best deals possible, it is best to have staff
    knowledgeable about utility purchasing in a deregulated market. In
    lieu of hiring staff, it is possible to hire a consultant or rely on
    a reputable broker or marketer.

-   **Risk:** It is possible to end up paying *more* for energy if the
    purchasing contract is not set up with proper protections for the
    housing authority. If the housing authority does not have in-house
    staff with expertise in these areas, it may be wise to seek outside
    help when writing an RFP or setting up a contract for an alternative
    energy supplier.

-   **Paperwork:** Although the paperwork is much less involved than
    other methods available under the HCDA of 1987, there is some. The
    housing authority must be able to demonstrate that it is paying less
    than if it was purchasing directly from the local utility. This may
    involve tracking down current tariffs from a resistant utility, or
    contacting the local utility commission. Also, the housing authority
    may need to issue an RFP for services from a broker or marketer (See
    Appendix E for a sample RFP and Chapter 9 for a discussion on what
    to include in the RFP.)

-   **Decreased savings from performance contracts and the additional
    subsidy.** If a housing authority negotiates cheaper prices for fuel
    before implementing conservation projects, the potential savings
    attributed to the conservation project will be decreased. (See
    Chapter 5, "Introduction to Performance Contracting" and Chapter 6,
    "Introduction to the Additional Subsidy" for discussions on the
    impact of rate changes on these methods.)

### 6. Summary {#summary-3 .unnumbered}

The advent of utility deregulation has made the rate reduction method an
even more valuable option for buildings where utility costs are high but
consumption is low. Because negotiating for better prices is often
easier if the customer consumes large quantities of energy, housing
authorities may want to consider retaining master meters for their
utilities. Caution should be exercised in utilizing this option if
conservation measures are being considered in the near future. If a
lower-cost fuel option is available, a fuel-switching retrofit should be
considered as part of a performance contract or additional subsidy
conservation project.

# DECISION: wHICH METHOD TO USE?

Planning and implementing a conservation or rate reduction project using
the incentives of the Housing and Community Development Act of 1987 can
be complicated and entail a considerable amount of staff time. But if
done well, many parties can benefit from a source of funding --
decreased utility bills -- that would normally remain untapped. The
scope of the projects that can be undertaken, and which might remain
undone otherwise, can make the investment of time well worthwhile.

Chapter 8 outlines the steps to gather data and prepare for making the
decision of which course - modernization funds, performance contract or
rate reduction; frozen base or add-on subsidy; or a combination of
several - is right for a particular housing authority. Chapter 9
discusses the factors that should be considered in that decision-making
process.

##  {#section-4 .unnumbered}

## Chapter 8  {#chapter-8 .unnumbered}

## PREPARING FOR THE DECISION {#preparing-for-the-decision .unnumbered}

In order to choose the course of action that is most beneficial to a
particular housing authority, it is of the utmost importance to evaluate
the potential benefits of each of the possible options for decreasing
utility expenditures available under the HCDA of 1987. Energy
performance contracting for conservation retrofits, in particular, may
require many hours of staff time and large amounts of money to be
invested in project preparation and implementation. So it must be
determined that a conservation retrofit is a wise course of action
before investing too many resources into the project. Once the decision
to pursue a performance contract is made, appropriate steps must be
followed to ensure the housing authority's interests are protected. The
successful completion of the performance contract depends on it.

This chapter outlines the steps that should be taken to help decide if
conservation retrofits make sense, including performing a preliminary
fuel- and water-use audit and assembling a team to manage the project.
If a retrofit is indicated, then the next step is choosing what type of
incentive is the right vehicle for financing the project.

### 1. Perform the Fuel- and Water-Use Audit {#perform-the-fuel--and-water-use-audit .unnumbered}

In determining whether to pursue conservation options under the HCDA of
1987, the housing authority should acquire and analyze fuel- and
water-use data for each building. Through this preliminary audit, it is
possible to tell if the buildings are using enough resources to warrant
taking further steps -- without ever setting foot in a building. This is
a low-cost way to understand which buildings merit an investment of time
and money versus those which will not give a good return on investment.
If resource use is not high enough to merit pursuing conservation
measures, the housing authority may still be able to save significantly
on its utility expenditures by pursuing alternative methods for
purchasing energy. (See Chapter 7) It may be possible for the housing
authority to perform this preliminary audit itself, or it may hire a
consultant to help. (See "Where to Go for Fuel Analysis Services"
below.)

The preliminary fuel- and water-use audit is critical for several
financially important reasons. With performance contracting, the housing
authority is liable for the costs of any energy audits an ESCO performs,
if the housing authority decides not to progress with any further work.
This can be true even if the decision not to continue is because no
cost-effective measures are available, depending on how the RFP and
Audit Agreement are designed. These audits can cost anywhere from \$35
to \$150 or more per unit, depending on the complexity of the buildings
and the size of the conservation project. Because of this expense, it is
vital to send out RFPs only in cases where there is definitely potential
for savings through conservation. If a housing authority uses the
additional subsidy method, without an ESCO the housing authority's
operating subsidy may be cut by any shortfall in projected savings. So
the housing authority must be sure that savings potential is truly there
before launching a project.

Past audits performed on the properties can also supplement the
information obtained through the preliminary fuel-and-water-use audit.

#### Methods for Analyzing Resource Use {#methods-for-analyzing-resource-use .unnumbered}

Sophisticated computer modeling tools can analyze energy use in a
building and adjust the data to account for impacts on fuel use due to
differences in climate from one area to another, changes in the weather
from year to year, and the size of the building. These tools can be used
to look at fuel use in one building, or a set of buildings. The analysis
can be done for a point in time, e.g. how much energy did my building
use last year?, or over a period of time, e.g. how much energy did my
building use this year compared to last year? For this preliminary
audit, an evaluator will use the models to examine current energy use in
the buildings being considered for retrofit work. If conservation
measures are installed, these fuel-use programs can also be used to
track the savings by comparing pre- and post-retrofit fuel use.

When a housing authority looks at the fuel and water use at their
properties, it is important for them to have a benchmark to compare
against. Benchmarks for energy use may be set up in units of "Btus of
energy used, per square foot of building area per **heating degree day
(HDD)** or **cooling degree day (CDD)"**, "dollars per square foot", or
"Btus per square foot". All of these units normalize the energy used (or
energy cost) by dividing it by the size of the buildings. In this way,
the fact that a larger building should be expected to use more energy
than a small one is factored in. Btu/sf/dd also standardizes for
climate. Water use can also be normalized by looking at gallons/unit or
gallons/person.

Heating and cooling degree days are summary measures which compare the
average daily temperature in an area to a baseline temperature, usually
65 degrees for HDDs and 75 degrees for CDDs. These baselines are chosen
as representing the temperature at which heating or cooling equipment
will be needed. For example, if the average daily temperature were 45
degrees, that day would have 20 heating degree days. If the average
daily temperature were 25 degrees, the day would have 40 heating degree
days. The number of HDDs and CDDs over a year are added together to
arrive at an annualized measure. The more heating and cooling degree
days there are for an area, the more extreme the weather. They indicate
relative amounts of fuel that will be needed in a building as weather
changes. They are used here to normalize fuel use for variations in
weather and climate when determining the possibility of decreasing
consumption through conservation.

A first step in benchmarking is to compare buildings across the HA's
portfolio. Find out which buildings are using more energy and water than
others at your housing authority. It is also important to compare to an
overall benchmark, if possible. All of your buildings may be higher (or
lower) than average energy and/or water users. Comparing against
regional or national data can help you determine this. Through analyzing
numerous buildings, NCAT developed a standard for classifying high,
medium and low energy and water users. (Hayes, 1998) (See Figure 5.)

Figure 5. Ranges of Utility Use

+-----------------+----------+-------------+----------+---------------+
| **Ranges**      | **Ba     | **Heatin    | *        | **Water**     |
|                 | seload** | g/Cooling** | *Total** |               |
+-----------------+----------+-------------+----------+---------------+
| **of Utility    |          | **(B        | **(Btu/  | **            |
| Use**           |          | tu/SF/DD)** | SF/DD)** | (Btu/SF/DD)** |
+-----------------+----------+-------------+----------+---------------+
| **Low**         | Below 5  | Below 10    | Below 15 | Below 71      |
|                 |          |             |          |               |
| **Medium**      |          |             |          |               |
|                 |          |             |          |               |
| **High**        |          |             |          |               |
+-----------------+----------+-------------+----------+---------------+
|                 | 5 - 8    | 10 - 13     | 15 - 21  | 70 - 90       |
+-----------------+----------+-------------+----------+---------------+
|                 | Above 8  | Above 13    | Above 21 | Above 90      |
+-----------------+----------+-------------+----------+---------------+

Determining where a building falls in these classifications can help
identify the potential for savings from conservation measures, but it
must be remembered that these rankings are only guidelines. There are
many factors that affect energy use in a building. The classification
system in Figure 5 attempts to get at a first cut of whether there is
potential for conservation savings. There is no "right" answer, no
absolute cutoff point in energy and/or water use below which a
conservation project doesn't work and above which it does.

It is best to compare your buildings' data to several benchmarks. The
more information you get that points in the same direction, the more
confidence you can have in your assessment of the potential for savings.
Work with your closest Federal Department of Energy or State Energy
office to get other benchmarking data, perhaps derived from buildings in
your region or type of occupancy, such as whether the buildings have
families or elderly tenants. You can also ask the ESCos that have
expressed an interest in bidding on the job what benchmarks they use to
help "pre-qualify" buildings.

Remember, too, that the quality of the fuel and water use data you use
is extremely important. Variations in meter accuracy, completeness of
billing data, etc. can greatly affect the reliability of your analysis.

#### Computer Evaluation {#computer-evaluation .unnumbered}

Computers can help evaluate fuel use data. Some programs can be used to
model individual buildings and project what their energy use will be if
various conservation retrofits are installed. It is this type of
computer program that an ESCO will use when performing an energy audit
and when recommending specific energy conservation measures. These
programs predict energy use based on engineering estimates of the
physics of heat transfer in a building. Another type of program analyzes
actual fuel use. This type of program looks at the actual utility usage
and normalizes it for weather, among other things. It provides
statistical measures that help an evaluator determine whether the input
data, and therefore the output, is reliable.

The **Princeton Scorekeeping Method (PRISM)**, first released by
Princeton University in 1986, is one of the computerized fuel-use
modeling programs. The version of PRISM that was released in 1995 makes
it easier to allow for estimated readings and inaccurate data. Through
statistical analysis of the fuel-use data, PRISM can break up energy use
into heating, cooling and baseload use. Baseload is energy use that is
not dependent on the weather, such as that used for lighting, domestic
hot water and household appliances. PRISM will also normalize the fuel
use for the weather experienced during the period under evaluation,
producing a measurement called Normalized Annual Consumption (NAC). NAC
is the amount of fuel the building *would have used* if temperatures
over the heating or cooling season had been "normal" -- Normal is
determined by averaging the temperatures experienced in the area over a
number of years, usually 30.

This breakdown of where energy is used can help the housing authority
and ESCO to determine where the most likely conservation retrofits lie.
A building with high baseload and low NAC will require very different
conservation measures than one with a low baseload and high NAC.

#### Data Needed {#data-needed .unnumbered}

The housing authority will need to provide energy and water consumption
data for the entire building, including common areas and tenant occupied
areas. For this preliminary audit, it is important to have at least 12
months, preferably 24 months, of past consumption history, complete with
meter read or fuel delivery dates. If the analysis indicates that a
conservation project is warranted, 3 years of data will be needed for
establishing baseline utility use and freezing the rolling base, so it
is wise to gather as much data up front as possible.

Consumption is the amount of energy used -- for instance, kwh of
electricity, or therms of gas -- not the dollar amount spent. In
addition, information is needed on building size, use and occupancy.
Weather data can be obtained by the evaluator from climate data sources
and doesn't need to be provided by the housing authority.

#### Cautions When Using Computer Tools {#cautions-when-using-computer-tools .unnumbered}

There are some difficulties involved in utilizing computerized fuel-use
programs such as PRISM. Historical weather data for an area is generally
only available from the nearest airport weather station, and the weather
at the site of the building being analyzed may vary significantly.
Missing or inaccurate utility information can also affect the accuracy
of results. A computer analysis is only as good as the data fed into the
program --- good clean data is essential if the analysis is to
accurately characterize a building\'s energy use and potential
conservation savings. See Appendix L for a discussion of statistical
measures to examine when evaluating the accuracy of the data produced by
PRISM.

#### Where to Go for Fuel Analysis Services

There are a number of options available for obtaining fuel use analysis.
Some ESCOs will evaluate fuel use as part of their response to a Request
for Proposals (RFP) issued for performance contracting. Unfortunately,
due to the time involved in preparing an RFP, it is best to evaluate
fuel usage and the potential for conservation *before* issuing an RFP. A
housing authority may hire a consultant with experience evaluating
savings from energy programs such as the Low Income Home Weatherization
Assistance Program (HWAP) and utility demand-side management programs.
The National Center for Appropriate Technology also provides fuel use
analysis services for public and assisted housing. If the analysis
indicates potential for conservation, and the housing authority decides
to pursue a conservation project, these costs can be rolled into the
project costs and paid for through the conservation financing, allowing
the authority's CIAP/CGP funds to be reimbursed.

### 2. Assemble the Project Team {#assemble-the-project-team .unnumbered}

Once it has been determined that enough savings potential exists to
warrant pursuing energy conservation measures, the next step is to put
together a team to work on the project. Start by choosing a project
manager who will take responsibility for coordinating and managing the
project at least through the planning and ESCO-selection processes, if
applicable. This person will draw on the expertise of the others on the
team.

There are a number of subject areas that are important to cover when
choosing team members. These include energy conservation, project
management, finance, facility and operations management, legal matters,
and procurement policy. Technical advisors and consultants, as well as
HUD Field Office representatives may also be included on the team.

One of the project manager's first responsibilities should be to contact
the HUD Field Office to let it know the housing authority is considering
using a conservation project using the incentives from the HCD of 1987.
For larger housing authorities, it might even be worth hiring a staff
person to deal specifically with energy matters.

#### Hiring an Energy Manager {#hiring-an-energy-manager .unnumbered}

The supply and conservation of energy is a complex and ever-changing
field. The staff of a housing authority often does not have the time nor
the expertise to keep abreast of developments in energy conservation,
use and procurement. Keeping track of energy efficiency options, fuel
prices and utility billing for a large housing authority is a technical
and demanding job. Hiring a full-time energy manager with experience
with multifamily housing, ESCOs, HUD procedures and utility deregulation
is a good investment for most larger housing authorities.

An energy manager's responsibilities typically include coordination of
conservation activities between staff, residents and government
agencies; keeping up to date on energy-management issues, techniques and
opportunities; fuel-bill monitoring; and energy audit oversight. The
energy manager plays a lead role in the development and acquisition of
contracts for conservation improvements to housing authority properties
and in monitoring energy consumption. And as the natural gas and
electric industries deregulate, there will be even more opportunities
for managing utility expenditures through **gas transportation** and
through **retail-wheeling of electricity**.

##### Case Study

The Chicago Housing Authority (CHA) hired an energy specialist in
January, 1993. He had spent the previous eight years administering
energy purchases and energy-management programs for the Chicago public
school system, which was the largest customer of the local natural gas
utility, People's Gas. While with the school system, he had negotiated a
gas-storage agreement with the utility that saved the school system a
substantial sum.

The new energy manager's first undertaking at CHA was to negotiate a
similar arrangement for the housing authority, which, with more than
56,000 apartments, was the gas utility's second largest customer. The
utility agreed to store more than one thousand MMCF at no cost to the
housing authority. The storage capability made it possible for the
housing authority to purchase natural gas when rates were low and to use
gas from storage for heating when gas rates were high. The storage
system saved CHA \$10 million in 1993 and \$12 million in 1994. Savings
have decreased since that time due to fluctuations in the price of
natural gas and changes in gas company billing procedure. The manager
also instituted a periodic audit of utility bills to ensure that the
housing authority was being charged correctly --- an action that saved
\$525,000 during 1993.

## Chapter 9 

## making the decision

After the housing authority has assembled the project team and gathered
the necessary data for making a well-informed decision, it is time to
chose which route to pursue to decrease the housing authority's utility
expenditures. If the energy and/or water use is low, but expenditures
are high, negotiating rate reductions is the best course. (See Chapters
7 and 15.) If consumption is high, a conservation project may be
worthwhile.

When a conservation project is determined to be feasible, the next step
is to evaluate the options available for funding. These include spending
modernization funds and using the standard PFS method, or arranging a
loan from a non-HUD source and using the frozen base or the additional
subsidy incentives. The team also must decide whether to use a
performance contract or administer the project with housing authority
staff. To make these decisions, a number of factors should be
considered. These include the availability of modernization dollars,
investment of money and staff time and risks for each option and savings
retained by the housing authority.

#### Availability of Modernization Dollars

A substantial part of the decision of which funding option to use is
whether there are sufficient modernization dollars available to do the
conservation work that the housing authority desires. If money is
available from this source, the housing authority should give serious
consideration to using it on the conservation project. If the existing
pot of modernization dollars is insufficient to cover all of the housing
authority's capital improvement needs, they may want to consider
borrowing private capital and using the frozen base or add-on subsidy
incentives.

