In this transcript and slidedeck from a webinar, Steve Heinz shares best budgeting practices to enhance your organization’s current budget practices: Unique aspects of utilities budgeting Key questions to ask before creating your budget(s) Primary factors impacting utilities budget adjustments Departmental vs. central budgeting EnergyCAP’s new Excel®-based Budget Worksheet tool

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2. How do you create your annual utilities budget? Interesting to me, I've been in this
business for 35 years, utility bill management software, we first launched a budget
module in about 1985 and I would say virtually every client I've ever worked with has
had a slightly or radically different spin on budgeting. We found it to be very difficult
to develop software where a budget module meets everyone's needs. So it just has
been interesting to me about how many different ways people go about creating their
budgets so we thought we'd present webinar to provoke some thinking on the topic
and also to introduce a new tool that we've built into EnergyCAP Online.
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3. So how do you go about creating your annual utilities budget? For many
organizations it's pretty simple, they just look at how much they spent last year and
they increase it by some percentage. We spent $5 million last year; we're gonna
bump it up by 5 percent this year.
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4. Well, if we drill into the budget process, we can look at four distinct steps that should
be given some thought and consideration if you're going to modify your budget
process and create a budget more effectively.
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5. The first thing to think about is what is the basis for the budget? Now, a lot of people
would simply use the most recent 12 months. Usually the budget is due at least a few
months before the beginning of the fiscal year, so I've seen most folks, when they
prepare the budget, they simply take the most recent 12 months of utility bill data
and they use that as the basis. Some people would, instead of that, use the last
complete fiscal year for which they have data in their accounting books.
And then to improve upon that, you might want to take the average of several prior
years, thinking that if you average a few years together you might get a better
composite that tends to shake out the impact of one year of severe weather impacts
on your utilities budget. And an even more details way would be to look at the
average usage in prior years but then apply today's most recent unit price. So what
you're saying is, here is my typical usage in the month of August in kilowatt hours or
therms or CCF but I don't want to use three years' average cost, I want to use the
most recent unit price because that's most reflective of what we'll probably have in
the year going forward. So you can see that as you get into it deeper you can refine
your process to get more detailed and specific.
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6. Then the second thing to look at is granularity, details in the budget. The simple way
would be just total purchase utilities budget but you can become more granular by
breaking it down by commodity. So you'd have separate budget items for electricity,
gas, water, sewer, oil and so on. You might want granularity by building or by building
site or by campus, if appropriate. And you might want even more granularity meter
by meter or utility account by utility account.
Most people would – when they think of a budget, they think of dollars they think of
cost, but you might want to create a usage budget as well, that can help to inform
you if your usage trends are not what you were expecting and it can help to answer
questions like why are we above the budget. If you're just looking at dollars you don't
really have a lot of information to go on other than the fact that you are above the
budget. If you are tracking consumption, actual consumption versus a budget
consumption you have a little bit more data to go on.
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7. Third, so you want just an annual budget or a budget that is more granular by time, a
quarterly budget or even a monthly budget. You ought to start thinking about some
variables that would be significant drivers in the budget creation process. You want to
account for things such as expected vendor rate changes. If we're basing the budget
on last year, it's important to understand if you're major vendors have published or
announced any rate changes, increases or reductions for next year and you certainly
want to take that into account. That really drops directly to the bottom line of the
budget.
Facility construction, occupancy, equipment changes, those kinds of things.
Obviously, if you're going have more square footage in the budget year than you did
last year you want to take that into account if your occupancy is going go up or down.
If you have any equipment changes, major pieces of equipment; your air conditioning
a building, let's say a school that wasn't air conditioned in the past. And something
else to give some thought to is energy management initiatives. If you have a major
retrofit project you want to take that into account. Hopefully, that's going to help to
control the budget or even drive the budget down.
You want to consider any contractor fees that are paid out of the utilities budget. If
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8. you have contracted for energy management on a performance contracting basis,
let's say a shared savings kind of basis, there's some various forms of contracts that
have some sort of a performance basis to it, you might have done that with the
ground rule that the fees that you pay for the performance contract come out of your
utilities budget. So be sure to take that into account.
You want to think about reduced maintenance costs. If you've implemented some
energy management projects and as a result of that you have reduced runtimes for
lighting and equipment, that should tend to save you on the maintenance side; fewer
filter changes, fewer preventative maintenance, fewer lamp and bulb replacements.
And sometimes the most important one is the weather. If you base today's budget on
last year's historical data you want to take a look at the weather data to see if last
year was a typical year or an abnormal year. That's going have an impact on the
reasonableness of your budget.
