Establishing a Green Lights Revolving Fund in Houston.

The City of Houston, Texas, has established a revolving fund to support selected departmental energy improvement projects whose energy savings will repay the initial project costs plus a fund-administration fee within 24 months.

This article consists of excerpts from the report Establishing a Green Lights Revolving Fund, published by Public Technology, Inc.'s Urban Consortium Energy Task Force, and is used with permission.

The City of Houston, Texas, owns and operates more than 1,100 facilities with a combined size in excess of nine million square feet. They vary in use - ranging from unmanned pump and lift stations to office buildings, airports, and convention centers - and are operated by 11 departments. To operate these city facilities, Houston incurs annual energy costs of $70 million for electricity and $4 million for natural gas.

Efforts to optimize the energy efficiency of all of the city's facilities began with the Federal Emergency Temperature Building Plan of 1978. The federal plan was allowed to be modified for the Houston region because of the climate and was named the Houston Emergency Temperature Building Restriction Plan. The City of Houston Office of Energy Conservation was created in order to enforce the plan citywide. After the ordinance was rescinded in 1982, office staffing was reduced, and the office was charged with monitoring and assisting operating departments in optimizing facility energy consumption.

The Green Lights Program

The most recent effort to optimize energy usage in facilities on a citywide basis is the City of Houston's commitment in the U.S. Environmental Protection Agency's (EPA) Green Lights Program. In 1992, Houston was the first large urban government to sign the memorandum of understanding (MOU) with the EPA. As part of the MOU, the City of Houston agreed to review the lighting efficiency in all of its facilities over the next five years and to implement those lighting upgrades which are cost effective and environmentally beneficial.

The City of Houston expanded the EPA Green Lights Program by executive order of the mayor to include not only lighting but all major energy consuming equipment and factors in the city's facilities. Houston's Green Lights Program allows the departments operating facilities several options for conducting facility energy audits and for financing cost-effective energy improvements identified through these energy audits. As the facility-operating departments proceeded with the Green Lights Program, the single most important obstacle to widespread adoption of energy-efficient, cost-effective improvements was the question, "Where does the department get the funds to buy the equipment to make the improvements?"

The Green Lights Revolving Fund project was designed to provide an attractive answer to that question: an internal source of recurring monies to be devoted to energy improvements. The proposal to create a revolving fund for energy improvements had its roots in previous city experiences with private-sector performance contracting.

Performance Contracting

In 1987, the City of Houston library department entered into an energy-savings performance contract. This was one of the first energy performance contracts entered into in the State of Texas in which all of the capital costs were to be paid by the contractor and recouped through savings. The installation of energy management systems, lighting retrofits, and building envelope renovations and modifications were made and resulted in significant reductions in electric and natural gas utility costs in the range of 20 percent to 40 percent. The annual cost of electricity and natural gas was approximately $1.3 million in 1987. With savings guarantees from the energy-service contractor, the annual energy cost for the library department essentially would be frozen for the five-year period for the contract. In addition to the energy-efficiency and building improvements, the library department also received a full repair and replacement maintenance contract on two large facilities located in the central complex and preventive maintenance in all of its 36 branch libraries.

In 1993, as part of Houston's Green Lights Program, the library department renegotiated an energy performance contract with a similar scope of work as the first contract except for additional capital mechanical equipment, updated lighting, and additional maintenance services. The contractor was required to renovate, retrofit, and modify the city facilities to improve energy efficiency and reduce energy consumption. The energy conservation measures the contractor included were replacing inefficient water chillers; changing a constant-volume air conditioning system to variable-volume; replacing existing motors with energy-efficient motors; cleaning the lenses of fluorescent lamp fixtures; removing lamps where not required; and installing an energy-management system for the control of the air conditioning, lighting, and other miscellaneous measures included in the contract. This was a large project with several million dollars invested up front by the contractor, who will reap a good profit from the project.

An alternative method of funding the project internally was explored - through a revolving fund that would reduce the cost to the facility-operating department while allowing the principal and interest from the capital invested to replenish the revolving fund. Similar private-sector energy performance contracts in other jurisdictions (e.g., Austin, St. Louis County, San Francisco, and Washington, D.C.) were investigated by the city.

Establishing the Revolving Fund

Based on previous experiences with private-sector performance contracting (both in Houston and elsewhere), Houston's commitment to the EPA Green Lights Program for its 1,100 facilities, and the need to find funding for cost-effective energy improvements, Houston officials decided to establish a Green Lights Revolving Fund. The revolving fund would consist of an internal, dedicated, self-replenishing funding source based on a performance-contract approach for city energy improvements identified through the Green Lights audits.

