Utility Operations with Staying Power
A holistic, entrepreneurial approach to campus energy management can yield long-term, self-sustaining savings.
By Scott Turley
Every campus has strategic maintenance needs, and most business officers struggle with how to address them. More than likely, your institution's utilities operation manages one of the single largest capital assets on your campus, and your utility budget is one of your institution's top five operating cost line items. So why not find a way to leverage that capital asset to help fund the deferred maintenance needs of utility operations and create a self-sustaining enterprise? The University of Arkansas has embarked on such an endeavor and offers a new perspective on the value of investing in campus utility systems.
Connecting Utilities to Your Campus Master Plan
In 1998, University of Arkansas Chancellor John A. White called for the creation of a campus master plan to support the university's academic goals. The plan spelled out how much space was needed (square feet), what type of space (research, office, classroom), and where the space would be located on campus. Armed with high-level information about future space requirements, the university's physical plant began working with GLHN Architects and Engineers in 2000 to develop a utility infrastructure master plan.
Our first task was to develop a vision of what we wanted our utility operation to become and a program that laid out the necessary utility infrastructure projects to get us there. The importance of this visioning process was clear: Because utility infrastructure has a useful life of 25 years or longer, energy planning requires a long-term commitment by decision makers. Getting their buy-in with a credible utility infrastructure plan that would link the institution's utility development and growth plans was critical.
Holistic planning. What emerged as our new game plan for energy management and utility system operation can be likened to the core philosophy presented in Zen and the Art of Motorcycle Maintenance, a pop culture book from the 1970s that encourages thinking in terms of the whole, not only the component parts. In the case of utility operations, we began thinking of air conditioning units and hot water boilers not only as equipment that consumes maintenance dollars, but also as financial assets that can contribute to the bottom line. Likewise, the utility plant operators and building system mechanics no longer represented opposing teams competing for limited resources, but rather, an interdependent team that produces, distributes, and consumes energy.
Our discussions early on with representatives of Rebuild America got us thinking about the importance of holistic energy planning. Rebuild America is a program of the U.S. Department of Energy that promotes the benefits of increasing energy efficiency for higher education institutions. Working through our local city partnership, Rebuild America provided case studies and technical support that confirmed for us the economic benefits of a comprehensive energy management strategy that not only reduces operating costs but also maximizes the benefits of capital investment.
Our planning process generated several key outcomes that laid the foundation for the university's new operational model:
- identified the deferred maintenance needs related to utility infrastructure and accompanying energy-saving opportunities;
- brought into focus the associated cost for infrastructure to support the university's academic plan (Now that academic mission and enrollment targets are linked to facility needs and specific infrastructure projects, the university is able to conduct realistic long-range capital planning.); and
- allowed university leadership to better understand the value of building out specific areas of campus in an organized manner. As within the real estate development community, we learned that we could maximize the value of our investment in utility infrastructure.
Financial accountability. Once the scope of both new and replacement infrastructure needs was identified, our next task was to change the financial perspective of utility operations. This would require accounting processes that provide accountability for where our utility dollars go, track how specific investments are linked to the overall campus energy management effort, and incorporate reporting tools that document the effects of these investments. Our new financial plan involves more sophisticated utility rate schedules, implementation of automated metering and accounting systems, and financial separation of the utility operation from the general facilities budget. Utility dollars are no longer co-mingled with general physical plant operating funds. In this way, financial and management accountability is clearly maintained.
The University of Arkansas model. What has emerged during the past several years is an integrated plan that combines targeted capital improvements, reinvestment of energy savings, and a hybrid organizational structure that is fundamentally changing utility operations at the University of Arkansas. Although the physical improvement program is what everyone sees, the most crucial and distinctive change has been our philosophical restructuring. In effect, the physical plant department has adopted an entrepreneurial business model for its utility operations. After all, as a $10 million-per-year "company" of the university, this business unit purchases raw utilities and delivers electricity, steam, and chilled water to 85 buildings across six different customer groups.