#### Staff Resources and Project Timelines 

Some of these methods are more time consuming for housing authority
staff than others. The project team should factor the resources that
will be needed from the housing authority into its decision. The
standard PFS method uses existing procedures and should not require any
more staff time than would normally be allocated to a project of this
type. The rate reduction method requires staff to document the decrease
in rate, to investigate alternative utility suppliers and negotiate
contracts.

For the additional subsidy, staff must project savings and determine a
cost effective measures package, or they must go through the process
outlined below to enter into a performance contract with an energy
services company. If doing the work themselves, staff members must
document their savings projections and rationale behind the selected
measures to obtain HUD approval for an additional subsidy. Staff are
responsible for arranging the project financing and managing the
construction. Every year they will need to gather consumption
information and demonstrate that actual savings met or exceeded
predicted savings.

If using the frozen base, or an ESCO with the additional subsidy, some
of the roles mentioned for staff above are taken over by the energy
services company. But the process of securing an ESCO can be time
consuming in itself. And hiring an ESCO introduces another party to the
project, which can add time and complexity. Chapter 10, "Choosing an
ESCO," outlines this process and the responsibilities of housing
authority staff in performance contracting.

The time needed to implement a project varies with each incentive. The
rate reduction method can be done relatively quickly. Conservation
projects, being capital improvement projects, take longer. Of the three
options for financing conservation retrofits, the standard PFS is the
quickest, in that it uses the same protocols as any other modernization
project and no documentation of savings are needed, beyond the filling
out the 52722-A and -B forms in the same manner they are normally
completed. Energy performance contracting, whether done with the add-on
subsidy or the frozen base incentive, has the longest timeline due to
the many steps involved. It is not suitable for projects needing an
extremely quick turn around.

#### Risk

##### Standard PFS Method

When a housing authority is debating which route to pursue for
decreasing utility costs, there are a number of risk points to be
considered. The standard PFS method may be least risky, in terms of the
exposure a housing authority has from a project. But there is the other
side of risk -- that of not being able to afford to do all the work that
could be done for facilities improvements. If modernization funds are
used for energy projects, it may be at the expense of other work that
could or should be done. With privatization, not taking advantage of
every opportunity available to improve its properties could be costly to
a housing authority. In a privatized world, if facilities don't measure
up, tenants may move to more favorable living quarters. If the housing
authority decides against addressing needed energy measures, it is
paying money to a utility company when it could be paying a loan for
improvements to its facilities (and pocketing some of the savings as
well).

##### The Additional Subsidy 

If the housing authority chooses to do the conservation project using
the additional subsidy incentive without using an ESCO to guarantee the
savings, they assume the risk of the project performing as predicted. If
the measures don't perform, the housing authority still must pay its
loans, and there are contractual and regulatory restrictions on what
source of funds may be used for this purpose. (HUD Form 53012A, Annual
Contributions Contract, Part A, July 1995) The amount of the additional
subsidy will be decreased in any years following a shortfall between
actual savings and the amount of the debt service. Housing authorities
are also at risk for changes in rates with the additional subsidy,
unless HUD allows them to stipulate a floor rate for calculating savings
over the years. Even if the retrofit measures perform as predicted, the
dollar value of the savings may be eroded by falling utility rates to
the point where the savings do not cover the amount of the debt service.
At the time of publication the, the authors are unaware of any cases
where a HUD floor rate has been used with the additional subsidy method.
If the housing authority uses a performance contract for the additional
subsidy, the risks discussed below for the frozen base should be
considered.

##### The Rate Reduction Method

In order to profit from the rate reduction method, a housing authority
must be well versed in the opportunities available from deregulation in
their area, if indeed their utilities have been deregulated. They must
also be skilled in dealing with energy procurement contracts. These
contracts vary in complexity. The simpler of these, such as contracts
that stipulate a certain percentage savings below the local distribution
company price, may have little risk. More complex contracts, while
perhaps yielding greater savings, can also lead to greater risk. It is
possible for a housing authority to pay *more* for energy from an
alternate supplier than from their local distribution company. If the
housing authority or its consultants are well-versed in these issues,
risk to the housing authority can be minimized. Still, savings are
volatile and can not be counted on for long term income. And the housing
authority can lose if it wants to do conservation later -- reduced rates
will lead to a smaller pot of savings to draw from. On the positive
side, with the rate reduction method there is no capital expenditure and
a comparatively small amount of staff time needed.

##### The Frozen Base Incentive

The risk to the housing authority for consumption savings not meeting
predictions is mitigated in the frozen base incentive (and the add-on
subsidy if done with a performance contract) by having the ESCO
guarantee the savings in the performance contract. Risks from rate
fluctuations may be addressed through the use of floor rates. There are
risks, though, to performance contracts.

The clearest risk is that of having to pay for a high cost audit if the
housing authority and the ESCO can not reach agreement on an energy
services contract. A complete and thorough audit is very necessary to a
successful performance contract. But because of its expense, care must
be taken prior to signing an agreement for an audit, that a performance
contract will be feasible. Analyzing fuel and water use before issuing
an RFP will help ensure that predicted savings will be sufficient to
fund a project. Another strategy for mitigating this risk is to
negotiate an audit fee the housing authority is comfortable paying in
the event a final energy services agreement can not be negotiated. Being
clear in the RFP about what expectations the housing authority has,
including potential measures, will help avoid misunderstandings down the
road. Language can also be included in the audit agreement to require
the ESCo to stop the audit if they determine that a cost effective
project is not feasible. This encourages due diligence on their part
prior to bidding on the project.

There are also risks not related to the cost of the audit. HUD has
specific rules for the frozen base, and for performance contracting. It
is important that the housing authority and the ESCO be very familiar
with those regulations and obtain HUD approvals at every required point.
This will help avoid situations where savings could be disallowed, or
projects must be delayed or canceled prior to signing an energy services
contract. There are also risks from weather, especially if the project
will be dealing with cooling equipment. Since HUD does not allow
adjusting consumption with a cooling degree factor, as they do for
heating, there may be occasions where fluctuations in weather will
result in consumption savings not meeting expectations. The housing
authority must make sure the ESCO is aware of this and willing to
guarantee savings in these situations.

It is possible that even with a savings guarantee a housing authority
may not recoup enough savings from a project to pay for the financing.
It is very important to evaluate the structure and backing of an ESCO's
guarantee, as well as its calculations for computing consumption
savings. A specific RFP, a careful evaluation of these details when
selecting an ESCO, and a working knowledge of what to look for in an
energy services agreement will help ensure that there are no problems
meeting loan payments.

This relatively long discussion on risk inherent to performance
contracting is not meant to discourage pursuing that path. The risks are
greater here than in some of the other methods because it is a more
complex process. But performance contracting offers many advantages, and
it may be the best alternative for a housing authority. If these risks
are addressed up front, there is every likelihood of a successful
project. Going into the process knowing what might be encountered will
enable a housing authority to set up their strategies to avoid any
problems. Unit 4 will outline in much greater detail the steps involved
in implementing a successful performance contract

#### Net savings to Housing Authority

This may be the least important factor of those discussed. Although it
is tempting to look at dollar amounts to the exclusion of all else, the
"soft" issues discussed above are very important to the decision-making
process. In addition, the type of retrofits to be installed, their
useful life, and the desires of the HUD, the project financiers and the
ESCo may be heavy influences on whether to use the frozen base incentive
or the additional subsidy. As you will see, aside from the increased
capital that is brought to bear when using the incentives of the Housing
and Community Development Act of 1987, the variation in net savings to
the housing authority are relatively small between each of the
incentives. That being said, it is illustrative to see how cash flows
between the housing authority and HUD for each of the methods.

It is impossible to say which method will result in the most benefit to
an authority, without examining their particular situation. Much depends
on what the housing authority wants to get out of the project. Does it
want to use this mainly as an additional source of funding for capital
improvements, or is it more focused on capturing excess savings above
those needed to pay for the retrofits? Does it have modernization funds
that could be spent on energy improvements without bumping another
project that is needed? Are project costs small relative to projected
savings or are most of the savings required to pay the debt service and
annual fees?

When examining total savings to the housing authority, this manual looks
at two aspects of the incentives: 1) the dollars that remain with the
housing authority and 2) the value of any capital improvements that were
done beyond what would have been possible using only modernization
funds. Figures 6 and 7 summarize savings information from the examples
that were presented earlier in the book for each method of conservation
financing. All the examples dealt with a conservation retrofit financed
over 10 years which saved 25% of a \$1 million pre-consumption utility
bill. Total project savings are defined as the gross amount by which
utility bills are decreased over this time period, \$2.5 million. This
common period was chosen to allow for comparison between methods. For
simplicity, the examples held the rate constant so that savings in
consumption translate directly into dollar cost savings. Figure 6
summarizes the savings if the total project cost is \$2 million. Figure
7 uses a total project cost of \$2.4 million.

Figure 6. Comparison of Benefits to Housing Authority from \$2 Million
Project

  ------------ ----------------- ------------------ ------------- --------------- -------------- ----------------
               Pre-Consumption   Post-Consumption   Total Project Project Cost =  Net Dollar     Total Benefit to
                                                    Savings^2^    Capital         Cost           HA
                                                                  Improvement     Savings^3^     
                                                                  Benefit                        

  Standard PFS \$1,000,000       \$750,000          \$2,500,000   \$2,000,000     \$375,000^4^   \$375,000^7^
  Method^1^                                                                                      

  Frozen Base  \$1,000,000       \$750,000          \$2,500,000   \$2,000,000     \$625,000^5^   \$2,625,000^8^

  Additional   \$1,000,000       \$750,000          \$2,500,000   \$2,000,000     \$375,000^6^   \$2,375,000
  Subsidy                                                                                        
  ------------ ----------------- ------------------ ------------- --------------- -------------- ----------------

1 Evaluated over 10 year period for comparison with the other two
methods.

2 10 years at \$250,000 per year savings.

3 See earlier chapters 4,5 and 6 and the footnotes below for further
discussions on how this is derived.

4 = (250,000+250,000+166,667+83,333)/2

5 = Excess Savings during contract period + 50% of savings as base
unfreezes: \[500,000+(166,667+83,333)/2\]

6 = (250,000+250,000+166,667+83,333)/2

7 Project costs are not counted in "Total Benefit to HA", as the funds
did not expand the pot of capital improvement benefits to the HA

8 The HA's total benefit for the frozen base can be greater than total
project savings because the HA retains 50% of the savings for 2 years
after the base unfreezes.

Figure 7. Comparison of Benefits to Housing Authority from \$2.4 Million
Project

  ------------ ----------------- ------------------ ------------- --------------- -------------- ----------------
               Pre-Consumption   Post-Consumption   Total Project Project Cost =  Net Dollar     Total Benefit to
                                                    Savings       Capital         Cost Savings   HA
                                                                  Improvement                    
                                                                  Benefit                        

  Standard PFS \$1,000,000       \$750,000          \$2,500,000   \$2,400,000     \$375,000      \$375,000
  Method                                                                                         

  Frozen Base  \$1,000,000       \$750,000          \$2,500,000   \$2,400,000     \$225,000^1^   \$2,625,000^1^

  Additional   \$1,000,000       \$750,000          \$2,500,000   \$2,400,000     \$375,000      \$2,775,000^2^
  Subsidy                                                                                        
  ------------ ----------------- ------------------ ------------- --------------- -------------- ----------------

1 Note that the Project Costs and the Net Dollar Cost Savings always
combine to equal the Total Benefit to the HA. In this case where the is
higher than in Figure 6, the Net Dollar Cost Savings is lower, but the
Total Benefit to HA is constant.

2 The HA 's total benefit for additional subsidy can be greater than
total project savings because the HA is allowed to keep 50% of rolling
base savings, in addition to HUD amortizing loan payments up to a limit
of annual savings.

Observe that the lowest total benefit to the housing authority is for
the standard PFS method, at \$375,000. The net dollar cost savings are
low because the rolling base isn't frozen and the housing authority only
nets 50% of the savings from decreased consumption. The capital
improvements benefits are counted as zero for this method. Even though
work is done, it does not extend the amount of money available to the
housing authority beyond its normal resources. This is not to say that
the housing authority does not receive benefit from modernization funds,
just that it is not a benefit beyond what they would have received from
the funding formula, whether they did a conservation project or not.
Neither the net dollar cost savings, nor the capital improvement
benefits are dependent on the cost of the project. Benefit to the
housing authority is derived solely from the savings resulting from
decreased consumption.

The frozen base incentive allows a housing authority to keep 100% of the
dollar cost savings from a conservation project for the length of the
financing contract. There are capital improvement benefits in the amount
of the project cost. The capital improvement costs have been counted in
the "Total Benefit to HA" column because this project used private
capital that expanded the pot of funds available to the housing
authority. The savings are captured by freezing the rolling base at the
pre-retrofit consumption level. Once the contract is over, the housing
authority continues to accrue savings as the rolling base unfreezes. So,
benefits to the housing authority will always be higher than the total
savings for those 10 years. Because HUD does not increase the operating
subsidy, the costs of the debt service for the project must be paid for
out of the savings that are generated. The result of this is that *the
total pot of potential benefits to the housing authority is defined by
the total project savings plus the 3 years of retained savings as the
base unfreezes*. If the project costs go up, it decreases the net dollar
cost savings to the housing authority, but increases the capital
improvement benefits. If the project costs go down, it increases the net
dollar cost savings to the housing authority and decreases the capital
improvement benefit. With the frozen base, then, the net dollar cost
savings to the housing authority will always depend on the project cost,
but the total benefit to the housing authority will *only* depend on the
total project savings that are generated. There is simply a trade-off
between how many of this fixed amount of dollars are spent on capital
improvements, and how much comes to the housing authority as cash.
Therefore, in both Figure 6 and Figure 7, the total benefit to the
housing authority is \$2,625,000, the sum of the savings HUD allows the
housing authority to capture.

The additional subsidy uses the same formula as the standard PFS method
for determining dollar cost savings which accrue to the housing
authority. Given a similar amount of consumption savings, each will
produce the same net dollar cost savings to the housing authority, in
this case, \$375,000. The difference is in the capital improvement
benefit. With the additional subsidy method, the housing authority
receives an increase in subsidy sufficient to satisfy the annual debt
service (with the caveat that savings must be at least equal to the debt
service each year, or the following year's operating subsidy will be
decreased by the amount of the shortfall). This extra pot of money
extends the work a housing authority can afford for their properties. So
in cases where a housing authority wants to do more work than its
modernization funds allow, the additional subsidy has a clear advantage
over the standard PFS method. The *total benefit is dependent on the
cost of the project* (as opposed to the frozen base method, where the
total benefit is defined by the savings generated by the project). For
this example, if the project costs \$2 million, the total benefit to the
housing authority is \$2,375,000. If the project costs \$2.4 million,
the total benefit to the housing authority is \$2,775,000.

At first glance, it may appear that the frozen base will always result
in higher total benefit to the housing authority than the additional
subsidy. With the frozen base incentive, HUD allows the housing
authority to net 100% of the difference between the frozen rolling base
and actual consumption. With the additional subsidy, the housing
authority is only allowed to keep 50% of the dollar cost savings and the
base isn't frozen. But as the example above demonstrates, whether the
additional subsidy or the frozen base method is most advantageous
depends on how close the cost of the project is to the total savings.
Other factors which come into play are the size of the project and the
amount of the savings. Remember, it is unwise to base

Figures 6 and 7 look at two scenarios where all the factors other than
project cost are held constant. In the case where the cost is \$2.4
million, which is relatively close to the total project savings of \$2.5
million (Project costs are 96% of savings), using the additional subsidy
results in a slightly higher total benefit to the housing authority
(5.4% greater than the frozen base). Financing a project with costs this
close to savings may happen if the housing authority's goal is to get as
much investment into its buildings as possible. It does this by
including as many items as possible, to the point where predicted
savings are very close to the cost of the project. The total benefit is
high because HUD pays the project cost dollar for dollar through the
increased subsidy, and the housing authority still gets the savings from
the first four years after the measures are installed as the rolling
base catches up. This can be a risky strategy, though, if there is no
third party guaranteeing savings. It is possible to miscalculate the
savings potential of a project and have the shortfall between actual
savings and the amount of the debt service deducted from the housing
authority's operating subsidy. If debt service payments are that close
to predicted savings, there is very little room for error in actual
savings meeting predicted. The housing authority must be prepared to
cover any shortfall, or use an energy services company to guarantee the
savings.

When project costs are not as close to predicted savings, as in Figure
6, using the frozen base incentive results in higher total benefit to
the housing authority. (In this case, 9.5% higher than the additional
subsidy. This assumes the excess savings that are projected actually
materialize. Generally, the guaranteed amount is set at the project
cost. Actual retained savings over debt service may be higher or lower
than projected.) In this example, the project cost is \$2 million and
total project savings are \$2.5 million (Project costs are 80% of
savings). This type of situation might result when the housing authority
wants more breathing room for actual savings to meet estimated, or if
its goal is to capture dollar cost savings as well capital improvements
from a project.