The city applied for Public Technology, Inc., Urban Consortium Energy Task Force (UCETF) grant funds as seed money to establish the revolving fund. City officials supplemented the $20,000 grant by locating other funding sources, as noted in subsequent sections of this article.

During the lengthy process of establishing the revolving fund, energy management staff were able to use the grant funds' acceptance as the justification for establishing the Green Lights Revolving Fund in spite of opposition from some city groups to the establishment of a dedicated, revolving fund for energy improvements and concerns as to the adequacy of the initial funding.

One of the first steps taken by city staff once the grant funding was approved was to identify all the key stakeholders associated with creation of an internal, dedicated revolving fund. These groups included the budget office, the finance director, the controller's office, the legal department, and the facility-operating departments. With support from the facility-operating departments and the finance director, the energy management staff became the champion of creating the revolving fund and taking the multitude of steps needed to establish such a fund. The concept and steps needed to complete the task were discussed with the various stakeholders, and their review and approval of the steps were obtained. The comptroller's office identified and approved the steps to create the revolving fund.

In the City of Houston's fund accounting systems, a special revenue fund was required to enable carryover of revenues and expenditures from one fiscal year to another, which is a critical element in order to make effective use of performance contracting repayments (energy savings) to replenish the revolving fund over time. If the Green Lights Revolving Fund needed to be reauthorized each year and was limited to only those improvements that would be repaid in one year, the types of energy improvements that could be funded through this device would be severely limited.

Unfortunately, the energy staff did not contact all the appropriate city stakeholders early enough in the fund establishment process, and some of the stakeholders changed personnel or did not address the revolving fund issues due to the small amount of seed funding. As a result of these problems, the creation of the revolving fund became a repetitive and lengthy process. A particular problem associated with poor communications was that the transfer of the funds from the grant fund to the revolving fund was not included in the city's annual budget and appropriations ordinances. Because not all the affected parties in the budget office and the legal department were aware of the efforts to create the revolving fund, the transfer between the grant and special revenue fund had to be revised several times before it was finally approved.

Additional Funding Sources

The initial seed funds for the Green Lights Revolving Fund were from salary reimbursement from the UCETF grant. The grant funds were then transferred to the revolving fund. Because of the limited amount of grant funds made available, coupled with the time required to perform the project tasks and obtain grant reimbursement and funds transfer before the revolving fund could be established, it was decided to explore additional initial funding options for the Green Lights Revolving Fund.

One source of additional funding was achieved through utility rebates to the city from the local electric utility. Its commercial efficiency improvement program, offered to all customer electrical loads served under the two commercial rate tariffs, allows rebates of up to $50,000 per facility and $100,000 per customer. Rebates are paid on a reimbursement basis for reduction of peak kilowatt usage through proven high-efficiency technologies such as lighting upgrades; replacing electric motors; heating, ventilation, and air-conditioning (HVAC) upgrades; and structural improvements. Because of the relatively small amount of rebates available to city operating departments, to prevent unnecessary competition among facility-operating departments, and to provide additional seed monies for the Green Lights Revolving Fund, the city's office of energy management was designated the clearinghouse for all rebate applications and receiver of all funds from the rebate program. This was accomplished through a rebate policy, which states:

* all rebates will be applied for through the office of energy management;

* if more than $100,000 in rebates are requested in any given year, the office of energy management will determine which applications for rebates are to be submitted;

* all rebates will be shared on a 40 percent to the initiating department and 60 percent to the Green Lights Revolving Fund basis; and

* the rebate share allotted to the revolving fund will be used to fund additional energy improvements on a competitive basis among facility-operating departments.

The electric utility rebates to the City of Houston in the first year totaled $60,769 through lighting and HVAC improvements from the civic center and library department. Using the rebate sharing allocation procedure, the Green Lights Revolving Fund received $36,461 from these rebates, with the two initiating departments receiving $24,308. As a result of these additional funds, the seed funds available in the revolving fund totaled $55,707.95 for the initial round of energy projects to be funded.

