This Article Appears in our January 2001 Newsletter
THE ENERGY CRISIS – HOW TO COPE
Rising Costs Mean Rent Increases for Calgary’s Apartments
By Jim Walmer and Tim Sommer
There has been a lot of press about increasing energy prices – skyrocketing natural gas prices, and rising costs of electricity in an environment of de-regulation. While the latter will be offset to a certain extent in buildings where the tenant pays for their own electricity and through government rebates, natural gas prices are extremely volatile and heating bills are expected to be 50% greater in 2001 from 2000. landlords need a strategy to cope, and the following information has been provided to help do so.
Enmax rates last winter were 10.06 cents per kilowatt hour; this year they are currently 11.63 cents. At our deadline, projections were for increases of 25% - to 12.6 cents per kilowatt hour. Much of Alberta’s electricity is generated by gas fired plants – so higher gas prices drive higher energy prices. Growth in the Alberta economy has caused power shortages and forced the purchase of high priced power from out of province. Price volatility for electricity shatters that of gas; while gas prices can vary by 50%, electricity can vary by 800% or more.
Further complicating the issue is Alberta’s deregulation of the electricity market and the uncertainty it is causing. Investment in power generation facilities has reduced to the point where demand is outweighing supply, while the costs and lengthy development times involved in producing a new facility present additional hurdles and mean there will be no quick fixes. It also appears the Alberta government may be changing the rules of deregulation, prolonging this uncertainty. While they may suspend rate rider charges in the near term, these charges must be paid eventually.
There is a small amount of relief for electricity prices. The Government of Alberta is providing each household with a monthly rebate of $20 per month for 2001, which will automatically be deducted from and shown on the electricity bill. For commercial users – including apartment properties – a similar rebate will appear on your apartment’s electricity bill, based on 1.8 cents per kilowatt hour of usage. The example Enmax gave us was for a high-rise apartment building using 90,000 kilowatt hours per billing period. Such a building would see a “discount” during that same billing period of approximately $1,650.
Meanwhile, Atco Gas expects the cost of gas (which represents roughly 50% of your total bill) to double – projections average $6.49 average per gigajoule (“GJ”) for 2001 compared to $3.26/GJ last winter (at press time, prices had surpassed $11). Prices are the same for both single-family and multi-family users. In November of 2000, every resident of Alberta who filed an income tax return received $150 to compensate for rising energy prices – regardless of whether they paid for the natural gas to heat their home.
The above factors are generally long term structural or strategic factors and suggest that we will be living with high energy costs for the foreseeable future. Based on the above, we have attempted to estimate the cost impact to the “typical” apartment building on the average landlord as a result of energy cost increases for the upcoming year.
Because all buildings are different in terms of construction, energy efficiency, suite sizes, and composition, apartment suites cannot be compared directly. In addition, landlords may only be responsible for a portion of total energy costs. Our assumptions are based on an apartment block of twenty-five suites; natural gas consumption per suite is 60 GJ per year; electrical consumption per suite is 4,000 kilowatt hours per year.
Based on these assumptions, the projected costs due to energy price increases per suite where the owner pays all electricity and gas costs are as follows:
Electrical cost increases 4,000 kwhr X $.025= $100 per year
Natural gas cost increases 60 GJ X $3.23 gas cost increase = $ 194 per year
Total energy cost increases per year: $294
– equivalent to
$25.00 per month.
Based on this scenario, rents must increase by $25 per month to break even. A Rental Review survey of Calgary’s major management companies revealed that this number was in fact at the lower end of the scale; energy costs per suite were typically estimated at between $25 and $40 per suite.
Our survey clearly showed a consistent strategy among not only these management companies but among private owners and smaller operators: rent increases. Most have or will be implementing rent increases to take effect early in 2001. Increases are for at least $20 to $30 per month - depending upon the variable factors previously mentioned increases are as high as $50 to $60 per month. Many notices explain that the rent increase is a result of rising energy prices; some have even adopted a two-part strategy, first explaining to tenants that increases may be necessary and if so, they will be because of rising energy costs.
At the time of writing, there remain many unanswered questions regarding the deregulation of electricity. The potential freezing of rider fees may mitigate certain electrical rate increases but this appears only to be a deferral of the costs in the short term.
Another wrinkle that may cause some concern in a de-regulated environment is “who is the tenant’s Energy Provider”? landlords may want to amend their leases to include a space for this information. Consider the following situation: a new tenant informs you of their Energy Provider (“EP”). During their tenancy, they switch to another EP and forget to tell you. The tenant later moves out and you now want to contact the EP to have the power switched to the building’s bill pending re-renting of the suite. Who do you call?
The Rental Review was told by Enmax that Enmax, as the Wire Service Provider (“WP”) would maintain records of who the EP’s are, because the EP’s will be using the WP’s infrastructure. In the above instance, you would then call Enmax to get in touch with the Energy Provider. Sound confusing? Add to this the yet to be determined impact of the Freedom of Information and Protection of Privacy Act. Will Enmax disclose information about the tenant and their EP? Our research provided no clear answer as to whether or not the WP and/or EP can act without the consent or at least the involvement of the tenant. At press time, Enmax staff were being trained on how such situations will be handled; there is also discussion of some form of communication with landlords. The CAA will stay close and keep you informed.
We hope to provide further updates. If you have researched any of the issues raised, or have learned through experience (i.e. the “Hard Way”) please contact
Tim Sommer, Editor of the Rental Review (298-0417) or
Gerry Baxter,
Executive Director of the CAA at 265-6055.