Of course, timelines, scope of project, requirements of staff resources
and all the other factors discussed in this chapter will also play into
the housing authority's decision as to which route to use. Net savings
is only one factor to be considered. And in a real world situation, the
housing authority will not have sole decision-making authority as to
which incentive to use for a conservation project. ESCos, lenders and
HUD will have preferences based on the availability of modernization
dollars, the type and expected life of the retrofits, the size of the
project, the length of the loan if the HA is borrowing money and many
other factors. Rates will not stay constant and other factors will
introduce "noise" that may affect which incentive looks better when
solely looking at dollar benefits to the housing authority.

The rate method can also lead to savings captured by the housing
authority. Because it does not involve consumption savings or capital
improvements, it was not included in Figures 6 and 7. This method
appears attractive because the housing authority may retain 50% of any
savings negotiated, for an indefinite time. But the savings from this
method are more volatile than others. With conservation measures, there
is a permanent change in consumption, with a relatively secure savings
stream. With the rate change method, everything depends on the market
and the type of deal that the housing authority has structured for
purchasing utilities. There will be times when it is the only feasible
route -- the facilities are already efficient, but utility bills are
high because of high rates. In other cases, housing authority facilities
may be inefficient and have high rates. When deciding which route to
take in these cases, remember that lowering rates will result in lower
savings potential for any future conservation work the housing authority
may want to undertake. (Savings = rate decrease in consumption.) This
may make it impossible to finance a conservation package that was cost
effective at the higher rate..

### Summary 

When determining which method for decreasing utility costs, if any, will
work for a particular housing authority, the first step should be an
analysis of fuel and water use and a review of past audits on the
properties. This will illustrate whether there is a potential for
conservation savings. If it is determined that a potential for
decreasing costs does exist, the next step is to assemble a project
team. This team must determine what specific goals the housing authority
wants to accomplish through the project. The team should look at the
risks, benefits and resource costs (both dollars and staff time) to help
decide whether to pursue a rate reduction, a conservation project, both
or neither. If it doesn't appear that a conservation project can be paid
for from savings, and the housing authority still wants or needs to do
the project, modernization funds may be the only route available. If the
first cut analysis indicates that a cost-effective conservation project
is feasible, the team must decide whether to use modernization funds,
manage the project themselves with an additional subsidy or to pursue a
performance contract. If using a performance contract, the choice of
which incentive to fund it with will be influenced by the factors
discussed above, and will probably not be finalized until during the
energy services agreement negotiations. For each option, team members
must weigh the benefit the housing authority may receive against the
staff resources needed, the timeline constraints and the risks involved.
After evaluating all of these factors, they should be able to choose the
best route for their housing authority to follow.

# PERFORMANCE CONTRACTING 

The chapters in this unit detail the process involved in successfully
planning, implementing and completing a conservation project using
performance contracting. Performance contracting may be used with either
the frozen base incentive or the additional subsidy incentive. Chapter
10 discusses the preparation of a **Request for Proposals (RFP)** to use
for selecting an energy services company. Chapter 11 details the process
of selecting an ESCO. Chapter 12 covers contract negotiations of the
energy audit agreement and the energy services agreement. Chapter 13
discusses project implementation. Chapter 14 outlines HUD's role in
approving performance contracts.

##  Chapter 10 

## Preparing the REQUEST FOR PROPOSALS {#preparing-the-request-for-proposals .unnumbered}

Once the team has decided to pursue an energy performance contract the
next step is to prepare a Request for Proposals (RFP). This document
solicits an energy services company to provide the performance
contracting services. The RFP provides information to the ESCOs about
the project and the expectations of the housing authority, as well as
requesting information about the ESCO and how they would address the
project. Responses to this RFP will be used to choose the ESCO that will
responsible for the project. Because the housing authority will enter
into a long-term relationship with the chosen ESCO, and because the
housing authority is liable for audit costs if no work beyond the audit
is done with that ESCO under the performance contract, it is vitally
important that a qualified, competent, financially sound ESCO is chosen.
A well-prepared RFP can greatly increase the chances of selecting the
best ESCO for a housing authority's particular needs.

This chapter discusses steps that should be taken prior to preparing the
RFP and the components that should be included in a good RFP. A sample
RFP is included in Appendix E.

### 1. Planning Checklist {#planning-checklist .unnumbered}

In preparing an RFP, the following points should be considered and data
should be gathered:

#### Investigate Contract Issues and Local Regulations

There are a number of contract-related issues to explore prior to
preparing an RFP. The housing authority must determine whether it is
authorized to enter into multi-year contracts, which are a necessity
with performance contracts. State and local regulations should be
reviewed for any restrictions regarding contracts and the bidding
process that might need to be built into the RFP, or that would prohibit
the use of a performance contract. In some regions, multi-year contracts
and non-competitive bidding processes may present problems. If the
housing authority has a union maintenance staff, the union contract
should be reviewed to be certain that non-union ESCO personnel will be
allowed on the premises to perform maintenance work and emergency
service that might be called for in the performance contract. If
non-union personnel are not allowed to work on the newly installed
equipment, this must be spelled out in the RFP.

#### Determine Project Size {#determine-project-size .unnumbered}

The housing authority needs to strike a balance between the need to keep
the project to a manageable size and the economies of scale available to
a large project. Because the performance contracting process can be
complicated, and gathering data for an RFP can be time consuming, it is
advisable that a housing authority considering its first performance
contract deal with a relatively small number of buildings. ESCOs may not
respond to the RFP if the project is too small. Annual utility bills of
at least \$200,000 to \$500,000 are necessary to make the potential
conservation savings attractive to an ESCO. Once the housing authority
becomes familiar with the performance contracting process, larger
projects can be undertaken. It may be advisable to write language into
the RFP to allow the housing authority to increase the scope of the
project at its discretion, without having to go out to bid again for an
ESCO.

#### Perform a Short Energy Audit {#perform-a-short-energy-audit .unnumbered}

A housing authority contemplating a performance contract should be
familiar with the conservation opportunities that are available in its
buildings. Most housing authorities already have performed audits to
comply with 24 CFR 965.302. If some buildings have not been audited, a
walk-through audit performed by the housing manager and maintenance
staff should be adequate to give the team an idea of where savings
opportunities lie. This walk-through will better enable team members to
evaluate the proposals they receive in response to the RFP.

The housing authority should be cautioned, however, that it is unwise to
spend significant sums of money on a pre-RFP energy audit. The ESCO
selected for the performance contract will have a long-term financial
stake in the conservation measures it installs. Therefore, it will
conduct a thorough energy audit of the facilities to be retrofitted in
order to gain a better picture of the conservation opportunities
available. This audit will be far more in-depth than a standard
compliance audit. Because the ESCO is guaranteeing the savings, it will
want to perform its own audit, and not rely on one conducted by another
party.

Investing large sums into an audit prior to choosing an ESCO is unwise
since it will essentially lead to paying for the same service twice. The
housing authority should only gather enough information to feel
comfortable in evaluating the responding ESCOs' proposals.

#### Decide Which Buildings to Retrofit {#decide-which-buildings-to-retrofit .unnumbered}

Once the general size of the conservation project has been determined,
specific buildings need to be chosen to include in the RFP. (Note that
an evaluation of housing authority property improvement needs can also
help influence the size of the project.) Several factors should be
considered when deciding which buildings to include in the conservation
package. Fuel and water use are discussed below in "Analyzing Baseline
Utility Use." Other characteristics that should be sought include
buildings that:

-   need major energy-related updates in the near future. If a building
    needs a new boiler or other major capital improvement, replacing the
    old system as part of a performance contract package can free up
    housing authority funds for other purposes, making the conservation
    package even more attractive.

-   already have cost-effective conservation retrofits recommended by
    energy audits performed under 24 CFR 965.302, HUD's requirement to
    perform an energy audit not less than once every five years.

-   are in basically sound condition and not in need of major,
    non-energy renovation. It is very difficult to track savings in
    buildings that have gone through major structural changes.

-   have a low vacancy rate, low turnover and no plans for substantial
    changes in use. Changes in building use make it very difficult to
    assign savings from the energy work that was done. The energy
    services agreement should outline what methods will be used to deal
    with any changes that do occur in how the building is used.

#### Consider Potential Measures {#consider-potential-measures .unnumbered}

For the buildings that *are* chosen for retrofit work, every
cost-effective measure should be considered. The combination of short-
and longer-term payback measures can help maximize the conservation
savings and capital improvements realized as a result of the contract.
It will be much more difficult to cost-justify individual measures at a
future date if the most savings-lucrative measures have previously been
installed. It would be unfortunate to lose the opportunity for financing
major improvements in housing authority properties by not including all
the possible measures.

#### Gather Utility Data {#gather-utility-data .unnumbered}

The housing authority must provide utility data for the ESCOs to use
when preparing their responses to the RFP. This will help them to
determine which buildings show the greatest potential for savings and to
make an estimate of the approximate conservation savings available.
During contract negotiations, this data will be further refined into a
baseline from which to calculate savings. This baseline will account for
weather, energy-related improvements made during that time, changes in
occupancy and failures of equipment or maintenance.

The utility information provided in the RFP should be more detailed than
that in the initial fuel- and water-use audit. A minimum of three years'
data on energy- and water-use must be collected for each of the
buildings being considered as part of the conservation package. Utility
use should be estimated as closely as possible for each building.
Estimate, if possible, what percentage of the baseline fuel use is for
domestic hot water, space heating and cooling, and the total consumed
annually for lighting and appliances in each building. Being this
specific in the RFP will help the ESCOs to prepare a list of possible
measures that is more detailed and representative of what they might
actually propose after the audit is performed. (See Appendix F for a
sample format for presenting data.) Three years' data allows the ESCOs
to feel confident that their energy calculations are not skewed by
oddities in consumption from any one year. And three years is also the
amount of data HUD requires for determining the level at which to freeze
the rolling base.

Gathering baseline utility data can present a number of problems. The
housing authority may not keep records of all the data needed to
establish a baseline, e.g. consumption and rates, as well as billing
amounts. If any of the necessary data is unavailable from the housing
authority's records, the utilities that supply water, electricity, gas
and/or oil should be consulted. Rates are public record and should be
available through the state public utility or public service commission.

A May, 1995 survey by the HUD Inspector General\'s Office found that
most housing authority buildings are *master metered* and have no check
meters. (HUD Office of Inspector General, 1995) Master metering can make
it impossible to determine from utility bills exactly how much energy
was used in different parts of a building or in individual apartments.
If more than one similar building is on a meter, an estimate of the
utility use of each building can be made by dividing the total according
to total floor space.

Other problems may include faulty meters, missed meter readings,
readings that were not taken on a regular basis and estimated readings.
Apartments that were vacant during the period being analyzed and
significant changes in building use can also throw off the accuracy of
the baseline, as can unusual energy use patterns from particular
occupants.

### 2. Components of an RFP {#components-of-an-rfp .unnumbered}

After researching the issues in the planning checklist above, it is time
to write the RFP.

It is important to keep the procurement procedure as straight forward as
possible so that it will be easy for ESCOs to compete for the projects
and for the team to evaluate their responses. But it is also important
to be thorough in the request for information, in order to facilitate
choosing the best ESCO for the project. A well-thought-out and complete
RFP greatly increases the chances of a successful, trouble-free project.

A sample RFP can be found in Appendix E. It can be customized to fit the
needs of the housing authority using it. When the team is drawing up an
RFP tailored to a particular housing authority's situation, it should be
sure to include all of the components that are in the sample RFP. These
components are discussed below.

#### Overview {#overview .unnumbered}

This section gives the ESCO an overview of the project: where it is
located, who the contact persons are, what expectations the housing
authority has for the conservation project and the contracts that will
be used in implementing the work. It could reserve the right to expand
the scope of work beyond the named properties. It should specify the
type of measures to be considered and the types of services the ESCO is
expected to perform. It should also state that the housing authority
expects a guarantee of minimum energy savings, and that the payments
under the contract will be contingent on projected savings being
achieved.

#### The Procurement Process {#the-procurement-process .unnumbered}

This section outlines the process by which an ESCO will be chosen. The
regulations pertaining to this process are located in 24 CFR 965.308(a).
It specifies the use of the process for competitive proposals (24 CFR
85.36(d)(3)(i), with the cost of the audit being of less importance than
the technical features of the proposal. The steps used to chose the ESCO
should include site visits, submission of the written proposals,
evaluation of the written proposals, oral interviews, modification of
the written proposals into a "best and final offer" and development of
the contract. The RFP should include a timetable of when each step will
occur. These steps are discussed in detail in Chapter 9, "Choosing an
ESCO."

#### Criteria for Awarding the Contract {#criteria-for-awarding-the-contract .unnumbered}

Since the scope of work proposed by the different ESCOs will differ, a
contractor can not be selected on the basis of a bid, as would be the
case with a sealed bid . Instead, a comparative method that ranks the
competitors according to their quality of work, their experience and
their financial stability must be used. It is possible to ask for
information on the ESCO's per unit costs and fees. See Appendix P for a
sample problem that can be included in the RFP to help compare the
various fee structures used by ESCOs. This fee scenario can help you
evaluate the relative costs a complete project that you might expect
from each of the responding energy services companies. It asks the ESCOs
to provide information on their fees when the measures, measures costs,
savings, and interest rates are defined. Because ESCOs structure their
fees in many different manners, it is often difficult to compare the
costs you may expect from one ESCO with another. This scenario helps you
compare "apples to apples".

These costs, though, should be a secondary consideration to the other
technical factors that are listed below. The ESCO should be chosen for
their project management skills and their ability to achieve and
guarantee the maximum savings from a project, among other factors. Such
an ESCO may charge a bit more for their services than one that is not as
financially stable or does not have as successful a track record of
achieving savings. On the other hand, if an ESCO has unusually high
prices, the project may not be able to cost-effectively address as many
measures as the housing authority would desire.

The evaluation criteria that will be used to screen ESCOs should be
described in the RFP. (See Appendix G.) These criteria fall into 4 broad
categories: the ESCO's project management experience, and the technical,
financial and legal approaches to the project that are proposed. The RFP
should make clear that the information the ESCO provides to comply with
the "Required Documentation" list (see below) will be scrutinized in
light of the following:

**1. Project Management**

The ESCO should be evaluated on its abilities in the following areas:

-   managing construction, repairs, regular maintenance and emergencies;

-   finishing projects on schedule and in compliance with contract
    terms;

-   coordinating the work of subcontractors, utilities, equipment
    suppliers, facility personnel and housing authority management;

-   servicing and maintaining equipment over the term of the contract;

-   providing training for management, maintenance staff and residents;
    and

-   achieving resident participation in the project.

There should be a clear assignment of responsibilities to specific
individuals and subcontractors for specific project tasks. The ESCO
should also be evaluated on the quality of communications skills at the
oral interviews and the company's responsiveness to the specific goals
identified in the RFP.

**2. Technical Approach**

A number of areas should be examined, including:

-   the ESCO's understanding of the existing building conditions,
    structures, systems, operations and schedules;

-   the quality of a sample technical analysis for a similar facility,
    completed by the person responsible for this project's technical
    design;

-   the qualifications of the company's technical design personnel,
    including the number of similar projects in which the personnel have
    participated;

-   documented savings from past projects;

-   the reliability of equipment performance during the life of past
    contracts;

-   the comprehensiveness and clarity of the company's technical
    approach to the project;

-   the baseline energy and water use calculation methodology; and

-   the ESCO's ability to enhance project performance by adapting
    control strategies, equipment and maintenance practices in response
    to changes in utility rates, technology and building conditions.

While the choice of the ESCO will not be driven by the measures it
proposes, nor the savings it estimates (without a complete audit, these
are only preliminary estimates), the company should supply a preliminary
list of proposed measures and estimated savings based on site visits and
fuel data supplied. The housing authority may evaluate this list for
comprehensiveness and reasonableness.

**3. Financial Approach**

The ESCO should be evaluated on the financial soundness and stability of
the company and the completeness of its most recent fiscal report.
Business and financial references should be included and checked. The
housing authority should also examine the quality and clarity of a
sample financing agreement and a sample project invoice. The housing
authority should evaluate:

-   the details of the ESCO's fee structure;

-   the proposed methods for calculating annual payments and
    conservation savings;

-   the proposed financing method;

-   the ESCO's ability to obtain project financing;

-   the reconciliation procedures for windfalls and/or shortfalls in
    project cash flow;

-   the proposed cost for the energy audit; and

-   the terms of the savings guarantee.

**4. Legal Approach**

Criteria for ranking an ESCO's legal approach include:

-   the company's depth of understanding of HUD regulations relating to
    the HCD of 1987;

-   the quality of a sample of a legal agreement similar to that which
    will be used in this project;

-   the contractual terms used to deal with changes in building energy
    use, such as changes in occupancy and usage schedules; and

-   quality of provisions for early termination of the contract.

The legal agreement should demonstrate flexibility to accommodate the
needs of the housing authority.

Many ESCOs consider information on proposal specifics such as savings
calculations, audit materials and fee structures to be proprietary.
Under no circumstances should information from an ESCOs proposal be
given to another ESCO.

Remember, the major emphasis in evaluating the responses should be on
the qualifications of the firm, not the proposed price of the audit, nor
the initial estimate of savings. The goal is to choose a firm the
housing authority feels certain will be best able perform a technically
accurate audit and that is well qualified to proceed with the work once
the audit results are known.