An additional funding source identified as potential money for a dedicated revolving fund for energy improvements is associated with private-sector energy [TABULAR DATA FOR EXHIBIT 1 OMITTED] performance contracts. In these agreements, the contractor generally guarantees only 85 percent of its projected savings as a conservative business practice. The actual energy savings, however, are typically 98 percent of the projected savings and oftentimes are more than 100 percent of projected savings. The result is that while the budgeted energy costs are frozen at baseline costs for the duration of the contracts (typically five to 10 years), in actuality the portion of the nonguaranteed savings that occurs (between 85 percent and 100 percent of projected savings) is available to the facility-operating department for additional energy improvements or other purposes. Since oftentimes the actual savings exceed the projected savings (greater than 100 percent), it was decided to use these excess savings to fund other energy improvements citywide. An interdepartmental memorandum of agreement allows all performance contract excess savings to be deposited in the Green Lights Revolving Fund.

Additional funding for the revolving fund will come from the interest from the original seed funding from the initial energy conservation projects that will be funded.

Interdepartmental Agreements

Before the initial project solicitation process for the Green Lights Revolving Fund, it was critical to develop a written guide of what requirements would be needed for the revolving fund to be effective and how it would work. The various roles and responsibilities of the stakeholders needed to be defined in written, binding agreements.

Binding agreements were developed for use between the facility-operating department(s) and the office of energy management for the Green Lights Revolving Fund. The purpose of this memorandum of understanding (MOU) is to establish a multiyear agreement for funding viable energy conservation projects from the revolving fund and to guarantee a mechanism for replenishing the fund from avoided energy cost. The MOU freezes the facility's budgeted energy costs for the duration of the agreement and specifies that the repayment will continue from energy savings until project costs and fund administrative costs are recovered.

The office of energy management has responsibility for administering the Green Lights Revolving Fund, determining which projects to fund, establishing the base year for funded facilities to be upgraded, monitoring and verifying energy savings from any and all energy conservation measures funded, maintaining current financial records on audit and installation costs, and continually seeking ways to increase and maintain the revolving fund. The administrative costs are incorporated in the departmental repayment agreement primarily to provide a mechanism for the revolving fund to increase future funds available for energy improvements.

The facility-operating department agrees to install or have installed under its supervision the energy conservation measures specified on a schedule attached to the MOU. It also agrees to make quarterly payments to the Green Lights Revolving Fund through the city's internal billing financial system. The facility-operating department repays the revolving fund the amount of the total project cost plus 25 percent over a specified time for fund replenishment and administrative fees.

Project Selection

The initial requests for Green Lights Revolving Fund projects were solicited by the finance and administration department from directors of the facility-operating departments. The interdepartmental memo, stating that the office of energy management had been charged with fund management responsibility, explained the fund and its operations as a special revenue fund created as an internal energy improvement performance-contract-based revolving fund. The initial project solicitation memo included several documents:

* Green Lights Revolving Fund procedure,

* Green Lights Revolving Fund project selection criteria (Exhibit 1),

* project application kit, and

* sample interdepartmental repayment MOU.

Because of the limited seed funds available in the Green Lights Revolving Fund, the initial solicitation of projects specified that projects to be funded should be small scale ($5,000 to $25,000) and have relatively short payback periods (one to two years). The criteria also emphasized short installation periods and measurable energy savings.

As departments submitted energy improvement projects, energy management staff worked with them to define the types of projects most likely to be funded through this program or to refine their project submissions. Energy management staff reviewed submissions and conducted independent energy audits of the proposed projects to determine the reliability and accuracy of the project costs, estimated energy savings, baseline energy costs, and payback periods. Independent verification of the accuracy of the departmental project information was completed to ensure project selection was a fiscally sound process. This independent verification increased the likelihood that the projects selected would be able to repay the funds advanced on time.

The two projects selected for funding were lighting upgrades with relatively short payback periods. The only savings which can be counted through the funding mechanism are electrical and natural gas cost avoidances, since they are the only source of budgeted funds from which savings can be accessed and transferred to the revolving fund. Maintenance labor savings cannot be captured through this mechanism, although these savings may be present as a result of the energy improvements. If the savings occur, they will be captured in the facility-operating department's budget and are not available for replenishment of the Green Lights Revolving Fund.

Monitoring the Projects

The two initial energy improvement projects selected for funding from the Green Lights Revolving Fund were lighting upgrades in a tennis center and a solid waste department regional service center. Only materials are being funded from the revolving fund; labor costs are absorbed by the facility-operating department budgets. Installation of the approved energy improvements has been completed recently, and the energy savings are starting to occur.

Energy management staff have established the baseline energy costs at each affected facility and have developed an energy savings accounting form to be used to document the actual savings from the baseline energy costs. The project savings accounting form also will be used to determine when the initial projects' costs plus the administrative fund costs have been recovered and the fund has been replenished.

