No Time To Lose
In the spring of 2001, there was little doubt what topic would dominate the agenda of top executives and governors in the Western states. The previous fall and winter had brought significant energy problems to the region. On everyone’s mind were fears of a repeat in the coming summer. With an energy program already in development and the potential for problems looming, Washington Mutual Inc., a Seattle-based national bank, felt an increased sense of urgency about energy conservation.
Among the many CEOs and governors who committed their organizations to cut energy use was Kerry Killinger, chairman, president and CEO of Washington Mutual. With the support of senior management, Killinger pledged a 10 percent cut in energy use by the end of the year. For Washington Mutual, a 10 percent reduction for its 2,300 properties was substantial, but not impossible. After all, the bank had recently completed an energy-reduction program for its California properties to stabilize skyrocketing utility costs. Though there were only nine months left in 2001 to hit that number, and the corporation was experiencing significant growth, senior management believed that 10 percent was achievable.
Washington Mutual, with assets of $275 billion, has been pursuing an aggressive growth strategy since 1983. The firm has completed 32 acquisitions and mergers. And a major area of focus continues to be reducing energy consumption and cost for its entire portfolio.
But there was a lot to do before the first lamp changed. The planning and analysis took much of the spring and summer, and it was well into fall before any significant retrofit reductions happened. What was a relatively easy 10 percent reduction in nine months turned into a challenge with four months remaining for the year. Suddenly, time was working against Washington Mutual, the bank’s facility management firm CB Richard Ellis, and EMCOR Group, the energy management company hired to manage the program.
“The number itself didn’t seem impossible to achieve because there was already a history of other large corporations cutting their energy by 10 to 20 percent,” says Robert de Grasse, national operations manager with CB Richard Ellis on the Washington Mutual account. “It wasn’t how much; it was when. Most initiatives take time before the first kilowatt-hour reduction ever occurs. In this case, we didn’t have time.”
Time wasn’t the only challenge. This energy reduction effort was not yet funded. Those responsible for seeing that the energy cuts occurred were also responsible for finding a way to pay for the work.
The story of meeting this goal — which the bank achieved — is the story of a different model to managing energy projects. When time and money are of the essence, this new model points to ways facility executives and building owners can cut procedural red tape and concentrate limited resources on reducing energy use quickly and cost effectively. Is it a model for every corporation and every energy project? Probably not. But where it does fit, it may mean the difference between doing something and doing nothing.
Energy reductions were not new to Washington Mutual. The corporation had already upgraded 243 California properties, mostly lighting retrofits begun in 1999. In that effort, Washington Mutual cut nearly 3.5 million kilowatt-hours, or about 1.4 percent of its total energy use nationwide.
The success of the California project and the realization of what was possible buoyed the enthusiasm that Steve Armstrong, vice president of facilities asset management for the bank, had for cutting energy. Armstrong believed the bank could double his CEO’s commitment — cutting 10 percent in 2001 and an additional 10 percent in 2002. While 20 percent was an aggressive goal, senior bank management was prepared to pool resources in support of this initiative.
To meet this goal, Armstrong and de Grasse had to first identify the scope of the challenge — how many buildings would be retrofitted and at what cost — and then find a way to staff and fund this national effort, which became known as the Energy Conservation Program (ECP).
To decide which buildings to tackle first, Armstrong and de Grasse ranked properties according to energy performance. The scoring system was based on a number of identifiers, including energy usage per square foot, energy cost per square foot, square footage and total energy costs. These numbers were analyzed for every property in the bank’s portfolio. This resulted in a ranking of the worst to the best performing properties. The 200 worst properties received preliminary site inspections by the regional operations staff.
For the remaining properties, desktop audits were performed based on facility and equipment data. An analysis of this information identified a number of obvious projects, without having to physically inspect them.
EMCOR’s energy conservation team of Craig Veal, energy program manager, John Muckey, senior project manager, and George Reed, senior energy engineer, contacted the manufacturers for specific data, such as the age and energy consumption of the equipment. This allowed them to develop a list of projects likely to meet the team’s payback criteria of two years or less.