#### Contract Specifics {#contract-specifics .unnumbered}

The RFP should spell out the minimum and maximum length for the contract
that the housing authority will consider (maximum allowed under the
final rule is 12 years). It should outline the scope of services to be
performed by the ESCO. These scenarios should include conducting an
audit to be performed within a certain period of time (90 days is
reasonable and usual) and submitting a package of measures -- The ESCO's
Approach to the Project -- to be based on the audit results. (See
Attachment A of the RFP in Appendix E.) If the housing authority accepts
the final proposal, the scope of work will include the work outlined in
Attachment A. The RFP should discuss provisions for renegotiating the
contract and outline technical and other contract provisions that will
be expected in a final contract.

#### Required Documentation {#required-documentation .unnumbered}

Provide a list of the documentation the ESCO should submit as part of
its proposal. This should include general information, personnel
information, financial references and project information. This list
will be analyzed by the criteria above for selecting an ESCO.

#### Documentation Checklist {#documentation-checklist .unnumbered}

In order to ensure that all the required documentation is submitted,
include a documentation checklist. This should include a sign-off from
an ESCO representative, attesting that the information is complete, true
and correct, and acknowledging that misleading or missing information
may lead to the firm's disqualification.

#### ESCO Profile Form {#esco-profile-form .unnumbered}

To aid in the evaluation of the proposals, it is recommended that the
RFP include a standardized form for the ESCOs to use when profiling
their company. Ask the ESCO to supply a description of the structure of
the company, its background, affiliates and parent company, if any, and
a biography of key personnel.

#### Experience {#experience .unnumbered}

Ask for a description of the firm's performance contracting experience,
a project list and a summary of the performance of similar projects that
the firm has completed. The ESCO should also include résumé's of
personnel proposed for the housing authority's project, and a list of
primary subcontractors. Request that the ESCO include a copy of an
energy audit performed on a similar facility.

#### References {#references .unnumbered}

The ESCO should supply a list of similar projects it has completed,
their addresses, and phone numbers for contact persons for each project.
References should include at least two projects for which construction
has been substantially completed and for which at least some savings
data is available.

#### The Facility Profile {#the-facility-profile .unnumbered}

A facility profile must be prepared for each building in the planned
conservation upgrade. It will become the technical section of the RFP.
(See Appendix F.) The forms on pages F-4 through F-7 of the appendix can
be used to record the data. The facility profile includes a description
of the building, its heating system and the ways in which both are used,
as well as baseline utility data. The following elements should be
included:

##### 1. Building Description {#building-description .unnumbered}

##### 

-   Provide the building's name and address, a physical description and
    the year in which it was built.

-   List the building contact person's name and phone number.

-   Describe any recent modifications to the building that may have had
    an impact on energy use, and mention any planned changes to the
    building.

##### 2. Building Operating Data {#building-operating-data .unnumbered}

#####  {#section-6 .unnumbered}

##### Describe the current uses of the building and any planned changes. 

-   Describe parts of the building with special requirements for minimum
    or maximum temperatures, humidity or ventilation.

-   Provide the average occupancy rate and billing days for the
    building.

-   Outline the typical facility operating hours. If certain parts of
    the building are used on a different schedule or have a different
    energy use pattern than others because of differing uses or
    variations in occupancy, this should be noted.

-   List the typical summer and winter thermostat settings used in the
    building. If setback thermostats are present, the setback target
    temperature and the hours during which the setback occurs should be
    noted.

-   Describe the heating, ventilation and air-conditioning (HVAC) system
    specifying the type of equipment, its manufacturer, age and
    condition. Heating zones in the building should also be described.

-   Provide a schedule of operation for the building's HVAC system for
    different days of the week and times of the year.

-   Make note of holidays or other events that may have a significant
    impact on energy consumption.

-   Briefly describe any conservation options that have been identified
    in previous energy audits of the building.

##### 3. Building Physical Data {#building-physical-data .unnumbered}

-   For each building, list the number of square feet that are heated
    and/or cooled. If there are differences between the two figures,
    explain.

-   Describe the construction of the buildings' walls, roof and windows,
    and summarize their state of repair.

##### 4. Baseline Utility Consumption {#baseline-utility-consumption .unnumbered}

-   Describe the types of fuels that are used for heating, cooling and
    domestic hot water.

-   Provide a schedule of fuel use and copies of applicable utility rate
    schedules for the last three years and a copy of typical utility
    bills for summer and winter. The use of energy and water can be
    recorded in the tables that are part of the sample RFP technical
    section.

-   Report the average energy consumption per residence unit, if known.

-   Provide copies of water and sewer bills and copies of sewer rate
    schedules for the last three years. If gas is bought on contract, a
    monthly price history should be provided, if available.

**5. Energy Systems**

-   Describe the major energy-consuming systems in the building
    including HVAC, lighting and water heating. Include: brand name, age
    and capacity of HVAC equipment, set-point temperatures for heating,
    cooling and domestic-hot-water systems and the type of ignition
    system used in each.

-   List facilities and equipment in the building that use a significant
    amount of energy (2% of total energy use or more) such as kitchens,
    laundries, swimming pool or medical equipment. For kitchens, report
    how many meals are prepared each year.

-   Describe the building's heating/cooling controls. If the building
    has an energy management system, list the manufacturer, the
    installation date and describe how it is typically used in different
    seasons.

-   Estimate the total percentage of the lighted area in the building
    that is illuminated by **incandescent lights**, **compact
    fluorescent lights, standard fluorescent lights** and fluorescents
    with **high-efficiency ballasts**, and estimate the hours of
    operation for each.

-   If high intensity discharge (HID) lights are used in significant
    numbers, describe the application for which they are used and the
    hours of use. HID lights are used in outdoors and in large indoor
    areas such as gymnasiums. HID lights have the highest efficiency and
    longest life (and highest cost) of any light.

##### 6. Water Data {#water-data .unnumbered}

-   Describe how water is metered in the buildings, and provide at least
    two-years' water meter readings.

-   List the types of faucets, shower/tub assemblies and toilets being
    used in the building and the types of repair parts that have been
    used in the fixtures.

##### 7. Improvement Opportunities {#improvement-opportunities .unnumbered}

-   Describe any serious problems that are being experienced in the
    buildings that may in some way be related to their heating and
    cooling.

-   Mention any major energy- or water-related equipment that is due for
    replacement in the next five years.

-   Mention any building improvements the housing authority would like
    to achieve as part of the retrofit.

#### Other Information to Include in the RFP {#other-information-to-include-in-the-rfp .unnumbered}

It should be stated in the RFP that the qualifications of the
respondents will be given more weight than the audit price. Performance
contracting follows the same procurement guidelines that govern small
and minority-owned businesses, as defined in the Federal Register in 24
CFR 85.36(d)(3) & (d)(4).

The ESCO procurement process must be a full and open competition with
public notice and advertisement. If performance contracting services are
available only from a single source, a noncompetitive process may be
used for selecting the contractor. This occurs primarily when a utility
or its exclusive contractor provides services or low-interest money for
a project, that other bidders could not offer.

Offer to provide additional data on request. This might include copies
of the actual utility bills for the last three years for the buildings;
additional details on the buildings' mechanical systems including age,
manufacturer, size, capacity, hours of operation and areas served;
copies of previous energy audits and technical analysis of conservation
measures for the building; and detailed documentation for the
buildings\' energy management system.

### 3. Next Steps {#next-steps .unnumbered}

#### Submit the RFP for HUD Approval {#submit-the-rfp-for-hud-approval .unnumbered}

When the RFP is finished, it should be sent to the HUD Field Office for
approval. Field office staff may approve or reject the proposal, or may
request changes to the document. If HUD has been notified in writing
earlier that the housing authority was considering a performance
contract, and has been involved in the process, this step should go
smoothly. If the housing authority experiences unusual delays in
receiving approvals, they may contact the office of Field Coordination
in Washington, D.C.

#### Mail the RFP {#mail-the-rfp .unnumbered}

Get an up-to-date bidders list from the National Association of Energy
Service Companies, and when HUD approval is received, mail the proposal.
Many ESCOs specialize in commercial and industrial customers. It is wise
to research which are interested in multifamily residential work prior
to sending out the RFP. The National Center for Appropriate Technology
is one resource for obtaining such information. They have surveyed ESCOs
as to whether they would bid on housing authority conservation projects
and keep an updated listing. Any ESCO interested in serving the housing
community will be added to the list upon their request. In addition to
mailing the RFP to selected ESCOs, public notice of the planned
conservation project must be printed in trade journals and local
newspapers.

Get an up-to-date bidders list from the National Association of Energy
Service Companies, and when HUD approval is received, mail the proposal.
Many ESCOs specialize in commercial and industrial customers. It is wise
to research which are interested in multifamily residential work prior
to sending out the RFP. The National Center for Appropriate Technology
(NCAT) is one resource for obtaining such information. NCAT has surveyed
ESCOs as to whether they would bid on housing authority conservation
projects and keep an updated listing. In addition to mailing the RFP to
selected ESCOs, public notice of the planned conservation project must
be printed in trade journals and local newspapers.

## CHAPTER 11  {#chapter-11 .unnumbered}

## choosing an ESCO {#choosing-an-esco .unnumbered}

Final ESCO selection is the most critical phase of the performance
contract process. The performance contract may have a term of a decade
or more, and it is essential not only that the contractor selected does
quality work but that it be reliable and easy to work with.

The ESCO-selection procedure described in this chapter was developed by
the state of Illinois for use by public agencies using performance
contracting for conservation retrofits. See Appendix G for sample forms
to use when ranking the ESCO's written response, Appendix O for
suggested prompts and guidelines for the phone interview with the ESCO's
references, and Appendix H for a sample point-scoring sheet for the for
RFP evaluation.

The selection process satisfies the federal competitive-procurement
requirements by using a formal process to select a contractor.

### 1. Site Visits {#site-visits .unnumbered}

A pre-bid meeting for interested ESCOs should be scheduled for after the
RFPs have been sent out. At this meeting, general information about the
properties will be provided and questions about the RFP process will be
answered. ESCO attendance at the meeting is optional, although it should
be stressed when the meeting is announced that ESCOs not represented at
the meeting will not have access to the same information as those in
attendance.

The meeting should include a visit to the buildings included in the RFP.
Make maintenance and operations personnel available to answer questions
about the buildings and existing equipment, especially repair
information. Any additional utility data requested by an ESCO should be
provided at this time. Copies of past energy audits or facility
analyses, schedules of equipment maintenance and repair, occupancy
records and documentation for energy management systems are among the
data ESCOs may require.

### 2. Evaluating Written Responses {#evaluating-written-responses .unnumbered}

Once the written responses are in, they must be evaluated by appropriate
housing authority representatives. This group may be the same team that
was used in preparing the RFP and should include the housing authority's
purchasing agent, energy manager, administrative and financial officers
and legal counsel. It should also include the designated project manager
and the facility and operating engineers. Technical advisors and HUD
Field Office staff may also be part of the team.

The criteria the team focuses on are the ESCO's qualifications and the
cost of its energy audit. Since bottom-line pricing information for the
project will not be available until the energy audit is complete, no
precise comparison such as would be used in a competitive bid process
can be used. The team must rank the ESCO as was laid out in the
"Criteria for Awarding the Contract" section of the RFP, analyzing the
ESCO's technical, financial, legal and management approach to the
project. (See Chapter 10 "Preparing the RFP." If a fee scenario such as
that provided in Appendix P was included in the RFP, the team may have
some pricing information that can be used for comparison. These should
not drive the decision, but can help supplement it.

Comparisons can and should be made of what the different contractors are
projecting as possible conservation measures and estimated savings in
the site-specific discussion. Other factors are more important, though,
in the choice of an ESCO to perform a major conservation retrofit: Is
the company financially sound? Will the package of conservation measures
the ESCO installs save enough utility money to make the payments on the
loan? Will ESCO employees be easy to work with and eager to please both
the housing authority and tenants? How good is the guarantee, and has
the ESCO ever had to use the guarantee? Does the company have experience
with housing stock similar to the buildings that are to be renovated?
Such questions have at least as much bearing on which contractor is best
for the job.

#### Ranking {#ranking .unnumbered}

A sample ranking system for ESCO proposals is provided in Appendix G.
Each team member is given a copy of the proposal to rate. This enables
the proposals to be evaluated by people with expertise in all the
applicable areas, and makes for a much stronger review. Each question
used to rank ESCOs is assigned a numerical weight. Although numbers are
used in the ranking procedure, it must be emphasized that these are
being assigned to comparative criteria --- where experience and
financial status have more importance than easily quantified factors,
such as the proposed audit pricing. Selection committee members must be
fair and impartial when evaluating the ESCO's responses.

**Figure 8. Example from ESCO Proposal Ranking Form**

*[Management]{.underline}*

7\. Quality of the project summary:

Superior \_\_ Very Acceptable [\_X\_]{.underline} Acceptable \_\_ Not
Acceptable \_\_ Unqualified to rank \_\_

Discussion: [The ESCO had a fairly complete, site-specific description
of what they thought the project would entail. Their summary appeared
reasonable, practical and thorough. They did not address the problems we
have with the chiller in Parks Tower, however.]{.underline}

Reviewers are asked to rank various categories of the ESCOs' responses
and to provide written comments supporting their ranking. The ranking
classifications are superior (3 points), very acceptable (2 points),
acceptable (1 point), not acceptable (0 points) and unqualified to rank,
if the question pertains to an area outside of the reviewer's expertise.
In the latter case, the question is deleted from the number of points
possible. Each question is assigned a weight reflecting its overall
importance as a judging criterion. The number obtained by the ranking
(0-3) is multiplied by the weight factor assigned to each question to
attain a numerical ranking. Figure 8 illustrates a question from the
Sample ESCO Ranking Form. The ESCO was rated "very acceptable" for this
question. Figure 9 shows how this ranking is quantified on the Sample
ESCO Ranking Form Score Sheet". The ranking of "very acceptable" has a
value of 2 points. The weighting factor for this question is 0.5. So the
ESCO receives 1 point out of a possible 1.5.

**Figure 9. Example from ESCO Proposal Ranking Score Sheet**

  ----- ------ ------- ------- ------- -------- -------- ---------- -------- -----------------
                                                                             "Possible"

                                                                             Minus

        3 pts  2 pts   1 pts   0 pts            Weight   Possible   Actual   \"Unqualified\"
  ----- ------ ------- ------- ------- -------- -------- ---------- -------- -----------------

  ----- ---------- ------------ ------------ ------------ ------------- ------ ------- ------ ----------
        Superior   Very         Acceptable   Not          Unqualified                         
                   Acceptable                Acceptable   to Rank                             

  7\.              x                                                    0.5    1.5     1      1
  ----- ---------- ------------ ------------ ------------ ------------- ------ ------- ------ ----------

Once all of the questions are marked and the points earned are tallied,
a "ranking ratio" will be computed. This is done by dividing the number
of points earned by the number of points possible. This ratio will be
between 0 and 1. The closer to 1, the higher the ranking. For example,
an ESCO that received 110 out of 129 possible points would have a
ranking ratio of 0.85 (110/129). An ESCO that received 80 points out of
129 would have a ranking ratio of 0.62 (80/129). The first ESCO is rated
higher than the second.

The ranking ratio is used, rather than a straight evaluation of points
achieved, to account for the cases where a certain reviewer isn't
qualified to evaluate the ESCO in every category. Because of the diverse
expertise of the team members, it is quite possible not all of the
members are qualified to answer all of the questions. For example, a
facilities engineer shouldn't be ranking questions having to do with the
companies' financial statements, and the financial officer shouldn't be
evaluating measure packages for replacing aging boilers. If reviewers
feel they have insufficient knowledge to rank the ESCO on some specific
criteria, they should choose the "unqualified to rank" response. This is
very different from the "not acceptable" response, which should be used
when a response to the RFP is unclear or when important information is
missing. If "unqualified to rank" is marked, the total number of points
possible will be adjusted to exclude the points from that question. For
example, if a reviewer marks "unqualified to rank" on a question with 6
possible points, the total number of points possible would be revised
downward from 129 (the amount if all questions were included) to 123.

It is very important that the members of the evaluation team use the
"unqualified to rank" rating when appropriate. They should not guess
about the adequacy or inadequacy of the ESCO's response or using the
"not acceptable" ranking if they aren't qualified to evaluate a
response. Erroneous "not acceptable" ratings could eliminate the ESCO
from further consideration, whereas the "unqualified to rank" category
leaves the door open for the ESCO to remain in the competition, based on
the evaluation of team members more qualified to evaluate that section
of the proposal. For instance, if in the example above, the second ESCO
may have only earned 80 points because the reviewer had marked
"unqualified to rank" for a number of questions. If the total number of
points possible from that question were only 86, the ranking ratio would
be 0.94 (80/86), a much higher rating than the 0.62 (80/129) that
results if all 129 points were used.

If the selection team believe that not enough proposals have been
received to proceed with contractor selection, the housing authority
must advertise the retrofit opportunity again, mail the RFP to an
expanded list of ESCOs and start the evaluation process over. ESCOs that
received but did not respond to the original RFP could also be contacted
to see if they are interested in submitting a proposal before the new
deadline.