Lessons Learned

The City of Houston learned several lessons in establishing its Green Lights Revolving Fund. The first relates to the amount of time and the level of effort required to establish an internal, dedicated revolving fund. Since establishing a dedicated internal revolving fund is not typical for all governmental units, it requires significant effort to explain and convince the various affected groups of the desirability of the course of action. Identifying all the affected groups and steps was lengthy and time consuming but essential to successfully establishing such a funding mechanism. It is useful to have a "champion" within the organization advocating the creation of this funding mechanism, with the time to respond to questions and objections from affected groups as to why to establish this funding mechanism. In Houston, it also was critical to have support from the facility-operating departments and from the finance director.

All affected groups should have been informed of all the steps needed to create the revolving fund in a timely manner. Because not all groups were contacted in a timely manner in Houston, several steps had to be repeated, and the time required to establish the fund was lengthened. The longer it takes to establish the fund, the more likely it is that key personnel changes in affected groups or other external actions (e.g., budget shortfalls, elections, etc.) will affect its establishment.

Another important lesson learned from the project is the importance of having sufficient seed funds from multiple sources to warrant the time and effort required to establish an internal, dedicated revolving fund. In retrospect, the city should not have accepted the limited amount of UCETF grant funds - even though the grant requirements were used several times with recalcitrant city groups as justification for establishing the revolving fund.

It is important to have multiple recurring funding sources for the revolving fund when these funding sources can be identified and directed to the fund. The use of utility rebate sharing and the creation of performance contract "excess savings" sharing were reliable, although limited, additional funding sources for the revolving fund.

The Green Lights seed funding was so small, however, that only partial funding (materials only) for two small-scale energy improvement projects was available for the initial solicitation process. Additional project solicitations will be delayed until the existing project loans are repaid. As additional funds are identified and made available to the energy revolving fund, other projects and other selection criteria can be accommodated.

A final caution regarding the establishment of an internal revolving fund: If the fund is to replenish itself, it is important that projects be selected with firm and documentable energy savings. Initially, projects with a strong probability of achieving the specified repayment in the specified time were funded to demonstrate the viability of the revolving fund and savings projections. If the initial projects do not achieve the projected savings, the fund will be depleted, with the result being another one-time fund dedicated to energy projects but no continuing source of monies for these purposes.

Transferability of the Program

The biggest success from Houston's experience is an existing, ongoing internal revolving fund dedicated to energy improvements, with all the procedures and documentation completed and capable of continuing it at any level of funding. Although the initial funding was small, as the fund "revolves," the fund administration fee will increase the amount of funds available for reprogramming into future energy improvements, with all savings recaptured by the city rather than shared with a private contractor.

Because the initial projects selected were "safe" projects, the probability of projects achieving the projected energy savings in the specified time is excellent. Once the fund has replenished its initial funding, not only will additional projects be funded but the likelihood of additional nonrevolving funding sources increases so that even more energy improvements can be implemented.

Several guidelines and documents were developed for the Houston Green Lights Revolving Fund project which can be modified for use elsewhere. The Green Lights executive order can be used as a model document for expanding the scope of the EPA Green Lights program to accommodate all energy improvements. The rebate sharing and performance contract "excess savings" sharing procedures can be adopted elsewhere with little modification and can provide ongoing funding sources for the revolving fund. Perhaps the most useful documents to emerge from the Houston Green Lights Revolving Fund project are the interdepartmental repayment memorandum of understanding (the "internal performance contract"), the project selection criteria, the project application kit, and the project savings accounting form. By using these documents and guidelines, other jurisdictions will have a head start in establishing their own internal revolving fund dedicated to energy improvement projects and ultimately have a continuing source of funding for these projects.

DEWAYNE HUCKABAY is the purchasing agent for the City of Houston, Texas, and also manages the fleet and environmental management group in the finance and administration department. He has worked in various executive management positions for the city for almost 20 years. He holds a bachelor's degree in political science from Rice University, earned a master's degree in planning from Rutgers University, and was one of the initial graduates of the Lyndon B. Johnson School of Public Affairs's Public Executive Institute. Copies of the full report Establishing a Green Lights Revolving Fund can be obtained for $10 (free for Public Technology, Inc. members) from PTI Publications, P.O. Box 321, Annapolis Junction, MD 20701 (phone: [phone]; e-mail: [e-mail]). For additional information on the process described in this article, contact the author at 713/658-4517.