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DEVELOPERS ENLIST CONSULTANTS TO HELP MANAGE ENERGY USE

By Dave Bodamer

With growing concern about the volatility of the energy market due to deregulation, mall developers such as Simon Property Group, The Macerich Co. and Glimcher Realty Trust have turned to outside firms to help them manage energy use in their portfolios.

The ongoing energy crisis in California (Shopping Centers Today, April 2000) and the possibility of similar situations arising in other states have exacerbated what was already a growing problem for shopping center owners and retailers.

Center owners say energy managers from outside firms can look at every aspect of operations and find methods to reduce energy costs, which mall managers do not have the expertise to do — whether it be changing the heating and cooling system or something as simple as using different types of lightbulbs.

"Energy is on every agenda now. You’re seeing executives talk about it at REIT conferences. Everyone in the industry is basically saying ’Hey, we’ve got to do something,’" said Angela Schwarz, vice president at Enron Energy Services, Houston, which provides analysis and energy management services to property owners. "Last year we were the drivers; now [owners] are the ones being proactive."

Energy managers from outside firms can help owners find ways to cut power consumption, become more savvy when buying power in states that have deregulated and work to stabilize energy costs, even in a volatile marketplace, proponents say.

"As long as we continue to stay serious about reducing expenses, this is such a large one that it deserves all the attention we can give it," said John P. Hoeller, senior vice president of property management for Columbus, Ohio-based Glimcher. "Deregulation is one issue that has raised the profile, but overall it’s our fiduciary responsibility to continue to work to reduce these expenses on a regular basis."

The seeds for what is occurring now were planted in the Energy Policy Act of 1992. That federal law gave state legislators the power to rewrite regulations regarding electricity generation and transmission. The issue bloomed in 1998 when California enacted its deregulation legislation. Since then, more than 25 states have either deregulated the energy market or are in the process of doing so.

The main downside of the trend is that while it has brought increased competition, it has also brought increased volatility. Whereas in the past energy rates were fixed for owners, now rates can fluctuate from month to month, and, in extreme situations like the one in California, present a real threat to owners by vastly increasing a property’s operating budget.

"If you live in California, you know that this is something to pay attention to," said George Ackles, vice president of energy management for Macerich. The Santa Monica, Calif.-based REIT created Ackles’ position weeks after it signed its deal with Enron.

Energy management consultants can set up an agreement under which a property owner pays the consultant a fixed annual fee, and the firm is then responsible for making some or all energy decisions regarding the owner’s properties. For example, Simon’s annual energy expenditures were roughly $150 million. The company’s contract with Enron is worth $1.5 billion over 10 years. Simon’s energy costs are thus locked in at the rate it is used to paying, and it is now up to Enron to make that $150 million cover all of Simon’s needs. Similarly, Macerich also signed with Enron and locked in its energy rates at an undisclosed rate and so will not have to bear the brunt of any rate hikes in California. Most of the agreements that have been signed so far have been five- or 10-year contracts.

Consultants provide an in-depth analysis of a mall owners’ properties and find ways to cut energy consumption that someone without that expertise could not find. The situation is looked at from the supply side (as in contracts and rates with energy providers) and from the demand side (how a center is consuming its energy).

For all its clients, Enron provides a value-at-risk analysis at the portfolio level that shows an owner what the worst-case scenario could be over a certain period of time and how that might happen. Basically, the analysis takes into account a portfolio’s energy consumption and the situations in the various states and municipalities in which the properties are located.

Energy consultants analyze every property in a manager’s portfolio and then compare it with a prototypical building of similar size maximized for energy efficiency. That serves as a model for some immediate changes that can be made to properties. Common alterations include changing the way that HVAC systems are operating or even putting in entirely new ones.

Consultants also install more sophisticated meters that tell them more about how a shopping center is using power and sometimes find simple ways to cut costs. For example, after Johnson Controls, Milwaukee, installed these meters at Glimcher’s malls, they discovered there was a surge in power use every morning at 5:45 a.m. at one property. It seemed that as the early morning cleaning crew worked its way through a center, every light was turned on and then kept on, even though the first shoppers don’t arrive until 10 a.m. At another mall, Johnson Controls’ recommendations led to replacement of the natural gas-powered heating and air-conditioning system with an electric-powered system that would be 30% more efficient.

"In most of the properties I’ve seen where an owner has not looked at energy consumption, loads are 30% or maybe even 40% higher than they really need to be," Ackles said.

Exit signs are rather common energy sappers. Older signs are lit with inefficient bulbs and need to be replaced often. But newer LCD signs use 1/10th the energy and do not burn out, according to Peggy Mahoney, vice president of marketing and communications at Enron Energy Services. In the past, making this type of alteration would not seem that important to an owner, but the increased focus on energy makes it a potential money-saver.

Enron and Johnson Controls, because of the size of the companies, have the capability to monitor every property in a portfolio from central locations. Enron also has an extensive network of alliances with repair technicians throughout the United States. If a property manager notices a problem, he or she can call a toll-free number, and Enron will find the technicians closest to the center and dispatch them immediately to fix whatever the problem might be.

Some large retailers have gotten into the market as well. Federated Department Stores, Saks and J.C. Penney all have agreements with outside consultants to help manage energy consumption at their stores. Saks and J.C. Penney just signed with Enron several months ago and are at the beginning stages of analyzing properties to find ways to cut costs. Federated signed with Atlanta-based Service Resources.

In a smaller-scale deal, ERI Services, Pittsburgh, and Providence (R.I.) Energy Corp. have a 30-year contract to jointly manage the energy consumption at the 1.3 million-square-foot Providence Place Mall. The venture owns, operates and maintains the mall’s three gas-fired generators that provide half the center’s energy. The rest is provided by a local power plant under a contract managed by the joint venture.

"It doesn’t make sense for owners to build this expertise in-house, but at the same time they stand to lose quite a bit of money if they don’t focus on it," Mahoney of Enron said.

"Owners have got to start taking some control, and that’s where we fit in."

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