### 3. Check References {#check-references .unnumbered}

The next step is to conduct phone interviews with the ESCO's references.
The interviewer should talk to the persons who managed the projects
listed in the response to the RFP, if possible. If the project manager
is unavailable, try to interview another staff member who has extensive
knowledge of the project. Sample interview prompts can be found in
Appendix I.

### 4. The Short List  {#the-short-list .unnumbered}

The results from the analyses of the written proposals are combined with
the reference checks to establish a final ranking for deciding which
companies to invite to oral interviews. Generally, the three ESCOs with
the highest scores from the evaluation phase are selected, but more or
less may be interviewed, depending on the results of the rankings. This
initial screening should narrow the field to contractors that have a
reasonable chance of being awarded the contract. This avoids wasting the
housing authority and ESCO's time. The ESCOs on the short list should be
mailed a letter stating the time and place of the interview and the
interview format. ESCOs that were not selected for the short list should
be notified that their proposal is no longer under consideration. This
marks the end of the initial phase of contractor selection.

If the evaluation team should conclude that none of the proposals are
acceptable, each of the finalists can be contacted and asked for
additional information or a revised proposal. The housing authority may
also choose to start solicitation for a new round of proposals.

### 5. Oral Interviews {#oral-interviews .unnumbered}

The ESCOs on the short list are invited to oral interviews where they
can further explain how they plan to undertake the conservation project
and can respond to the selection committee's questions. All ESCO
personnel with major responsibility for the project's technical design,
management and negotiations should be present.

The interview allows the housing authority team to examine the ESCO's
proposal in more detail. It is also an opportunity for the ESCO to
introduce employees who would play a significant role in the retrofit,
and to outline the ESCO's strengths to the housing authority team.

Two sets of interview questions should be prepared. One is a set of
general questions that will be asked of all the ESCOs (see Appendix O).
The other is prepared for the ESCO being interviewed based on its
response to the RFP. The question topics are generally divided into two
parts: approach to the project and site-specific recommendations.
Questions should cover design; construction; financing; training;
operation and maintenance services; performance monitoring; and
performance enhancement. If the interview questions require advance
preparation on the part of the ESCOs, each ESCO should be provided with
a question list at least ten days prior to the interview.

The interview typically lasts from two to four hours, with the first
thirty minutes devoted to the ESCO's presentation. A facilitator should
be appointed to ask the prepared questions. All the members of the
interview team should be encouraged to participate in the discussion. As
with the written responses, answers to questions may be rated and the
ratings multiplied by the weight given each question to attain a
numerical ranking. If this approach is followed, then at the end of each
presentation, an initial ranking is made by each team member. After all
the interviews are complete, the ranking for each ESCO should be done
again to allow team members to change their initial rankings after
considering all of the finalists' interviews. Some housing authorities
use a less structured process for the orals, though and discuss merits
afterward without going through a formal numerical ranking process.

### 6. Final ESCO Selection {#final-esco-selection .unnumbered}

The ESCO selection committee meets after all the interviews have been
conducted to make a final selection. This can be a very formalized
process, where a numerical ranking is assigned to all of the components,
including the interviews of former ESCO clients, the evaluation of the
ESCO's written response and the oral interview. These are then added up
to produce a total for each of the finalists. If the total scores are
quite close, the team may reconsider all the evidence and try to reach
consensus based on the contractors' performance in the written proposal
and interview phases. The process can also be less formal, where all of
the numerical rankings from the written responses are considered in
light of the other information, which may not have been quantified. The
executive director of the housing authority can make the final decision,
if this is requested by the evaluation team.

All the ESCOs that submitted proposals should be notified when a
contractor is selected. Documentation from the selection process should
be presented to the housing authority's board of commissioners along
with an explanation of the rationale behind the final selection.

.

## CHAPTER 12  {#chapter-12 .unnumbered}

## Contract negotiatIoNs {#contract-negotiations .unnumbered}

### 1. The Energy Audit {#the-energy-audit .unnumbered}

After selecting the ESCO, the housing authority must negotiate a
contract for the ESCO's energy audit. This is the energy audit
agreement. (See Appendix N.) *This audit must be done, even though one
or more audits have generally already been performed on all of the
properties in the package*. The financial viability of the ESCO depends
on accurately predicting the energy savings that will result from the
conservation measures it installs. Therefore, the company must perform
its own audit to be comfortable that the savings projections are
accurate. The ESCO will generally perform a more exhaustive audit than
previously has been undertaken.

An estimated price was part of the ESCO's RFP response, so contract
negotiations are largely a matter of formalizing terms and conditions
and the deliverables expected as part of the audit, although price may
be negotiable, too. It is very important to spell out what the housing
authority expects as a result of the audit. These deliverables generally
include:

-   A description of fuel-use analysis and its results;

-   A description of the site that was audited;

-   Problems identified during the audit;

-   Proposed conservation measures and solutions to identified problems;

-   Estimated savings from each measure and the package as a whole;

-   Estimated costs broken down by measure; and

-   A cost/benefit analysis, preferably using life-cycle costing.

The housing authority must pay the ESCO for the energy audit whether or
not any further work is done. This cost may be rolled into the energy
services agreement, with the payments based on savings being achieved,
or a separate payment can be made to avoid accruing financing charges
for the cost of the audit. If negotiations fail to produce a signed
performance contract, the audit price must be paid up front.

Note that there are strategies available for mitigating the risk of
paying an audit fee if the project does not move forward. Appendix N,
"Sample Energy Analysis Report Agreement" has several examples of this,
including a pro-rating of the audit fee if the housing authority decides
to stop work prior to the completion of the audit. Another strategy
deals with the risk of the audit not finding a cost-effective project.
The ESCo should have evaluated the potential cost effectiveness of the
project as part of responding to the RFP. The housing authority may
include language in the RFP outlining the expectation of this due
diligence responsibility on the part of companies responding to the RFP.
The housing authority can negotiate language in the audit to require the
ESCo to stop work and not receive any compensation if at any point they
determine a cost effective project will not be feasible.

The results of the energy audit are used by the ESCO to determine the
savings potential of various energy conservation measures. This
evaluation is used as a basis for determining what will be included in
the performance contract. The energy audit becomes a part of the final
contract.

After the housing authority and the ESCO negotiate the conditions for
the energy audit agreement, it must be submitted to the HUD Field Office
for approval.

### 2. Preliminary Energy Service Agreement Negotiations {#preliminary-energy-service-agreement-negotiations .unnumbered}

Once HUD gives its approval of the energy audit agreement, the ESCO
performs the energy audit on the buildings included in the RFP. While
the audit is being conducted, representatives of the housing authority
and the ESCO meet to begin negotiations for the performance contract.
Housing authorities should be extremely cautious about using an energy
services agreement provided by an ESCO. It is possible to shift the risk
of the measures not performing away from the ESCO and onto the housing
authority and tenants. This may not be obvious to a reader unfamiliar
with HUD energy performance contracts. It is safer to use a template
from a source without a financial interest in the contract, such as the
one provided in Appendix J.

After the general conditions and format for the proposed performance
contract have been agreed upon, the ESCO prepares a draft version of the
contract. This draft then becomes the subject of final performance
contract negotiations.

### 3. Reviewing the ESCO\'s Proposal {#reviewing-the-escos-proposal .unnumbered}

Once the energy audit is complete, the ESCO submits a proposal that
includes the audit results, a list of proposed energy conservation
measures, a financing package and a proposed contract, the energy
services agreement. Before final contract negotiations can commence, the
housing authority team must review the energy audit results, the ESCO's
proposed list of conservation measures and the draft contract prepared
by the ESCO.

Questions the negotiation team should answer when reviewing the ESCO's
proposal include:

-   Are energy rates and equipment costs accurate?

-   Are calculations based on reasonable estimates?

-   Are there any math errors?

-   Does the audit include a comprehensive analysis of the technical
    options available?

-   Have interactions between various measures been accounted for?

-   Are all of the reasonable and desired measures included in the
    proposed package?

-   Is the financial risk fairly apportioned?

The following areas should be covered in the contract, and evaluated by
the housing authority team to ensure that its interests are met.
Remember, the details of the contract are all subject to negotiation.

#### Project Description {#project-description .unnumbered}

The buildings to be retrofitted, the proposed energy conservation
measures (ECMs) and the equipment to be installed should be accurately
described in full detail. If the proposal doesn\'t contain all the
conservation measures the housing authority wants, further negotiations
may be necessary. The addition or subtraction of measures will alter the
payback period and the proposed financing package will need to change to
reflect these alterations. For this reason, an ESCO may be reluctant to
renegotiate the measures included in the package, especially if the
measures added are considered marginally cost-effective by the ESCO.
Nonetheless, the housing authority should not be afraid to negotiate on
the measures package, especially if it thinks viable options are not
included. The performance contract is an opportunity to finance major
improvements that would otherwise be lost.

#### Project Contacts

Both the ESCO and the housing authority should name an individual to act
as their main point of contact. Generally it is best to have one person
on each side in charge of tracking the project as a whole, although the
contract may list people responsible for various portions of the project
as well, for instance, billing or construction issues.

#### Methods and Terms of Financing {#methods-and-terms-of-financing .unnumbered}

The housing authority's financial representatives should carefully
scrutinize the financing arrangements that the ESCO proposes. (See
"Financing Methods" in Chapter 5, \"Introduction to Performance
Contracting," for a discussion of financing considerations and options.)
They should evaluate what measures are included in the package, whether
the projected savings cover the cost of the contract, if the loan
vehicle selected is the best option for the housing authority, if the
interest rate is the best available and if the length of the contract
meets HUD requirements and the housing authority's needs.

Contract terms of as long as twelve years are allowed, but HUD
discourages repayment schedules longer than ten years. In the event of a
shortfall in conservation savings due to "changed circumstances," such
as equipment failures or maintenance problems, the contract would need
to be extended to pay for the installed conservation equipment. Having
the extra time would be essential to completely paying the debt service.
Note that HUD specifically does not allow extension of the contract for
miscalculations or misrepresentations of the projected savings (24 CFR
990.110 (e)).

The amount that can be financed and the work that can be done interact
with each other, to an extent. As more work is done, the cost of the
project goes up, but so do the savings, which allows for payments of a
larger loan. The optimal amount that can be borrowed is driven by a
combination of the costs of the total contract, the savings, the
interest rate, the term of the loan, the needs of the buildings and how
much excess savings the housing authority desires. (See discussion of
excess savings, below.)

Each of these factors plays off of the other. If the interest rate goes
down, or the loan term goes up, the amount that can be spent on the
project and/or the savings above that which is needed to pay the debt
service increases. It should be remembered, though, that if the loan
term is extended, the total cost of the project goes up, as interest is
being paid for a longer period of time. If more measures are done, the
savings go up, but so does the overall cost of the project. The goal is
to get a measures package that meets as many of the housing authority's
needs as possible, financed with the lowest possible interest rate and
the shortest possible loan term.

#### Savings Calculations and Verification {#savings-calculations-and-verification .unnumbered}

The contract should specify the procedure by which the ESCO will
calculate energy savings. This methodology should be mutually acceptable
to HUD, the ESCO and the housing authority. A procedure for settling
conflicts over the measurement of savings should also be included. There
should be provisions for how changes in occupancy or building use,
during the life of the contract, will affect the calculation of savings.

The contract should also outline how often the savings will be evaluated
-- i.e. monthly, yearly or longer -- and how payments will be made if
shortfalls occur. The frequency and details of this "true-up" can be
negotiated. It should be done at least annually, so that the housing
authority may be reimbursed if there is any shortfall in savings.
Performance of measures should be monitored more frequently in order to
find and address anything that may be increasing consumption.

The savings attributed to the work done under the energy performance
contract is a function of two pieces of information: the baseline energy
use and the post-retrofit consumption. Methods for calculating each are
discussed below. For an even more detailed treatment of options
available for savings verification, see the ***Building Measurement and
Verification Protocol***. This manual is published by the Department of
Energy and is gradually becoming the standard for measuring and
verifying savings in complex buildings. Note, though, that HUD has
requirements for measuring savings that may differ from the BMVP, so
care must be taken to account for all of the HUD protocols when
structuring savings calculations and measurement strategies.

##### [Establishing Baseline Energy Use]{.underline} {#establishing-baseline-energy-use .unnumbered}

It is necessary to establish how much energy and/or water is being used
prior to installation of the retrofits under the performance contract.
This is the baseline from which savings are calculated. Since savings
will pay for the retrofits, it is vitally important to obtain an
accurate baseline for each utility affected by the measures to be
installed.

Establishing the baseline is a more detailed process than the initial
fuel- and water-use analysis. A minimum of three years' data on energy-
and water-use must be collected for each of the buildings that are part
of the conservation package. Three years' data will give the ESCOs
enough information to feel confident of their usage calculations. It is
also the amount of data HUD uses for determining the rolling base. The
baseline is usually set at the level of the rolling base in effect at
the time of the contract, barring unusual circumstances.

On occasion, the level of the rolling base at the time the performance
contract is signed may not be representative of the use at that point.
In these cases, the initial level of the rolling base needs to be
adjusted. Energy or water use may have been unusually high or low for
some reason during the three years being used for the rolling base, for
example a major piece of equipment may have been off-line. Or the
housing authority may have installed some conservation measures in the 4
years prior to the performance contract, which permanently altered the
level of consumption.

##### [Adjusting Baseline Energy Use]{.underline} {#adjusting-baseline-energy-use .unnumbered}

The contract should also outline how this baseline may be adjusted
during the course of the contract. The energy services agreement will
have provisions for adjusting this baseline depending on changes in
occupancy patterns (e.g. is it a complex for the elderly or young
families?), vacancy rates, equipment or usage. The contract should
provide specific details of how any changes that occur in these factors
after the measures are installed will be reflected in the savings
calculations. In order to have an accurate base from which to adjust, it
is important for the baseline data to be broken down as finely as
possible, e.g. the data should specify what portions of current usage
are due to each of these factors: uses, occupancy patterns and vacancy
rate. If the baseline is adjusted, the frozen rolling base used to
calculate operating subsidy must also be adjusted to reflect these
changes.

In addition to the factors above, the energy used for heating the
building should be adjusted for the actual weather that occurred during
the baseline period, using the heating degree day change factor. This
normalization process averages the annual heating degree days from the
years that are used to compute the frozen rolling base. It then adjusts
the amount of energy used in each year of the contract to the amount
that would have been used if the weather had matched that of the rolling
base period. The change factor is computed by dividing the actual degree
days recorded over a contract year by the annual average of the degree
days used in the utility baseline period. For example, if the average
number of degree days in the rolling base period were 8600 but the first
year following the retrofit experienced only 7950 heating degree days,
the change factor for that year would be: 7950/8600 = .9244. The savings
for that year would be multiplied by .92 to allow for the utility
savings that were simply the result of the milder than average weather.

This removes any variability in fuel use due to changing weather
conditions across years. This method for weather normalization is
slightly different from the one used by PRISM as discussed in Chapter 8.
In that case, both the pre-consumption and post-consumption usages are
adjusted to "normal" weather, usually an average of 30 years historical
degree day data. Both accomplish the same end. Note that HUD has not
allowed normalization for weather when calculating the AUEL since FY
1996, nor does it allow for normalization of energy used for cooling.

##### [Determining Post-retrofit Consumption]{.underline} {#determining-post-retrofit-consumption .unnumbered}

There are a number of strategies that can be used to determine
post-retrofit consumption use. The simplest is to monitor actual
consumption by feeding data from utility bills into a computer-based
fuel-use analysis program, such as the Princeton Scorekeeping Method
(PRISM). (See Chapter 8.) This type of program will provide a
"normalized annual consumption," taking into account differences in
weather. But this strategy does not always perform well, due to several
possible complications. The circumstances that might need additional
provisions for ascertaining and assigning savings include the following:

-   If HUD monies are used for energy-saving measures in combination
    with the performance contract, the savings due to measures funded by
    HUD must be factored out of the savings assigned to the performance
    contract.

-   Changes in building use, occupancy patterns and/or vacancy rates.
    (See discussion above and "Material Changes" and "Unreported
    Material Changes" below.)

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-   Inaccurate or infrequent meter reads.

Strategies to combat these complications include:

-   end-use monitoring, and

-   engineering calculations to differentiate use for each type of
    utility.

Early and frequent evaluation of post-retrofit consumption is also an
excellent method to identify measures that are not performing properly.
So, although HUD only requires a true-up of savings once a year, it is
wise to have the ESCO (and the housing authority) begin tracking
consumption as soon as the measures are installed, and continue on a
regular basis throughout the duration of the contract.

##### [Material Changes]{.underline} {#material-changes .unnumbered}

A material change to a building is defined as a physical modification or
change in use that changes energy use more than a minimum amount that is
specified in the contract. Remodeling of buildings or replacement of
energy- or water-using equipment could both constitute a material
change, as could an increase in the number of people using the
building's laundry facilities. Changes in the use or hours of operation
of building facilities, changes in occupancy and structural changes
could all qualify as material changes. Changes to buildings as the
result of condemnation, fire, flood and other events are also treated as
material changes.

The contract should require that the housing authority report material
changes to the ESCO in a timely manner, and discuss how material changes
will affect other contract provisions. The contract must specify how
adjustments to the baseline for material changes are to be made.