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9. And the fourth thing that often comes up when we're working with clients on
budgets is the question about distributing the budget funds to the stakeholders and
you should consider if this is a good idea or not. And what I mean by this is some
organizations have said rather than paying for utilities centrally out of a physical plant
budget or a general services budget, they're gonna take that entire purchase utilities
budget and they're gonna break it up department by department or agency by
agency, division by division and distribute that budget to the various stakeholders and
their budgets then are going to get charged for their portion of utility consumption.
So they're paying as they go.
Now, why do we do this? The rationale for doing it is the idea that if each
department has to pay out of their own utilities budget for their utility expenditure,
they are gonna be motivated to save just like you're motivated to save at home
because you pay the electric bill, but if you didn't pay the electric bill, if that was
included in your rent you would have less of an incentive to save. And at the same
time that some organizations distribute the budget to the stakeholders, they
sometimes add a fee or a markup because centrally they're performing the accounts
payable and processing function. By assessing a fee, let's say a 7 percent fee or a 10
percent fee to all the departments, you're actually collecting funds from the
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10. department that can be used not just for processing but maybe for some energy
management efforts.
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11. So that's the basic idea. There are some complications you should be aware of if you
decide that this is the way you want to go. Number one is, it adds complexity to the
bill processing workflow because typically if each department is controlling their own
utilities budget, they're going to want to approve utility bills before the bills are paid
because they have a stake in the game now, so they're gonna want to see those bills
and make sure those bills are reasonable. Distributing the approval process for utility
bills adds complexity to workflow and potential delays in the process because you're
waiting for people out in the field to approve the bills.
A big question is, is it really fair? How can you be fair in a shared facility, let's say a
headquarters type building that has multiple departments in it without installing sub-
meters throughout the building and that could be virtually impossible depending on
how the HVAC and how the electrical systems are installed in the building. About the
only way you can allocate the total single electric bill for the building is by percentage,
percentage of floor area, for instance, maybe with a weighting factor based upon how
intense the energy usage is by department. But that's just very difficult to be fair in
doing that, and we've seen cases where, in the large central headquarters, there is a
constant change of floor space allocations. This department is moving into an
additional office space and this department is giving up an office space. So floor area
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12. is changing every month.
And the hours of use can be changing so that maintaining those split percentages can
take a lot of effort and, really, at the end of the day, the question is does it really
motivate occupants to save, again, particularly in shared facilities, because in a
shared facility an agency could do everything they can possibly do to reduce their use
of energy but because they're not individually metered, they're sharing in a larger
facility, their effort cannot be rewarded very much in lower charges against their
piece of the utilities budget. So these are all things to consider.
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13. The bottom line is, is your method working for you?
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14. So on that note let me take a few minutes to show you the new EnergyCAP Online
budget worksheet. This is in response to requests from users who said we need to do
a better job of budgeting, however we do it, we really need to end up in Excel
because anything that you do in EnergyCAP software is going to have to be modified
by us. There is just too many things that are in a state of flux to be able to tick one
button, maybe 15 months in advance of the end of the coming budget year and get a
budget that's going be locked in for all of those months without changes, without
unknowns coming up. So we need something that's very flexible.
So this will give you a quick idea of what we have developed.
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15. First of all, when we create a budget in EnergyCAP, we start by giving it the month
that ends the 12 months that are going to be used as the basis of the budget. So let's
say your fiscal year starts in July but your budget is due in April preceding July. So now
it's April and you're being told your budget is due. Well, you want to base the budget
on the most recent data that's available so you say I want to end my budget period,
my base in March, that's the most recent month that we have in the system. So start
in March and back up 11 more months and those are going be the 12 months that are
going to be the basis of my historical data for the budget. So we select that, we can
set some other filters, we generate the worksheet.
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16. EnergyCAP produces an Excel worksheet, some things that I'll point out to you. First
of all, there's tabs along the bottom, one tab per commodity. So we create a separate
worksheet for each individual commodity, that way you have better visibility into
each of your individual commodities.
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17. Number two is the fact that we use calendarized usage and cost. Now, what's
calendarized usage? EnergyCAP Online automatically takes your actual utility bills,
let's say a bill that was for January 15th to February 15th, and it breaks it into its
calendar month components. So some of that data is going to go into the January
calendar month and some is going into the February calendar month. We do this to
smooth out the data.