As an example of our new entrepreneurial mind-set, the university's physical plant has developed rate structures analogous to a public utility and treats all customers the same regardless of whether they represent academic or auxiliary operations. The new rate process provides financial incentives for energy efficiency, and monthly price announcements regarding energy costs encourage conservation. The result is a clear pattern of cash flow and cost allocation that clarifies the value that utility operation brings to the mission of the campus and greatly assists in justifying capital investment. This issue of the importance of investment justification cannot be overemphasized, and at the University of Arkansas, we recognized the need for establishing credibility for our plan early on.
Gaining Support of Administration
In the process of reviewing the factors that were keeping us from making a quantum leap in energy efficiency improvement, we soon realized our need for university administration support of a major investment in utility infrastructure. We determined that full implementation of our utility development plan would require about $50 million, including $26 million for existing utility infrastructure improvements. The other half would accommodate student and programmatic growth. To make such a commitment, university administration would need to be fully convinced that investment in these unseen capital assets was a fiscally responsible use of our institution's limited capital resources and in direct support of the university's mission and objectives.
In large part because of the new level of financial accountability we developed, the administration gained the confidence it needed to invest in this new enterprise—to the tune of $23 million in bonded capital for expansion and system replacement during the past four years. This confidence was bolstered by key advocates who emerged to speak to the benefit of our utility reorganization plan and the need for significant renewable investment. Among those advocates: Don Pederson, our vice chancellor for finance and administration, and Leo Yanda, director of our physical plant. (See sidebar, "An Academic Perspective on Utility Investment.") University administration agreed that the annual bonded debt payment to renew existing plant capacity and distribution assets could be included in the utility rates as a debt service charge. In this way, everyone on the system would help support the energy efficiency and reliability of the system. It is noteworthy that the administration showed its commitment by funding the debt service in the utility rates during a time of tight university budgets. The result for the University of Arkansas is the beginning of a new holistic approach to energy management—the key features of which are an ongoing capital funding stream for new construction and a perpetual infrastructure renewal plan.
What has the university administration gained from its sizeable investment? Remember the facilities department head waiting in line to ask for building capital renewal and deferred maintenance funds? On our campus, the consulting team of Draper and Associates and Adams Consulting identified that the university would need to invest $1.2 million each year into building renewal and maintenance to maximize the life of our facilities. Once the utility plant and distribution system improvement projects are completed, operating cost reductions will fund roughly half of the building-side need. During the next five years we expect that this ongoing reinvestment into building mechanical system renewal and maintenance, implementation of continuous commissioning, and further cost-reduction efforts will allow us to effectively self-fund the balance of building-side needs—without additional administrative financial help. Fully funding these building-side needs will keep our building mechanical systems performing at high efficiency, will protect the investments we have made, and will in effect allow us to step out of the institution's annual wish-list line.
Currently, our first major phase of new construction is complete with the start-up of a new 3,000-ton chilled water plant. A total of $4 million in new distribution infrastructure, water system improvements, and power grid capacity upgrades are in the ground to support current planned growth. Early this year, we expect to bid for installation of 4,500 tons of replacement chilled water capacity that should yield $125,000 in annual electrical savings. In addition, a comprehensive controls and metering project will improve chilled water system efficiency, yielding an additional $150,000 per year. At the completion of all currently programmed system and building improvements, we expect a total annual savings of $600,000.
While I would like to report that we are old hands at this new management paradigm and that the experience has been a rousing success, the truth is that we are just getting started. By the time you read this, our operations team will have been together a mere few months. Much work remains to set up accounting processes, automate reporting systems, and establish our ongoing renewal and maintenance program. Because I have an interest in military history, I often say that large gains in energy efficiency can be accomplished by waging epic battles with capital investment, but that it is the day-to-day trench warfare of maintenance and operation that holds those gains. At the University of Arkansas, we are learning that we must engage in both types of battle to be successful.
Author bio Scott Turley is the associate director for utility operations at the University of Arkansas, Fayetteville. An earlier version of Turley's article appeared in the January/February 2004 issue of Facilities Manager, published by APPA.