##### [Unreported Material Changes]{.underline}

There may be cases where utility consumption increases after the
measures are installed and no specific cause can be identified. This is
known as an unreported material change. Most energy services agreements
state that the baseline must be adjusted if there is an increase in
consumption of more than a specified percentage and equipment
malfunction or faulty repair can not be shown to be the cause. This
section is designed to protect ESCOs from changes that may occur within
the housing authority that are not easily quantified and assigned cause.

The housing authority must examine this section of the contract
carefully and determine if there is a fair apportioning of the risk from
these sorts of unreported changes. Often, contracts put the burden of
unexplained consumption increases on the housing authority. If usage
goes up without explanation, the baseline is adjusted so that the
increase is not counted when computing savings. In this scenario, there
is little incentive for the ESCO to search out elusive technical reasons
why consumption may have increased. The housing authority should
negotiate to ensure that the risk of these types of unreported changes
is apportioned fairly. This can be done by inserting mechanisms to
assign a percentage of the increase to both the housing authority and
the ESCO. This gives the ESCO an incentive to search out elusive
technical reasons for the increase. Another tactic is to insert language
that allows for third party arbitration of any disputes that may arise
as to unexplained causes of increased consumption.

#### The Energy Savings Guarantee  {#the-energy-savings-guarantee .unnumbered}

The energy savings guarantee is the heart of the performance contract.
To satisfy HUD requirements for performance contracting, the ESCO *must*
guarantee that a minimum level of conservation savings will be generated
as the result of the installation and operation of equipment, the
improvement of the building shell and the provision of services by the
ESCO. The guarantee is usually expressed as a dollar amount in the
contract, but its basis is kilowatts of electricity, therms of natural
gas, gallons of fuel oil or other units of consumption that are saved.
The prevailing utility rate at the time the contract is signed becomes
the baseline and the floor below which utility rates will not fall when
computing savings, if a floor rate is used. The savings guarantee, which
generally is between 65 and 90% of predicted savings, should be enough
to cover loan payments in the worst case scenario, i.e. when the floor
utility rate is being used to calculate savings.

#### Backing the Savings Guarantee {#backing-the-savings-guarantee .unnumbered}

The contract should also describe how the guarantee is backed. This can
be done a number of ways, including having the ESCO provide letters or
lines of credit, setting up an escrow account, obtaining an insurance
policy or bonding. If an escrow account, letter of credit or line of
credit is used, it is wise to have at least one year's savings available
as backing. These are perhaps the most secure of the various options.
There is an annual charge for these guarantees. Some ESCOs will suggest
that the housing authority may save money by canceling the guarantee
after a track record of satisfactory measure performance. This is a
risky strategy, since savings may decrease over time as measures age. It
may also conflict with 24 CFR 990.107(f)(1), which specifies that
payment must be dependent on savings.

A number of companies offer insurance policies that protect the ESCO in
case actual savings don't meet the amount guaranteed. If the ESCO
proposes to use an insurance policy to back the guarantee, be sure to
examine it carefully for clauses that conflict with arrangements in the
energy services agreement and for loopholes that might allow the company
to refuse to pay a claim. Examine how much is covered and if there are
any limits to liability. Make sure there are no legal restrictions in
your state on this type of policy. A draw back to using insurance is the
introduction of a third party into the negotiations of the energy
services agreement and in case of any shortfall of savings. Insurance
policies usually cost a percentage of the total project cost. The cost
of the policy will vary depending on the coverage provided and the risk
the company feels is involved, but may range from 5% to 7% of total
project cost. This amount is paid up front and covers the full term of
the contract.

Surety bonds may also be used to back savings guarantees. These bonds
are usually less expensive than other options and can be renewed
annually. Their disadvantage is that their cost may rise dramatically
each year if savings do not meet predictions.

The housing authority should be comfortable that the financial backing
will be available if there ever is a shortfall in savings. If the
housing authority is uncomfortable with the method that is proposed by
the ESCO, it can negotiate for another one.

#### Structuring the Savings Guarantee {#structuring-the-savings-guarantee .unnumbered}

Some energy services companies guarantee the amount of savings for the
entire project, not an annual amount. This is known as **accumulated
savings**. In these cases, the amount of the guarantee is usually set
exactly at the amount of the debt service. There is still an annual
true-up between actual and predicted savings. If the actual savings
exceed the predicted savings, that excess is credited to the amount of
total savings that are guaranteed. If savings don't meet predictions in
future years, the ESCO is not liable to pay for the shortfall until
after it is greater than the past amount of excess savings.

An accumulated savings guarantee has significant disadvantages to the
housing authority. Any excess savings it may accrue during a year is not
safely its own until the end of the contract, which may be a decade
away. The housing authority is at risk until that time for having to
come up with enough money to cover any future shortfall in savings in
order to cover debt service payments. This is especially detrimental if
a housing authority chose the performance contracting route specifically
to have excess savings to supplement its operating subsidy.

Another common practice that may not be beneficial to the housing
authority is the use of **escalation rates**. In a contract with
escalation rates, the utility rate that is used to convert consumption
to dollar costs is automatically increased every year. This has the
affect of increasing the dollar savings for a given amount of
consumption. (See discussion of rate increases in Chapter 7.) It will
result in more projected savings. Projected savings, along with cost of
retrofits, are what define the limits of cost effectiveness for a
project. So escalation rates can result in more investment. If rates
don't increase as stipulated, the amount of consumption savings can fall
off with the ESCO still meeting its guarantee. Because of the difference
between the rate used in the savings calculation and the rate the
housing authority is actually paying, the housing authority may get into
a situation where it hasn't realized enough dollar cost savings to cover
the debt service, but the ESCO\'s guarantee is not activated. Whether
this occurs will depend in part on whether HUD allows the housing
authority to use the escalation rate on the 52722-B form. It is best to
stipulate that actual rates with a floor rate will be used when
calculating savings.

#### Excess Savings

Excess savings occur when actual savings exceed the amount needed to
cover the debt service and other fees associated with the conservation
project. Guaranteed savings are usually set so that these costs will be
covered in the worst case scenario -- where the rate used to calculate
dollar cost savings is equal to a floor rate. This means when dollar
cost savings are calculated with the floor rate, and consumption
decreased only by the guaranteed amount, there would be no excess
savings. It is important to note that excess savings is not the
difference between predicted savings, which may be higher than the
amount guaranteed, and actual savings. It is possible for actual
consumption to be less than predicted, but still be over the guaranteed
amount.

HUD allows a housing authority to keep 100% of the savings attributable
to the installation of measures financed by non-HUD funding. At least
50% of those savings must go toward paying off the debt service. This
means that a possible total of 50% of the savings could be used by the
housing authority to fund other HUD-approved activities. Although in
actuality most performance contracts need more than 50% of the savings
to finance the debt service and cover other project fees (up to 90% or
more), deals are usually structured so there are some savings available
to the housing authority over and above that amount. This is especially
true if the rate used for calculating dollar cost savings is above the
floor rate.

How these excess savings are handled can be a subject of negotiation in
the contract talks. Of course, the housing authority could elect to keep
all of the savings. An alternative strategy is to split the savings with
the ESCO by some pre-arranged percentage. For instance, the deal might
be structured so that the housing authority gets 100% of the savings, up
to the amount needed to make the loan payment. Anything above this
amount might be split 50/50 This provides the ESCO with excellent
incentive to get the maximum performance out of the project.

Make sure, though, that it is very clear what the ESCO means when they
discuss splitting savings. Having incentives or fees based on a
percentage of excess savings is much different than having them based on
a percentage of the total dollar cost savings to the housing authority.
It is sometimes difficult to determine from the boiler plate of
proposals which of these fee and incentive structures the ESCO is
proposing. The following 4 scenarios illustrate the implications of this
distinction.

The ESCO predicts the project will save \$100,000 annually at the floor
rate. It guarantees 75% of this amount, which is enough to cover the
\$75,000 annual cost of debt service. This stays constant in each of the
examples below. They propose incentive-based fees of 12%. Whether this
is 12% of the excess savings, or 12% of total dollar cost savings will
have a great impact on the total cost of those fees. It can impact
whether the housing authority is able to meet the annual costs of the
project.

The first example will examine the case when the percentage fee is based
on the total dollar cost savings to the housing authority and the
project achieves the predicted amount of consumption savings. The
accounting will look like this when cost of the utility is at the floor
rate:

Estimated savings = \$100,000

Actual Savings = \$100,000

Incentive-based Fee = \$12,000 (12% of total savings )

Debt Service = \$75,000

The housing authority nets \$13,000 (\$100,000 Actual Savings - \$75,000
Debt Service - \$12,000 fee).The guarantee does not come into play,
because the estimated savings are above the guaranteed amount.

The next example looks at a case where actual consumption savings
generate \$80,000 when computed at the floor rate. The estimated savings
are not achieved, although they are still above the guaranteed amount.
In this case, the housing authority may not net enough to cover the debt
service, depending on how the fees are structured. Now the accounting
looks like this:

Estimated savings = \$100,000

Actual Savings = \$80,000

Incentive-based Fee = \$9,600 (12% of total savings )

Debt Service = \$75,000

Before the fee is paid, the housing authority nets \$5,000 (\$80,000
Actual Savings - \$75,000 Debt Service ). But after the \$9,600 fee is
paid, the housing authority is in the red \$4,600. The guarantee does
not come into play, because the estimated savings are above the
guaranteed amount.

When fees are based on a percentage of excess savings, the scenario is
quite different. The following examples will use the same numbers as
above, only altering where the incentive-based fee percentage is
applied.

In the case when actual consumption savings equal estimated consumption
savings, the accounting is as follows:

Estimated savings = \$100,000

Actual Savings = \$100,000

Debt Service = \$75,000

Excess Savings = \$25,000

Incentive-based Fee = \$3,000 (12% of excess savings )

In this case, the incentive based fee is much smaller, and the housing
authority nets \$22,000 (\$100,000 Actual Savings - \$75,000 Debt
Service - \$3,000 fee).

If the actual consumption savings are less than predicted and only
generate \$80,000 when computed at the floor rate, the accounting is as
follows:

Estimated savings = \$100,000

Actual Savings = \$80,000

Debt Service = \$75,000

Excess Savings = \$5,000

Incentive-based Fee = \$600 (12% of excess savings )

The housing authority nets \$4,400 (\$80,000 actual savings - \$75,000
debt service - \$600 fee).

If incentive-based fees are applied to total dollar savings, the housing
authority is at risk of having to pay out more in fees than it takes in
from savings. So it is best to only have percentage-based incentives on
excess savings. If an ESCO proposes to have any of their fees based on a
percentage of the total savings, the housing authority should make
structure the agreement to protect itself from project expenses
exceeding savings. This can be done by specifying a cap on
incentive-based fees so they do not exceed excess savings.

#### ESCO Fees  {#esco-fees .unnumbered}

The following types of ESCO fees are typically specified in an energy
services agreement:

-   **Hard costs:** These are costs for the purchase and installation of
    equipment and measures that will be installed under the contract.
    Examples would be boilers or insulation.

-   **Soft costs:** These include project design, materials
    specification, bid solicitation and project management. They are
    also paid out of the construction account. Often these costs are
    structured as a percentage of an applicable section of project
    costs, e.g. engineering may be 7% of the costs for purchasing and
    installing any equipment that is part of the project.

-   **Savings guarantee fee:** These fees are discussed in the section
    above.

-   **Construction financing** **fee:** If a separate construction loan
    is taken out to establish the construction account, there will be
    fees associated with it, above the charges for the project
    financing. The project usually can be financed under one loan, in
    which case the project financing charges would cover the
    construction account.

-   **Monitoring fee:** This generally includes utility-account
    management, consumption monitoring and reporting, and annual
    equipment and systems inspection.

-   **Staff and resident training** **fees:** There will be charges for
    training at the beginning of the project, and annually thereafter.

-   **Energy audit fee:** This fee may have been paid to the ESCO out of
    modernization or other funds prior to closing on the permanent
    project financing. If this is the case, they can now be paid out of
    project financing, allowing the housing authority to reimburse the
    pot which originally paid for the audit.

The time when payment comes due on the costs above varies. The
discussions below outline where each type will generally occur.

**Up-front fees** are incurred and must be paid prior to signing the
energy services agreement. The energy audit may fall into this category,
as would any fees to consultants who are helping the housing authority
navigate the performance contracting process. Consultants may perform
services such as fuel use analysis. Any up-front fees may be rolled into
the performance contract and reimbursed after the energy services
agreement is signed and financing is in effect.

**Implementation** **costs**. A construction account is generally
established after closing on financing. The housing authority has
control over this account. The ESCO invoices the housing authority,
usually monthly, for materials, sub-contractor labor and other
construction fees. They bill based on the percentage of work that has
been completed and inspected. Both hard and soft costs are paid for out
of the construction loan and are, therefore, implementation costs.

**Annual fees** may be assessed for tasks such as monitoring savings,
utility-account management, inspection of equipment, and resident and
staff education. These fees are typically paid for out of the cash flow
resulting from conservation savings. If the ESCO is responsible for
routine equipment maintenance, this is also dealt with through an annual
fee. When evaluating the cost effectiveness of a proposed performance
contract *make sure that these annual fees are considered and that
savings are sufficient to cover them*. Also check that these costs are
not included in the financing package. It does not make sense to finance
costs that aren't incurred at the beginning of the project and can be
paid for out of the annual savings stream of the project. Annual fees
can be structured as fixed charges, paid for with a percentage of each
year's savings or billed at an hourly rate.

It is useful to examine proposed annual fees as a percentage of annual
savings. This provides a reality check on how much various fees are
draining away from the housing authority. This can help the housing
authority to determine if they want to negotiate on the price of the
fee. They may also consider altering the scope of work (e.g. structuring
a maintenance contract in a different manner) in order to retain more of
the savings, if this will not negatively impact the project.

#### Billing Procedure {#billing-procedure .unnumbered}

There are a number of transactions that should be outlined in the energy
services agreement. The billing procedure to be followed by the ESCO
during construction should be specified in the contract, and a sample
invoice provided. Once construction is complete and the project
financing becomes due, the ESCO or the lender will regularly bill the
housing authority for payments on the interest and principal. Due dates
and penalties for late payment should be outlined in the energy services
agreement. If there are shortfalls in savings, the ESCO will reimburse
the housing authority. In order to track consumption, the ESCO will need
copies of utility bills. The contract should specify how often the
housing authority is to get this data to the ESCO and in what format, as
well as the timeline for reimbursing the housing authority in case of
shortfall. Payment schedules and structure for any annual fees, such as
the ESCO's compensation for maintenance and emergency service of
equipment, must be detailed in the contract.

#### Annual Reconciliation {#annual-reconciliation .unnumbered}

The contract should specify when the annual true-up will occur, what the
housing authority's obligations are for supplying data, and how long the
ESCO has to produce the report and pay any shortfall in savings that may
occur. It should also specify the timeline for any incentive payments
the housing authority may owe the ESCO for excess savings.

#### Conservation Hardware, Equipment Warranties and Ownership {#conservation-hardware-equipment-warranties-and-ownership .unnumbered}

The brand and type of equipment is a negotiable part of the contract. If
a housing authority has dealt with one manufacturer in the past, it may
be wise to continue to specify that brand of equipment, if the equipment
has performed reliably in the past. The housing authority maintenance
staff is familiar with that brand, there will be fewer types of
equipment for them to learn and fewer parts to stock, and there is less
likelihood of compatibility problems between various components of a
system.

The contract should state that ownership of installed equipment reverts
to the housing authority at the end of the contract period. Title to the
equipment may be with the housing authority, the ESCO or the lender,
depending on the financing vehicle and the structure of the ESCO's
energy services agreement. The ESCO should guarantee that all equipment
installed is new, in good working condition and fully covered by
equipment warranties for both parts and performance. Further, the
contract should require that all parts and equipment installed during
maintenance and repairs will be new and that they will be covered by
warranties that are transferable to the client, either at the time of
installation, or if the equipment is leased, at the time title is
transferred to the housing authority. If there are any equipment
problems that are covered under warranty, the ESCO should agree to work
with the manufacturer or seller to have the equipment replaced or
repaired and to pursue them legally if the conditions of the warranty
are not satisfied.

#### Equipment Maintenance {#equipment-maintenance .unnumbered}

The responsibility for regular maintenance, the repair of malfunctions
and emergency repairs of equipment must be clearly delineated in the
energy services contract, especially in cases where new parts have been
installed in existing equipment. Terms of access for equipment
monitoring and maintenance and for emergency repairs must also be
spelled out. If the housing authority's staff are responsible for
maintenance, the energy services agreement should spell out the training
needed in order for housing authority staff to become qualified to care
for the new equipment.

#### Specifying subcontractors {#specifying-subcontractors .unnumbered}

The ESCO is acting as general contractor and has responsibility for
selecting the subcontractors. Because the company is guaranteeing the
savings, it must have control over who will be working on the project.
But ESCOs often use local subcontractors, and the housing authority can
negotiate for the ESCO to consider or avoid certain contractors.