It works particularly nicely if you get 60-day water bills because when you look at the
raw water bills, which is the way you're accounting department probably looks at
'em, you have a bill in January, you have zero in February, and you have a bill in
March, you have zero in April. Now, that is the way the money went out the door but
it's not the way the consumption really happened. So the calendarization process is
gonna smooth that out so you're gonna see water use every month. We do that
automatically meter by meter. So we distribute it. We use this calendarized data, it
tends to be smoother than the raw utility bills, and that's what we use to create the
budget.
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18. Now, when we smooth it out, we use a very intelligent process to do it, the simple,
let's say dumb way, is simply to take a utility bill, divide by the number of days in the
bill and say, okay, I'm dividing by 29 days in the bill and 15 of those days go into
January, so 15/29ths go into January and 14 go into February. Energy Cap uses a more
intelligent process, where we do a linear regression of your data use versus degree
days for the summer season and the winter season to answer the question is this
meter weather sensitive. If it's not weather sensitive then we do what I just said,
straight line proration per day.
If it is weather sensitive we use a much more sophisticated linear regression
technique to allocate the usage into those days and months where the regression
calculation shows us that the usage probably took place. So this example you see on
the screen for this particular meter is not weather sensitive so we would not make a
weather adjustment to the proration disaggregation of the data in the summer, but it
is winter sensitive, and looking at year over year over year, it tracks almost exactly the
same every year. So we have a very good statistical model of how the gas meter
responds to the winter weather and based upon that we can allocate the data quite
nicely. So that's how we go about creating the calendarized data that we use as the
basis for the budget.
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20. Okay. So we've exported the data to Excel, or I should say EnergyCAP has
automatically created an Excel spreadsheet for us. We have to unprotect the sheet
first of all. When we create it, we protect it just to protect you from yourself. And this
is what the sheet looks like. So let me point out the most important aspects of it per
the numbers.
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21. Number one, in this column we show you if there is a month anywhere in the data,
the historical base data for this building that had zero cost in it; that might be an
indicator that some billing data is missing. In this case you can see there were two
schools, this is for a school district, there were two buildings that had at least one
month with zero cost data in it.
So that's just a warning and it would behoove you to pull up that building in Energy
Cap and look at each month. You can do that in about two seconds. And the way you
would do that is you'd go back to your calendarized chart and see right here, for this
particular building, for electricity, it has zero cost in Feb and March. That means we
made a bad assumption for the 12 months of historical data we're using for the
budget. We needed to back up farther because the most recent months still have not
received the most recent bill. So it's good that it warned us that this school was
missing some data because now we know we should recreate the budget but create a
budget using older historical data by two months. So that's a very convenient column.
Number 2, if any of your buildings are projected to have floor area increases or floor
area decreases, we can put the percentage in the column labeled number 2. So that
gives us a way to take into account any obvious changes to the physical plan. Number
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22. 3 is where we can enter a guess of how we think the weather is going to be affecting
us. Number 3 is the heating degree days. So in this case, this is an organization where
all the buildings are basically in the same climatic zone, so we have the same
projection for every building but if your organization spans different climates you can
put different percentages. We said we're going to take a guess that the weather is
going to be 10 percent more mild, 10 percent fewer heating degree days. And column
number 4 is the same thing but for cooling degree days, for the summer weather.
So what we're saying here is, we're guessing that the winter is going to be more mild
by 10 percent, that will help us. The summer is going to be hotter, 4 percent more – I
mean 7 percent more severe. Now, you might saw how do you know what to guess.
Well, you might see some long range forecasts published by companies like
AccuWeather. You can also run multiple budgets, because this is now in Excel. I can
put in an assumption, look at my bottom line, which is number 8 in green, write that
down and then put in another number, look at number 8 and see how changed it.
That way, when you present the budget you can say, well, if we assume no change in
weather here is my budget number. If I assume worst-case, which is the winter's
gonna be 40 percent colder and the summer is gonna be 25 percent hotter, here is
what the number is. That's what we think would really be the worst-case. Most
reasonable might be somewhere in between.
So it allows you to play around with this thing very quickly and bracket those budget
numbers, and when you're bracketing the budget numbers it recognizes the fact that
a budget is really setting expectations. You want your finance department to have a
reasonable expectation of how many dollars they should be on hand. Everybody
knows that things change that are uncontrollable during the year so at least you're
going on record before the fiscal year even starts to say best guess is it's gonna be
somewhere in here. So those are numbers 3 and 4.