This scoring and ranking system, as well as the desktop audits they performed, allowed the energy team and de Grasse to narrow their focus, spend money efficiently and move quickly through the process.
Although it differs from the California lighting retrofit process in a couple of ways, the project management and communication model for the national ECP grew out of the innovative method used in California. One element adopted for the ECP from the California model was allowing facility managers direct control of the site activities of the contractors, as well as the responsibility of all communication with site representatives. This was duplicated in the ECP.
The models differed on the issue of rebates. In the California model, the contractor and bank shared in the rebates. But because there weren’t enough rebates to fund all the California projects, the rebates were used as incentives only for the contractor.
With the ECP, EMCOR is the ultimate recipient of the rebates but does not share in the rebates directly. Instead, the company is paid a straight fee and the rebates, which go directly to Washington Mutual into an account for the energy team, fund the energy team’s budget. The ECP team manager has to manage team expenses so they don’t exceed the amount of the account or risk triggering a financial penalty. Therefore, EMCOR is encouraged to control spending based on the rebates received. The contract for EMCOR also includes incentives to meet certain energy savings goals, which are tied directly to the team’s staffing levels.
For the ECP team, there were other challenges in rolling out the retrofit program nationally. The most obvious one is that not all states offered rebates. Because the program was driven by rebates, the lack of them in some areas could potentially create a disincentive for the regional contractors and subcontractors to do the retrofits.
In addition to the focus on cutting energy use quickly, the ECP is also keeping an eye on retrofits and upgrades for properties that Washington Mutual acquires or builds in the future. To get the best price, while also proceeding quickly with retrofit projects, the energy team is building a database of unit costs per square foot for retrofits, categorized by state and region. To achieve this, the energy team and bank are requiring some of the contractors to open up their accounting books to monitor their time, material and unit pricing contracts.
Once the database is complete, which may be as early as this summer, the team will be able to cite a unit cost per square foot for a retrofit, by state and region. The ECP can then stipulate costs in their negotiations with future contractors, Veal says.
“If the contractor is willing to play ball, then you can launch the project immediately on a unit price-plus basis,” he says.
While using the rebates to fund the ECP management team, Washington Mutual paid for the energy projects themselves by reallocating capital funds it had for other facility projects. The money for 2001 was aggregated from smaller projects that were under budget. The monies reallocated to the ECP budget did not affect the infrastructure needs of the existing facilities.
“We weren’t trading roof repairs for energy retrofits here,” Armstrong says. “None of these capital funds affected the preservation or operations of these facilities.”
Because of the need to move swiftly, it was critical that subcontractors be paid quickly. To do this, EMCOR and de Grasse created a financial tool that raised some eyebrows in the bank’s and EMCOR’s accounting departments. They proposed a zero balance accounting system, to be based on a combined purchase order and invoice document.
How it works: Each month the subcontractors present the bank with a projection of the next month’s cost on the purchase order portion of the document, as well as a bill for the actual cost of work completed in the previous month. EMCOR gets paid within a week of receiving this document, based on the projected cost of the next month, and then the subcontractors that meet the tight management requirements of their contract are paid shortly after. Any difference is reflected in the invoice, whether it is a debit or a credit. The difference then carries over to the next month. For example, if the projected costs for a month’s work are estimated at $1,000, but the actual invoice cost on the job was $800, the $200 owed to the bank is then deducted from the projected costs for the next month’s work. This results in the actual billing.
“That way,” Veal says, “the contractors aren’t carrying any debt from job to job. The sooner they finish, they sooner they get paid and move onto to another job.”
None of this would have been possible without the support of senior management. Washington Mutual’s internal Strategic Sourcing Group helped to develop a solution for cash authorization and funding based on the team’s time limitations. The energy team also needed the support of internal departments such as Corporate Security and Strategic Sourcing, Armstrong says. Multiple divisions were asked to consider the significance of quick payment and strong cash flow to meeting the year-end deadline. He says there were some questions about this timely payment procedure, but ultimately the bank agreed, with adequate controls.