#### Staff and Resident Training {#staff-and-resident-training .unnumbered}

The training of maintenance staff and providing of resource-efficient
education for building residents are integral parts of ensuring that the
predicted conservation savings are realized. A good training program
should be part of the finalized performance contract. This training may
be carried out by ESCO staff or a subcontractor. The contract should
delineate the type and amount of training to be provided to residents
and staff and itemized costs for each. The ESCO should provide training
as part of the initial project and also in the years after completion in
order to reach new staff and residents. The method of payment for the
training, which is eligible to be reimbursed through conservation
savings, must be described in the contract. Generally, there is a set
fee negotiated. Another alternative is to specify a percentage of the
excess savings will be used to pay for the training.

#### Comfort Standards for Residents {#comfort-standards-for-residents .unnumbered}

Performance contracts with housing authorities are different from
commercial and industrial jobs. With housing authorities, the work will
be performed on people's homes, while they are occupying them. Therefore
the contract should guarantee that comfort standards for residents will
be preserved throughout the project. Minimum day and nighttime
temperatures should be specified during the heating season, and maximums
for the cooling season. Limited disruptions to water and domestic hot
water service should also be negotiated. The housing authority's rules
for required notice before entering apartments should also be included
in the contract. The housing authority should check to see if there are
any local regulations that set limits for any of the above factors. If
so, those levels should be outlined in the contract.

#### Default and Arbitration {#default-and-arbitration .unnumbered}

The procedure to be followed in the event of a default by either the
ESCO or the housing authority must be laid out. A method for resolving
disputes relating to the energy services agreement must be a part of the
contract. The payment of the expenses related to the resolution of such
disputes must also be addressed. Dispute resolution is usually
accomplished by bringing in a mutually agreed upon third party. The
costs of this dispute resolution may be a "winner takes all" approach,
where the party that is ruled against pays, or there could be a
predetermined percentage split.

#### General Construction Standards {#general-construction-standards .unnumbered}

The project must meet the general conditions for construction spelled
out in HUD 5370. The ESCO must certify that the project will comply with
all state and local building codes, certifications and licensing
standards. A registered professional engineer must review and approve
the retrofit plans.

#### Local Prevailing Wage and Insurance {#local-prevailing-wage-and-insurance .unnumbered}

The ESCO must guarantee that local prevailing wage will be paid to
workers on the project, and must agree to provide evidence on request
that the salary guidelines spelled out in the contract are being met.
The ESCO must carry Workman's Compensation Insurance for employees who
work on the project. The ESCO also must carry a casualty and liability
insurance on the equipment to be installed and a liability policy for
its employees. The ESCO is generally required to produce a completed
insurance or performance bond prior to commencement of the work.
Certificates of insurance must be provided for the construction and
operation phases of the project.

#### No Additional Personnel {#no-additional-personnel .unnumbered}

The contract must guarantee that the housing authority will not have to
hire additional personnel for the project unless a specific exemption
has been negotiated.

#### In-Progress Approval of Work {#in-progress-approval-of-work .unnumbered}

The ESCO is responsible for all equipment installation under the terms
of the performance contract. Housing authority staff should, however, be
familiar with the conservation equipment involved, and should monitor
its installation. The staff will also have to coordinate the ESCO's work
with residents and will have to resolve any conflicts between the ESCO's
work and activities that normally go on at the facility. The facility
engineer or operations supervisor is normally responsible for providing
such coordination.

ESCO staff must be granted full access to the facility for testing and
approval of work during the construction phase. All books and
construction records relating to the project should be available for the
housing authority's inspection at any time.

All of these factors should be discussed by the housing authority and
ESCO, and spelled out clearly in the energy services agreement.

#### Commissioning {#commissioning .unnumbered}

New equipment doesn\'t always operate according to specification.
**Commissioning** is the process of testing equipment to see if it is
performing as rated. Boilers and furnaces, blowers and pumps, heat pumps
and other equipment that produce or move energy should be tested to
confirm that it is working properly. Manufacturers' performance
specifications for equipment are part of the energy services agreement,
and procedures for confirming equipment performance must be specified in
the contract. If possible, these criteria should be quantifiable and
performance based.

#### Substantial Completion and Commencement Date

Payments and savings calculations will begin on the **commencement
date**. The contract should define how this date will be set. It is
often the first day of the month following the housing authority signing
a certificate of **substantial completion**. The contract should also
specify how consumption savings that occur during the construction
period, before the commencement date, will be handled. Usually these
savings are counted toward the guaranteed savings of the first year.

#### Drawings, Reports and Materials {#drawings-reports-and-materials .unnumbered}

The ESCO must supply the housing authority with copies of installation
drawings, operating and maintenance instructions, reports, equipment
manuals, warranties and other pertinent information.

### 4. After Negotiations {#after-negotiations .unnumbered}

If, after negotiating the above issues, the housing authority and the
ESCO agree on the elements of an energy services agreement, the document
must be submitted to the local HUD field office for its approval. Once
HUD has signed off on the completed contract, the principals may sign
the contract and it will be in force.

If the housing authority and the ESCO can not reach agreement on the
terms for the performance contract, the housing authority would have to
initiate a new RFP process and pay for the ESCO's energy audit. Since
this would cost the housing authority time and money, it is best that an
agreement be reached, if at all possible.

## CHAPTER 13  {#chapter-13 .unnumbered}

## project IMPLEMENTATION {#project-implementation .unnumbered}

### 1. Beginning the Project {#beginning-the-project .unnumbered}

After the energy services agreement is signed, the ESCO begins its work.
The ESCO will arrange financing for the project, which may include a
separate construction loan or just a construction escrow account from
the main financing. It will sign on subcontractors for the project. Its
project manager will contact housing authority staff in order to
coordinate the construction around any activities that the housing
authority run in its facilities. The ESCO and the housing authority
representative will also need to work together to develop a
communications plan to provide notice to the tenants of when work will
begin, how it will affect them and if and when access will be needed to
their apartments. Once all of the necessary pieces are in place, the
installation of the equipment will begin. Careful consideration during
contract negotiations of how to coordinate construction schedules with
housing authority needs should help this process go smoothly.

### 2. Final Quality Control and Equipment Check {#final-quality-control-and-equipment-check .unnumbered}

Before the project is officially complete, the housing authority's
approval of the installation of conservation measures and equipment
performance is required. Housing authority staff should inspect the job
when it is completed, looking for unfinished details and assessing the
quality of the work. Any deficiencies should be noted and corrected
before the housing authority signs off on the job by certifying
substantial completion.

#### Commissioning {#commissioning-1 .unnumbered}

Equipment commissioning should be carried out at this time according to
the conditions specified in the energy services agreement. If the
testing is carried out by ESCO personnel, a housing authority
representative should witness the procedure. Malfunctioning equipment
must be adjusted or replaced before the job is declared complete.

### 3. Payments Begin {#payments-begin .unnumbered}

The commencement date for payments to the financier and calculation of
the savings should have been specified in the contract. Compensation to
the ESCO for service and maintenance called for in the performance
contract generally doesn\'t start until one year after the commencement
date.

### 4. Monitoring Conservation Savings {#monitoring-conservation-savings .unnumbered}

The energy savings attained as a result of the conservation measures
adopted are at the heart of the performance-contract process, so
accurate monitoring of utility consumption data is essential. This data
will be compared against the baseline consumption to determine energy
savings. Accurate monitoring also provides housing authority staff and
ESCO employees with feedback on the energy performance of the buildings.
It allows them to spot malfunctioning equipment and to make adjustments
that will improve energy efficiency.

Utility bills, weather data, building maintenance and operation logs,
and reports from the maintenance staff on building equipment operation
and changes are the principal sources of monitoring data. The housing
authority is required in the energy services contract to forward copies
of utility bills to the ESCO in a timely manner, and the ESCO will
compute conservation savings each month under the formula agreed to in
the contract. The housing authority is also required to report any
material change in building use. (See Chapter 12.)

#### Reports {#reports .unnumbered}

From the monitoring data, the ESCO will prepare regular reports for the
housing authority, usually monthly, which summarize conservation
savings. It should compare estimated to actual savings, after adjustment
for the heating degree day change factor. To be useful, monitoring data
must be accurate, timely and easy to understand. The findings should be
summarized in an easy-to-read graphic format that clearly compares
actual savings with predicted savings.

### 5. Conservation Training {#conservation-training .unnumbered}

Training of housing authority staff and residents may take place before,
during and after construction. It is important to have some outreach and
information sessions prior to commencement of construction, to inform
staff and residents of what will be happening, how they will be affected
and what may be expected from them. Such training increases the
performance and useful life of conservation measures by increasing the
staff's understanding of the operation of the new equipment, and may be
required if housing authority maintenance staff are responsible for
maintenance of the new equipment. Resident training can help increase
savings and decrease complaints by informing the tenants of the changes
to expect in their homes.

One goal of the training is to demonstrate that conservation serves the
interests of staff and residents by increasing comfort, reducing utility
bills and increasing housing authority funds for other improvements. The
quantity and duration of conservation savings can be maximized by
educating the management, staff and residents of the buildings being
retrofitted.

#### Involvement {#involvement .unnumbered}

A good energy training program will actively involve all the
participants in a dialogue versed in terms of the building they live or
work in. The training session should cover the basics while remaining
flexible enough to respond to the needs of those receiving the training.
The instructor should provide each student with opportunities for
hands-on learning with lots of feedback on their personal concerns and
questions.

Utilities and government agencies provide a wide range of brochures and
instructional materials on all aspects of energy conservation. These are
usually supplemented by handouts prepared by the trainer. The instructor
should thoroughly explain the handouts, not just distribute them with
the expectation that they will be read and understood.

#### Housing Authority Staff Training {#housing-authority-staff-training .unnumbered}

After the ESCO has completed the installation of equipment and has made
any other modifications called for in the performance contract,
maintenance staff should be instructed on what their responsibilities
will be and what changes in the operation of the buildings may be
expected. They should be familiarized with the new equipment, and its
operation and maintenance. Maintenance logs and manuals should be
provided. Periodic reviews on maintenance procedures should be offered.
It is especially important that good procedures be laid out for the
training of new or substitute maintenance staff.

If the ESCO has signed an energy services agreement that calls for it to
take full responsibility for operations and maintenance of the new
equipment, as is frequently the case, in-depth training on the equipment
is sometimes postponed until close to the end of the contract period.
Because it is essential for the staff to have a basic understanding of
the retrofit measures and their effect on the buildings and residents,
some training should be provided earlier.

Non-maintenance staff should also receive training. They will be
interacting with tenants and should be made aware of what the
conservation project will entail. Their working environments may also
change, so training should outline what they can expect and how they can
contribute to making the project a success.

#### Resident Training  {#resident-training .unnumbered}

The apartments are the residents' homes and they are understandably
curious and wary of changes that are being made. They may be asked to
let workers into their homes and put up with inconveniences during
construction. A quality resident education program can help increase and
maintain savings over the life of the project, as well as decrease the
number of resident complaints during and after construction.

The 1987 HCDA provided that costs for educating residents about energy
and water conservation can be recovered from conservation savings. The
training is paid for over the life of the contract. Housing authority
staff must work with the trainers to plan and carry out resident
education. The staff must act as a liaison between the ESCO and
residents, scheduling meetings and training sessions and announcing
demonstrations of the new equipment to residents. In some instances,
conservation trainers may be invited to individual apartments to show
residents ways to save energy and how to operate conservation equipment,
such as a setback thermostat, that is installed in their apartment.

### 6. Capturing the Savings

It is vitally important that the staff responsible for completing the
paperwork for year-end adjustments to the AUEL to be instructed on how
this form should be filled out during the contract period. When
completing the 52722-B form, they must be aware that they should use the
consumption amount of the frozen rolling base, and not actual
consumption, for the properties involved in the performance contract.
Adjustments made to the baseline used for calculating savings for
purposes of the savings guarantee should also be made to the level of
the frozen rolling base. Staff must also be aware of the process for
unfreezing the rolling base so that savings may continue to accrue to
the housing authority for the first two years after the contract ends.
(See Chapter 5, "Introduction to Performance Contracting.") In addition,
the standard method of using the form results in the housing authority
receiving only 50% of the savings, not 100%.

There is no approved method for doing this reconciliation. A housing
authority should work with their ESCo and HUD to develop a methodology
that is acceptable to all parties, bearing in mind the issues outlined
above.

### 7. Concluding the Contract {#concluding-the-contract .unnumbered}

At the end of the project, the rolling base will unfreeze, and the
operating subsidy will begin to return to a level which matches actual
consumption. After 3 years, all further savings from the conservation
measures will go to HUD. (See Chapter 5, "Introduction to Performance
Contracting.") Warranties and ownership of equipment will pass back to
the housing authority, if they were in the name of the ESCO or the
financing company during the contract. The housing authority should
consider continuing periodic training of residents and staff on
conservation measures and preventive maintenance. This will help ensure
that consumption does not increase after the contract period ends.

## chapter 14

## HUD'S ROLE

HUD plays an integral role in issuing approvals and providing oversight
for all of the incentives discussed in this guide. A housing authority
that wishes to use any of these incentives must check work with its
local HUD field office. The approvals needed are outlined below.

### Performance Contracting

Performance contracting has always been used with the frozen base method
and may also be used with the additional subsidy incentive. Performance
contracting gives the housing authority considerable leeway in arranging
a conservation retrofit, but the final contract must conform to HUD
rules and federal contracting regulations. HUD approval of key documents
is required.

It is best to involve HUD early and often through the process of
securing a performance contract, to avoid mistakes and unnecessary
paperwork. A housing authority representative should notify the HUD
Field Office if performance contracting is being considered for a
conservation project. A preliminary meeting with HUD Field Office
personnel to open lines of communication and to review documentation
requirements can also help the project go more smoothly.

#### HUD Approvals

Elements of the performance contract process that require HUD approval
must be reviewed by the housing authority's HUD Field Office. The
request for proposals, the energy audit agreement, the fuel baseline
that is established by the ESCO after the energy audit, and the energy
services agreement all require HUD approval. It can be helpful to send
field office staff preliminary copies of these documents, while they are
being developed. This will keep the staff informed on the progress of
the project and will make it possible for them to make any suggestions
they may feel are necessary early in the process.

##### HUD Field Office Review

In reviewing the documents, the staff will confirm that they conform
with the federal regulations regarding the contractor procurement
process. The terms and conditions of the energy services agreement will
be scrutinized, and the feasibility of the improvements and the proposed
financial arrangements will be reviewed. Field office staff will also
certify that the General Conditions for Construction (form HUD-5370) are
met. After the initial review has been completed, the staff may ask the
housing authority for more information, or may approve or disapprove the
documents.

##### Freezing the Rolling Base

The housing authority must write a letter requesting that HUD freeze the
rolling base. This should be submitted at the time the energy services
agreement is sent to HUD for approval, by the housing authority and the
ESCO. The letter should include:

-   a description of the buildings included in the project,

-   the conservation measures to be installed,

-   any changes in fuels or energy source,

-   a summary of the contract terms, including the amount to be
    borrowed, the interest rate and the contract period,

-   the energy savings guarantee and financing arrangements, and

-   a statement of any maintenance or services to be performed by the
    ESCO.

The application also should include a copy of the financial summary
presented in Figure 10.

**Figure 10. Financial Summary**

NAME OF HOUSING AUTHORITY:

PROJECT NAME(S) AND ACCOUNT NUMBERS:

  --------------------------- --- --- --- --- --- --- --- --- --- ---- ---- ---- -------
  YEAR OF CONTRACT            1   2   3   4   5   6   7   8   9   10   11   12   TOTAL

  1\. ESTIMATED DOLLAR COST                                                      
  SAVINGS                                                                        

  2\. PAYMENTS TO ESCO\*                                                         

  3\. PAYMENTS TO FINANCIER                                                      

  4\. ESTIMATED NET SAVINGS                                                      
  TO HA                                                                          

                                                                                 
  --------------------------- --- --- --- --- --- --- --- --- --- ---- ---- ---- -------

\*Annual fees, e.g. monitoring, training, service charges, etc.

LENGTH OF CONTRACT: \_\_\_\_\_\_\_\_ YEARS

The summary can be completed by ESCO or housing authority staff. This
chart outlines estimated dollar savings, projected debt service and
other payments, and net dollar cost savings to the housing authority.

The ESCO must also develop a fuel baseline as outlined in the energy
services agreement. This is the level at which the rolling base will be
frozen, and includes adjustments for any non-working equipment that will
become functional under the contract and adjustments for vacant
apartments. (See Chapter 12, "Contract Negotiations.")

##### Waivers

A waiver from HUD is necessary in cases where the housing authority and
ESCO would like to incorporate aspects into the performance contract
that are not specifically dealt with in the regulations. This is the
case for performance contracts that wish to capture savings from
tenant-paid utilities. It is very important to consult with HUD about
proposed waivers early in the process. This allows them to realistically
structure the performance contract. If the housing authority gets too
deep into the process without obtaining HUD approval for something that
needs a waiver, it is at risk of scuttling the performance contract if
the waiver isn't granted.

#### Annual Reporting to HUD

All housing authorities must submit an annual report on actual and
estimated utility consumption to the HUD Field Office. Estimated utility
cost and consumption data are reported on Form HUD-52722A, which must be
turned in annually, along with a summary of the operating budget for the
year. Actual utility cost is reported on Form HUD-52722B, which is filed
after the end of the housing authority's fiscal year. This form looks at
actual versus estimated consumption and then multiplies it by the rate
that is in effect at the time in order to determine if the housing
authority is eligible for sharing any dollar cost savings from decreases
in consumption.

