Facilities operated by public entities such as public housing authorities (PHAs) have the same physical needs as facilities owned privately but are subject to legal requirements that inhibit their flexibility to upgrade their energy facilities and address emergency energy-loss situations. This is because PHAs are public bodies formed by municipalities and governed by state statutes but are also regulated by the United States Department of Housing and Urban Development (HUD).

PHA facilities exist in cities throughout the United States and provide affordable housing for families. PHAs typically include diverse structures such as multifamily apartment buildings, meeting locations, sports facilities, administrative offices, district energy electric or thermal plants, garages, and other facilities necessary to serve the PHA residential communities.

The problem of providing an adequate supply of affordable housing is a major issue in many areas of the country, and PHAs provide one of the solutions to that problem. Yet, how can PHAs that financially depend upon rents paid by limited income residents, although supplemented by HUD subsidies, gain the funding to meet the upfront capital costs of equipment needed to protect against outages much less accumulate the extensive capital funds needed to implement comprehensive energy-efficiency and conservation projects?

This need is met by regulatory mechanisms that a PHA can utilize to finance the often capital-intensive projects required to prepare for energy-loss scenarios and address peak demand and energy inefficiencies that can contribute to such scenarios. One of these mechanisms is the so-called "frozen baseline" method. Using a type of performance contracting, PHAs are able to fund energy projects with the savings achieved through the implementation of critical energy measures such as energy-efficient boilers and controls while also addressing retrofit lighting, HVAC, and other measures.

The background of "frozen baseline" funding is that HUD pays the cost of utilities of certain PHA residents (which could include as many as 90 percent of the residents in a PHA). Essentially, HUD takes a three-year average "rolling baseline" of energy usage, "freezes" it, and continues to pay utility costs as though the PHA were continuing to experience utility costs based upon pre-project energy use levels following the completion of the energy project. The PHA uses the cost difference between the frozen baseline pre-project utility use and the reduced post-project utility use to amortize the financing cost of the project.

As an illustration, let us assume that the PHA's existing average energy usage and demand, over a three- year period, amounts to $100,000 a year. For the purposes of this example, let us also assume that HUD subsidizes the entire amount of the PHA's utility costs. The PHA then conducts a bid process for a comprehensive energy audit and performance contracting agreement. It then negotiates a 12-year performance contract agreement with the successful energy services company (ESCO) to install measures including new boilers, HVAC, and a building management system, which the ESCO projects to reduce energy usage in the PHA by 20 percent, producing annual savings of $20,000 per year. As part of the contract, the ESCO guarantees these energy savings. Once HUD approves the contract and project, the PHA secures project funding by a "municipal lease" financing that requires annual payments of less than $15,000 each. Following the completion of the project, energy usage is reduced by more than 20 percent and the post-project energy usage results in utility costs of no more than $80,000 per year. As part of the "frozen baseline" process, HUD continues to pay the PHA $100,000 a year for the 12-year term until the cost of the project is amortized. Therefore, the PHA is able to pay the annual cost of $15,000 for the project through savings achieved.

It is not an easy or short process for a PHA to go from A to Z in implementing such projects. Such energy projects for PHAs are often large and complex and involve many steps and processes such as contract negotiations, securing utility incentives, and the arranging of financing. PHAs often rely on specialized consulting and professional services to provide guidance, assistance, and support. A PHA must also comply with complex HUD regulations. It is also reasonable to anticipate that HUD approval and the financing process may take months to complete. Keeping the board of the PHA informed and involved is also important since the project cannot proceed without such approvals and the complexity of such projects and the related financings can require time in order to familiarize the board. Over the past year in particular, projects have taken a substantial period of time to "put on line" in light of the burden of the difficult municipal market.

In such a scenario, the PHA must look far ahead and plan carefully to ensure that mission-critical equipment is replaced before failure or compromise and that all prior contingencies relating to the installation of critical equipment, are resolved so that the equipment is in place when needed.

In a recent instance, boilers in several residential building complexes of a PHA required replacement prior to the next heating season. Long lead time ordering of the boilers was necessary in order to make sure that these were installed in sufficient time, but HUD approval of the project was still pending as the lead time was expiring. Under those pressing circumstances, we were able to make use of a type of contract called an agreement to proceed, to allow work to proceed on the boiler procurement pending final HUD approval of the project. The boilers were thereby ordered in time to be installed prior to the onset of cold weather. The project was approved by HUD in time for the boilers to be installed, and the agreement to proceed was superseded by the performance contracting agreement between the ESCO and the PHA.

This article is intended to present only an overview of the "frozen baseline" process which is not the only HUD process available and will not necessarily be applicable to any particular PHA. The fact that such a project can present challenges should not detract from looking into the feasibility of such a project and the benefits such a project can bring to a PHA.