Washington Mutual’s final approval of all the plans came early in October. The second it did, Veal turned loose 114 people, including subcontractors, vendors and consultants, into a planning and mobilization mode.
“We stayed focused on the poorest performing facilities,” Armstrong says. “And we did so without having to spend a lot on energy audits and surveys.”
That was an important issue for Armstrong, de Grasse and the energy team. If extensive audits were necessary, the ECP would have cost much more and been slowed by measurement and verification.
According to de Grasse, the typical capital portion of an energy retrofit requires approximately a $3 to $6 investment for every $1 annual reduction in energy cost. Any measurement and verification, design and management overhead is additional to this, de Grasse says. Those investments can have significant paybacks, but they require the cash up front, which the ECP team didn’t have. It also would’ve required time, which the team was running out of. Veal says that if consultants had been used, the first retrofit would not have begun until after February 2002 — well past the first 10 percent reduction date the team had to meet.
Instead, the energy team and Washington Mutual were confident in the analyses they did.
“We recognize that we are less accurate in our energy strategy than if we had used data-loggers,” Veal says. “But the minimal difference in accuracy is something that the team was comfortable with.”
By the end of October, all the plans were approved, capital budget money was available, and the first work on the buildings had begun.
The pace of the work was incredible. Having the money to pay for the materials immediately, as well as having the materials readily available, helped expedite the process. No contractors lost time for lack of materials or funding.
But speed and efficiency did not mean higher costs. Veal says that the unit cost per square foot of the latest projects were far less than the comparable costs in the industry.
Speed wasn’t the only criteria, however, on these projects. Quality was also important. Mockups were installed in some of the retail branches to test the proposed lighting designs. Site managers, regional facility managers and employees were able to respond to the design.
Not only were the retrofits efficient, but they were also effective. The bank ultimately exceeded its 10 percent reduction. Each site at the end of the ECP will undergo a post-installation audit and analysis of its utility bills to verify that the installation achieved the projected energy reductions.
The energy savings weren’t all the result of spending money. The energy team laid out a strategy that began with “no-cost, low-cost” modifications at the various sites. Field technicians adjusted all of the water heater thermostats to 105 degrees. They also changed the set points on many thermostats up or down one degree, depending on the region.
According to de Grasse, implementing only some of these quick, “no-cost, low-cost” changes saved around 2.5 million kilowatt-hours or 1.05 percent of Washington Mutual’s total energy consumption.
To address the quick-hit energy conservation measures, a list was developed of items that cost less than $250 and took less than four hours to implement. This includes items such as insulation blankets on water heaters and pipes. These will be performed by maintenance technicians as time permits and will be completed during routine visits to the sites.
Also included were mechanical retrofits for some buildings, rooftop units for branch offices and larger, more extensive retrofits for some buildings on Washington Mutual campuses. Most of the retrofits, however, consisted of simple items such as lamps and fixtures.
What the effort boiled down to, de Grasse says, was a balance between time, cost and quality. “Time and quality were not variables; only cost was,” he says. “To get the job done faster, projects typically cost more, but funds had not been allocated in the current fiscal year budget.”
The rebate-based, zero-balance accounting model helped the bank replace hundreds of thousands of lamps, in just a few months.
“Innovative procedures” are what Veal calls the successful motivators behind this program. Because there was no need for an investment-grade audit on each site, and the bank was flexible and willing to expedite payment, the projects accelerated at an unbelievable pace.
“Every day we are getting projects online sooner than we had planned,” he says.
What began as a sprint has evolved into a long-term plan and solution for Washington Mutual.
“Kerry Killinger pledged the 10 percent reduction,” Armstrong says. “Although there were obvious challenges, we believed we could achieve that. Every building we acquire now will undergo a similar analysis and retrofit, if necessary. It’s good business.”