When a housing authority has a performance contract, these forms must be
filled out differently than in normal circumstances. The amount of
estimated consumption will be that of the frozen rolling base. Normally,
actual consumption as reported in the 52722-B form may not be adjusted
for heating degree days. With performance contracting, that adjustment
is allowed. Any adjustments to the baseline utility use made to satisfy
the terms of the energy services agreement should be made to the
estimated consumption amount used when calculating the difference
between actual and estimated consumption on the 52722-B. That change
should also be reflected in the rolling base that is specified in the
next year\'s 52722-A. After completion of the contract, the rolling base
level should be determined using the process outlined in Chapter 5,
"Introduction to the Performance Contracting Method."

#### Summary

Performance contracting rules are full of nuances that may affect the
success of the project. If a housing authority neglects to notify HUD
and doesn't receive the proper approvals, it is at risk of investing
staff time and money, only to have HUD refuse to allow some or all of
the components of the performance contract it is negotiating. In a worst
case scenario, savings it is counting on to repay the debt service may
be disallowed. For these reasons, it is vitally important to keep HUD
apprised on the progress of performance contracting negotiations and to
submit the RFP, energy audit agreement, and the energy services
agreement to HUD for approval prior to issuing or signing them.

### The Additional Subsidy 

If a housing authority chooses to pursue a conservation project using
the additional subsidy, but no performance contract, it must also obtain
HUD's approval for the project. In particular, HUD must review the scope
of the project and the expected savings prior to allowing the housing
authority to begin the work. The housing authority and HUD must also
agree to how the savings from the project will be determined for
purposes of meeting the requirements of 24 CFR 990.110(e)(2) which
specifies that savings must meet or exceed the amount of annual debt
service in order for the housing authority to be eligible for its full
share of operating subsidy the following year.

### The Rate Reduction Incentive

If the housing authority negotiates a decrease in rates, outside of the
normal rate making procedure, it is eligible to retain 50% of such
savings. In order to retain these savings, it must document for HUD the
amount that it would have been paying without its negotiations and
compare that to the rate that it is currently paying. Since the rate
from its local utility is public information, it should be able to
obtain this information from either the utility or its public utility
commission.

## REFERENCES

##   {#section-7 .unnumbered}

## Glossary

Actual Savings: The difference in energy use between that which would
have been used without the energy improvements and the actual energy
used.

Additional Subsidy or Add-on Subsidy: A HUD incentive for resource
efficiency improvements in housing authorities. The housing authority
obtains non-HUD financing to pay for the retrofit work and HUD provides
an additional operating subsidy in an amount sufficient to amortize
payments for the loan. The term of the loan is limited to 12 years.

Allowable Utility Consumption Level (AUCL): The level of consumption of
fuel, water and sewer usage to be used when budgeting for
authority-provided utilities. (using HUD 52722A). The AUCL is computed
using the rolling base.

Allowable Utilities Expense Level (AUEL): The estimated level of cost
for utilities, computed using HUD Form 52722A, for the upcoming year's
budget. The AUEL is computed by multiplying the rolling base by the
rates in effect at the time of the budgeting process.

Authority-Provided Utilities: Utilities that are paid for by the housing
authority rather than the tenant. Authority-provided utilities may be
either master-metered, master-metered with check meters or individual
meters.

Block Rate: Refers to a block or step rate structure in utility billing.
Energy use is billed at one rate up to a certain amount, and then
another rate goes into effect for amounts exceeding that level.

Broker: A customer's representative. In this context, one who represents
a utility customer's best interest with respect to finding the cheapest
utility rates.

Btu: A thermal measuring system based on the amount of heat necessary to
raise the temperature of one pound of water one degree Fahrenheit.

Burnertip: The final point of delivery of fuel in gas-fired furnaces,
boilers and other equipment where the gas mixes with oxygen and the
flame is produced.

CCF: One hundred cubic feet of natural gas or water. For natural gas, a
CCF is approximately equivalent to one therm of energy.

Check Meters: Submetering installed to "check" the energy use of
individual apartments in PHAs where master meters record the energy use
of the entire building or series of buildings.

CLPHA: The acronym for the Council of Large Public Housing Authorities,
whose members manage one-third of the nation's public housing units.

Compliance Audits: Audits required by HUD to be performed on housing
authority buildings every 5 years. These audits are regulated by 24 CFR
965.304.

Comprehensive Improvement Assistance Program (CIAP): Modernization funds
used by smaller (fewer than 250 units) public housing agencies to
correct physical, management, and operating deficiencies and keep units
in the housing stock as safe and desirable homes for low-income
families. It provides funding for capital improvements, major repairs,
management improvements and planning costs. These funds are applied for
on a competitive basis.

Comprehensive Grant Program (CGP): Modernization funds used by larger
(250 or more units) public housing agencies (PHAs) to make physical
improvements to public housing units and improve the management and
operation of the PHA. CGP provides funds, based on a formula, that can
be used for capital improvements, major repairs, management
improvements, and planning costs.

Curtailment: A notice issued by a utility to a customer with
interruptible service to stop the use of its product (gas or
electricity) during peak usage periods.

Customer Charge: See meter charge.

Demand-side Management (DSM): Utility programs developed to reduce
demands on the utilities' generation, transportation, and distribution
systems by improving the efficiency with which their customers use
energy or shifting the time of energy use.

Energy Performance Contracting: See Performance Contracting.

Energy Savings Guarantee: See Savings Guarantee.

Energy Services Agreement: A written agreement, between a housing
authority and an energy services company outlining the work to be done
under a performance contract. It must contain the following elements:
savings guarantee, scope of work, savings calculation methodology and
financing terms. It must be approved by the local HUD office and should
incorporate the HUD regulations for performance contracting..

Energy Services Company (ESCO): A company that specializes in managing
energy and water conservation retrofit projects. The ESCO may perform
any or all of the following services: auditing, developing packages of
recommended measures, arranging financing, installing or overseeing
installation of measures, tenant and staff education, equipment
commissioning, maintenance, measuring, verifying, and guaranteeing
savings.

Escalation Rate: A stipulated rate of increase in utility rates used in
energy savings calculations and guarantees.

ESCO: See Energy Services Company.

Excess Savings: A positive difference between the amount needed to cover
the debt service and other fees involved in a project (usually the
amount of the guaranteed savings) and the actual savings. Savings more
than cover costs. Excess savings may accrue solely to the housing
authority or may be split between the ESCO and the housing authority.

Firm Service: Utility service that is provided to the customer at all
times, even during peak usage periods such as very hot or cold weather.
The utility is required to have enough capacity and product to serve the
customer during these peak periods. The non-interruptible nature of this
type of service results in a much higher rate for firm service than for
interruptible service.

Fuel Charge: The portion of a utility bill that goes toward the purchase
of the fuel (as opposed to the provision of services such as meter
reading or line maintenance). The utility is not allowed to make a
profit on this portion of the bill and must simply pass through its
costs for purchasing gas or electricity to the consumer. It is this
portion of the bill that is being deregulated, so that now customers in
some areas may shop for energy from suppliers other than their local
distribution company.

General Purpose Bonds: Bonds that are financially certified by the
entity issuing the bond. Bonds are seldom used for conservation projects
because the high fixed costs of issuing this type of financing make it
an expensive option for funding the relatively small dollar amounts
needed for these projects.

HCDA of 1987: See Housing and Community Development Act of 1987

High Intensity Discharge (HID) Lights: These lamps operate by passing an
arc between two electrodes through a quartz or ceramic tube containing
small amounts of rare metals. The metals are vaporized and ionized,
radiating visible light. The three basic types include mercury vapor,
metal halide, and high-pressure sodium.

Housing and Community Development Act of 1987: Laid the regulatory
framework for improving the energy efficiency in Public Housing by
providing financial incentives for HAs to use non-federal funds for
conservation retrofits and by allowing housing authorities to retain a
portion of the savings they negotiate for rate reductions.

HUD Form 52722-A: Used by the PHA to estimate utility costs for the
upcoming year's budget.

HUD Form 52722-B: Used by the PHA to reconcile actual utility costs with
the estimated costs.

HUD USER: An information source, established in 1978 by HUD's Office of
Policy Development & Research (PD&R), for Federal Government reports and
information on housing-related issues.

Individual Meters: One meter per apartment that can be PHA or tenant
accounts.

Interruptible Service: Utility service that is available at a reduced
rate because the utility has an agreement with the customer that it can
interrupt delivery of service during peak demand periods.

Local Distribution Company (LDC): The local utility company that is
responsible for delivering fuel from the transportation company to the
customer. Traditionally, LDCs sold and delivered the energy to
customers. In areas with deregulated energy services, the LDC may now
only be responsible for delivering energy that the customer purchases
from a marketer or broker.

Low-Income Weatherization Assistance Program (WAP): A federally-funded
program that provides a maximum of \$1,600 in conservation services and
weatherization assistance to households with incomes of below 150% of
poverty level.

Marketer: A company that buys and re-sells gas and electricity. In areas
with deregulated service, a customer may purchase energy from a marketer
for delivery by their local distribution company..

Master Metering: One meter per building or a number of buildings,
usually a PHA account.

MCF: A unit of measurement for gas or water that is equal to 1,000 cubic
feet.

Meter Charge: A flat rate assigned to each utility meter to cover the
local distribution companies fixed costs in servicing the account, such
as meter reading and billing.

Meter Rate: This rate covers the utility's cost of providing service. It
includes operating expenses, taxes, depreciation, and the company's
allowed rate of return.

Modernization Funds: Monies provided by HUD (through its CIAP and CGP
programs) to PHAs for capital improvements, structural repairs to
buildings, conservation retrofits, management improvements, and planning
costs.

Normalized Annual Consumption (NAC): The amount of energy that would be
used in "normal" weather. Actual usage is normalized for the influence
of weather by comparing the weather during the period being analyzed to
a long-term average.

Peak Demand: Demand for gas or electricity service during times of peak
usage. Usually in extremely hot or cold weather.

Performance Contracting: A mechanism to implement resource efficiency
improvements with minimal up-front costs. It uses savings resulting from
the efficiency project to pay for the work.

Performance Funding System (PFS): A mechanism by which HUD provides
operating capital to PHAs. Under the PFS, each PHA's subsidy is equal to
the difference between a formula-determined allowable expense level
(plus utility and independent audit costs) and the PHA's projected
income (rents, interest on investments, and other locally generated
income). A funding system for operating subsidy designed to penalize
wasteful HAs and reward thrifty HAs. (24 CFR 990)

Persistence of Savings: Energy or water savings that persist beyond the
period initially following the efficiency retrofit into post-retrofit
years. Lack of persistence may jeopardize the ability to re-pay loans in
performance contracting, unless the ESCO provides a guarantee of
savings.

Per Unit Monthly (PUM): Authority-provided utility costs computed per
apartment unit per month.

Princeton Scorekeeping Method (PRISM): A utilities billing analysis in
which at least 12 months of energy use is regressed against daily
average temperatures to estimate the normalized annual consumption
(NAC). It provides a measure of analysis accuracy (R^2^) and separates
heating, cooling, and base-load energy use.

Project-based Utilities: See authority-provided utilities.

Public Utility Commission: A commission that is comprised of
state-appointed officials who regulate utilities.

Rate Risk: Dollar savings are calculated by multiplying the change in
consumption by the current rate. For a given amount of savings, an
increase in rates leads to higher dollar savings and a decrease in rates
leads to lower dollar savings. Projected dollar savings may fall short
if the rates fall. This is rate risk.

Requested Budget Year: The period of time following the current fiscal
year for which the housing authority is developing a budget.

Rolling Base: The rolling base period is the three year interval used to
figure baseline utility use when computing the Allowable Utility
Consumption Level (AUCL) for a PHA facility. It is an average of the
three years actual consumption prior to the current fiscal year.

Savings Guarantee: In a performance contract, a savings guarantee in
which an ESCO guarantees that the average energy and/or water savings
resulting from the conservation retrofit. The savings guarantee is
usually set at an amount equal to that needed to cover the debt service
and other fees associated with the project. An ESCO and housing
authority may chose to guarantee an amount higher than that needed to
cover project costs, especially if the project is estimated to have
relatively high excess savings, but may not guarantee less than the
project costs.

Section 8: The Section 8 program is designed to increase the housing
choices available to very low-income households by making
privately-owned rental housing affordable to them. It provides rent
subsidies, either rental certificates or vouchers, on behalf of eligible
tenants. These subsidies usually equal the difference between 30 percent
of the household's adjusted income and the HUD-approved fair market rent
(for certificates) or the PHA-approved payment standard (for vouchers).

Section 202: Supportive housing for the elderly. The Section 202 program
is designed to enable very low-income elderly (62 years or older) live
independently by increasing the supply of rental housing with supportive
services. It provides interest-free capital advances to private,
nonprofit organizations to construct or rehabilitate rental housing with
supportive services. It also provides rental assistance for project
residents by paying the difference between 30 percent of their adjusted
gross income and the monthly approved operating cost.

Shortfall: A negative difference between the amount needed to cover the
debt service and other fees involved in a project (usually the amount of
the guaranteed savings) and the actual savings. Savings do not cover
costs. The ESCOs savings guarantee should cover this shortfall.

Step Rate: See block rate.

Stipulated Savings: Energy or water savings that are calculated based on
mutually agreed upon operational patterns and the manufacturer's stated
energy use (or short term measured energy use), rather than long term
measured data.

Tariff: The allowed rate to be charged a utility customer. A published,
regulated rate schedule.

Tax Exempt Revenue Bonds: Traditional sources of low-interest financing
for municipal agencies. Bonds issued by a tax-exempt entity.

Tenant-paid Utilities: Where utilities are billed through individual
meters and the tenants are responsible for paying the bills.

Therm: A unit of thermal measurement that is the equivalent of 100,000
BTUs. Most often used when discussing natural gas and usually equivalent
to 100 cubic feet.

Transportation Company: A company that moves and delivers gas or
electricity from a generation or production facility to a local utility
company.

Unbundled: A term used to describe the more open market for utility
services brought on by deregulation. It is breaking up the current
energy service package into its three separate parts: supply,
transmission and distribution.

Utility Allowance: Per-apartment-unit allowance for tenant-paid or
check-metered utility expenses that are set annually by the housing
authority using a variety of means. The utility should be set to cover
utility costs of a reasonable conserving tenant.

WAP: See Low-Income Weatherization Assistance Program

Weatherization: Improving the thermal integrity of buildings by the
installation of energy saving measures or equipment.

##  

## Bibliography

Abt Associates Inc. "Study of the Modernization Needs of the Public and
Indian Housing Stock: National, Regional and Field Office Estimates:
Backlog of Modernization Needs." Washington, D.C.: U.S. Department of
Housing and Urban Development, Office of Policy Development and
Research, HUD-1130-PDR, March 1988.

CLPHA (Council of Large Public Housing Authorities). *Basic Facts About
Public Housing*. Washington, D.C.: Council of Large Public Housing
Authorities, February, 1993.

Energy Information Administration. *Household Energy Consumption and
Expenditures*. Washington, D.C.: DOE/EIA -0321 (93), October 1995.

Government Accounting Office. *Multifamily Housing: Effects of HUD's
Portfolio Reengineering Proposal*. Washington, D.C.: GAO Report to
Congressional Committees, GAO/RCED-97-7, November, 1996.

Hansen, Shirley J. *Performance Contracting for Energy and Environmental
Systems*. Lilburn, GA: The Fairmont Press, 1993.

Heiss, Harold, Personal Communication 1998.

Hayes, Victoria. Personal communication, 1998.

Hebert, Scott and Nolden, Sandra. *Utility Allowance Guidebook: for
Optional Use by Public Housing Agencies",* Washington, D.C.: U.S.
Department of Housing and Urban Development. September, 1998

HUD Form 53012A, Annual Contributions Contract, Part A, July 1995.

HUD Office of Inspector General. Audit report: "Report on Review of
Opportunities to Reduce Utility Costs at Public Housing Authorities."
Audit Case Number 95-SE-101-0001. May 31, 1995.

HUD USER website, www.huduser.org

MacDonald, J.M. *Description of the Weatherization Assistance Program in
Larger Multifamily Buildings for Program Year 1989*. Oak ridge National
Laboratory. ORNL/CON-329. April, 1993

Perkins & Will and Ehrenkrantz Group. "An Evaluation of the Physical
Condition of Public Housing Stock: Final Report." Volume 1. Washington,
D.C.: U.S. Department of Housing and Urban Development, HUD-0002627 (OR
H-2850). March 31, 1980.

PHADA (Public Housing Authorities Directors Association). *Reinvention:
The PHADA Plan and the HUD Myth*. Washington, D.C., Spring, 1995.

Ritschard, R., Goldman, E., Vine, E., Mills, E., and Greely, K. "Cutting
Energy Costs in Public Housing: Technical Issues, Institutional
Barriers, and Research Needs." Berkeley, CA: Lawrence Berkeley
Laboratory, LBL-19683, November, 1986.

Sherwood, Wayne. *Demographic Characteristics of Public and Indian
Housing Residents*. Washington, D. C.: Council of Large Public Housing
Authorities, May 1995.

###