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23. Number 5 is an opportunity to add a percentage change to the usage due to any
other factor. It could be occupancy, more days of occupancy, more occupants. It could
be energy consuming equipment that's being installed in the building. You know,
what have you. Of course, that could be positive or negative.
Column 6 would be the expected percentage change in the average unit cost of, in
this case, electricity. And again, you can have different scenarios there. You can have
a most reasonable expectation based upon what you've heard from your vendor and
maybe a worst-case and a best-case. That gives you the Column R, which gives you
the budget as it stands with everything to the left.
And then in Column 7, if you have a performance contract that's being funded out of
the utilities budget you could enter it there. That's not the normal case but that's
what you could do. 8 is the calendarized cost; 8 is the cost based upon your historical
data. So it's saying the data I grabbed as my 12 months of historical was $1.9 million.
Number 9 is the budget.
So based upon everything, all the scenarios that you see in yellow, my projected
budget is $2.2 million. So my 1.9 grew to 2.2 due to the assumptions I made, the floor
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24. area changes, unit cost changes, the energy performance contracting fees, the
weather and so on. So that's the process. What's nice about it is you can quickly
iterate through it. It's in Excel. You have control over the entire worksheet.
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25. Now, final thought is I mentioned the weather data, we projected a 10 percent
reduction in heating degree days, in other words, 10 percent more mild weather.
What you should do as you're making those projections is go to our weather data
site, this is www.weatherdatadepot.com. This is a site that we maintain using data
that we license from AccuWeather. We receive data on about 14,000 weather
stations every morning and we populate the site with degree day data.
What this shows is something very interesting. One of the functions in Weather Data
Depot allows me to chart cumulative heating degree days and cooling degree days. So
here I plotted ten years' worth of heating degree days cumulatively for the entire
heating season, the season running July to June. The line always rises to the right
because it's cumulative, every month is getting added to the months before that. And
you can see the tabular data down below.
Now, I based my budget on the prior 12 months, which was basically the 2014-2015
heating season, and I made a very bad assumption because the arrow is pointed to
the line for the 2014-2015 winter, and you can see down below that ending in June
my cumulative heating degree days for that winter was 3,066. You can see that that is
the lowest total in almost ten years. In other words, I based my budget on a
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26. historically mild winter, and not only did I base it on an historically mild winter but in
number 3 when I created my budget, I said I'm going to assume that my heating
degree days are going to be 10 percent less than my historical data. So what I'm
saying is I based my budget not only on historically mild winter but then I reduced it
by 10 percent on top of that. What's the result, the result is probably a very
unrealistic budget because I'm assuming the weather is going to be more mild than
it's probably ever been for this weather station.
So this Weather Data Depot has really helped me because it's showed me that I
should really assume that there's gonna be more heating degree days, that instead of
assuming a negative 10, I should assume maybe a positive 20 or 25 so that I'm
assuming a year that's more normal. And looking in the June column, my cumulative
column, you can see that most of the years were around 4,000 or so; 4,000 looks to
be a middle number of heating degree days, which is a full 33 percent higher than the
year I'm looking at. So it would be reasonable for me to say plus 33 percent when I
create the budget if I want to create a budget that's probably a reasonable
expectation of what the weather is really going to be like.
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27. Let me just say a quick thing about our Weather Data Depot tool. Again, it's
www.weatherdatadepot.com. We can enter a weather station code into it. The one
we were just looking at was in the Seattle area. I can view a map, it shows me where
this weather station is located, you can see it's near Seattle. It allows me to look at
monthly heating and cooling degree days. I can compare any two years; in this case,
I'm comparing last year and this year. It shows me year-to-date what my comparison
looks like.
So this is showing me that so far in the Seattle area compared to last year I've had 10
percent fewer heating degree days, it was mild. My cooling degree days were up by 6
percent. It's been a little bit of a hotter summer. And then there's some tabs up top
where we can do what I just showed you. I can plot heating degree days cumulative
and I can do that for many years if I want to and set this to seasonal. So instead of
looking at annual I'm looking at the season. Actually, we only have full data starting in
'07, so I think I'll just set that to '07, there. So that's basically the chart we were just
looking at.
You'll find Weather Data Depot to be a very useful tool, and if you don't understand
exactly what a degree day is, how a degree day is calculated and how they can be
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28. used in the budgeting process, I'd suggest that you come to Weather Data Depot, and
if you go to the FAQs up top, it'll explain what degree days are. Degree days are
particularly valuable in the budgeting process 'cause it allows you to compare year to
year as the weather affects the energy consumption in a building.
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29. I'd like to wish you all the best of luck in creating your budgets.
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