An Academic Perspective on Utility Investment
By Don Pederson
Implementation of a new business model for utility operations is part of a complete reorganization of the University of Arkansas physical plant that will serve this campus well for years to come. Such an endeavor has required a large financial investment into an area where I previously would have been reluctant to invest more than the bare minimum.
I joined the University of Arkansas as an assistant professor of physics in 1972, then later became the physics department chair, associate dean for research, and for 13 years was chief academic officer. Since 1998, as vice chancellor for finance and administration, I have been in charge of the areas that I view as servicing and supporting the teaching, research, and service activities that characterize our institution. With regard to the university's physical plant, my observations prior to moving from academic affairs to finance and administration were that we were spending a lot of money and that the outcomes did not meet expectations. I sensed that resources were not being directed adequately, but I had no idea as to what were the fundamental problems. Such an attitude no doubt resulted from a firsthand knowledge of how tight academic budgets were and the desire to move funds directly into academic programs.
Superimposed on those views and biases was a realization within the university's administration that for the institution to be successful in its broad mission it needed a larger financial base. Among other things, that implied the need for a larger student body. Such growth would require the strategic addition of facilities that would only exacerbate the concerns I already had. Yet, lack of facilities and infrastructure is penny-wise and pound-foolish with regard to faculty success. While there were only hints of infrastructure problems—such as the dropout of cooling on the hottest days or the short power outages when the electrical power system required repair or maintenance—the concern was that such problems were only going to get worse. Likewise, the fact that real solutions require long lead times suggested to me an administrative responsibility for reliability that is often hidden, particularly at budget time.
Perhaps it is the strong faculty and academic perspective I bring to my current role, coupled with a keen interest in understanding the logic of how we do business (which likely stems from my physics background), that provided the right juxtaposition of ideas to result in the university's new business model for utility operations. In determining how to proceed, I got agreement from the chancellor, other vice chancellors, and the administration of the physical plant that we would benefit from consultants who could review how we operated relative to national best practices and suggest where we could make improvements on campus.
With the strategic planning facilitated by the consultants, I realized the value of ensuring reliability and minimum quality for academic activities—the very activities on campus that I felt needed the most help. Because my background leads me to look for systemic rather than piecemeal solutions, I asked for lifecycle costing to match long lead times both for investment and future reliability. It has become clear to me that doing preventive maintenance and anticipating equipment mean time to failure is not only the more reliable way to operate but is also cost effective if direct costs are viewed on a longer time scale. One also must include indirect costs such as the negative academic program consequences of having infrastructure failures.
However, while reliability and mean time to failure are concepts that engineers and physical plant administrators know, if the solution is framed only in terms of ever-increasing demands for budget, these requests are lost in the din of other such needs on campus. The key factor in our university's ability to manage the costs of this investment has been the development of a rate structure similar to a private utility. This is based on not only the full operational costs of delivering the utility to a campus customer but also the full investment costs in plant capacity and redundancy that will ensure reliability and efficiency. Establishing a realistic rate structure that gives consumers the advantage of the campus volume utility purchase and differing peak loads has likewise been a key factor in our ability to satisfy campus customers.
Author bio Don Pederson is vice chancellor for finance and administration at the University of Arkansas, Fayetteville.
- IRS Grants Relief from New 1098-T Reporting Mandate
- New Overtime Rule Expected Mid-May
- 1042-S Questions Remain as Scrutiny Intensifies
- 2016 CAO and CBO Collaborations
August 1-2, 2016
- 2016 Planning and Budgeting Forum
September 19-20, 2016
- 2016 Managerial Analysis and Decision Support
November 17-18, 2016
- WEBCAST: The Clery Act: Strategic Planning to Mitigate Institutional Risk
Thursday, May 26, 2016 1:00PM ET
- ON-DEMAND: Title IX: Key Issues Surrounding Institutional Compliance
- ON-DEMAND: Containing Cost and Risk with Renewables – the Power Purchase Agreement Story
- ON-DEMAND: NACUBO Live! Higher Education Accounting Forum
- ON-DEMAND: Are Hedge Funds and Private Equity Right for You? An Analysis of Alternative Investments
- ON-DEMAND: Responsibility Center Management: Two Different Perspectives