June, 1998 - Smack in the middle of all hotel financial statements, often overlooked and neglected, is the line item, “Utility Costs”.  The most attention a hotel controller typically pays to utility costs is when they cut the check for the monthly bill.  Certainly, during the energy crisises of the seventies and eighties, hotels looked for ways to conserve electricity and fuel.  Yet, the most prominent action taken by the industry concerning this line item was to change the name from “Energy Costs” during the ninth edition of the Uniform System of Accounts for the Lodging Industry.
 
 

Deregulation Coming Down The Line

Just as they deregulated airlines, telephones, and banking, federal and state governments are enacting legislation that allows for the deregulation of the electrical utility industry.  Already, residents and businesses of several states have the option to choose their provider of electricity.  While the legal kinks are being worked out on a state-by-state basis, eventually, every person and business in the United States will have the right to choose their electric company.

Based on preliminary data from our 1998 edition of Trends in the Hotel Industry, we estimate that U.S. hotels, on average, spend $771 per available room for their electrical costs, or 58 percent of the total utility costs.  In total, all utility costs for a hotel average 3.9 percent of total revenue.  While this may not seem like a large percentage, it is frequently greater than the percent of revenue spent on such expenses as the beverage department, franchise and management fees, property taxes, and insurance.  I believe it is safe to say that all these other expenses typically receive more attention from management.

Now, with deregulation, hotel management will not only have the opportunity to competitively select an electric utility provider, but the way they are billed for this service.  What is the potential impact on a hotel’s financial statement with electricity purchased on a competitive basis?

Telephone History Rings Loud

Hotels have had experience with the deregulation of the telephone industry.  First it was the break-up of Ma Bell.  Then, hotels were first given the opportunity to choose their long-distance carrier, and most recently, their local-call provider.

Looking back, the relative cost of calls (not including labor, equipment rental, or maintenance) as a percentage of telephone revenue has steadily declined since 1973 from 62.8 percent to an estimated 25.6 percent for 1997.  While it is true that hotels have become more aggressive in adding surcharges to the cost of calls, these overall industry expense ratios have also been tempered by the increasing offering of free local calls.  It certainly appears that telephone deregulation and competitive pricing has assisted management’s efforts to convert their telephone departments from a loss- to a profit-center.

Energy Flows Consistently

Unlike telephone costs, energy expenses for hotels have remained relatively consistent when measured as a percent of total revenue.  From 1973 through 1997, utility costs have fallen within the range of 3.4 to 5.5 percent of total revenue.  However, further investigation is needed to understand the movement of utility costs.

From 1973 through 1982, the United States experienced two recessions and energy crisises.  Each year during this period, except for 1978, energy expenses grew in excess of 10 percent.  The combination of double-digit acceleration in energy costs and limited growth in revenues resulted in six consecutive years (1981 through 1986) of utility department expenses in excess of five percent of total revenue.  It was this red flag that drove hotels to seek more efficient ways to consume their utilities.

Since the early eighties, hotels have become more energy efficient, as well as benefit from stronger growth in revenue.  With exception of the slow revenue years of 1991 and 1993, energy expenses have steadily declined each year as a percent of revenue.

More specifically, electrical costs have averaged a compound average annual growth rate of 2.8 percent from 1987 through 1997.  This compares to average annual increases in hotel revenues and inflation of 4.7 percent and 3.3 percent respectively during this same time period.  Unlike the seventies and early eighties, energy costs appear to have been kept in check in recent years.

Shocking Decisions Ahead

Despite the apparent suppression of energy costs in the 1990s, one must assume there is still room for improvement when the utility monopolies are broken up.  As we have seen in the telephone department, competitive shopping for long-distance and local call service providers has contributed to dramatic operating efficiencies in that department.

In addition to competitive pricing, it is recommended that hotels contact an energy consultant for advice on the different metering options, rate classifications, and billing procedures now available.

While deregulation should eventually have a positive effect on the bottom lines of U.S. hotels, it will also have an impact on the amount of attention that needs to be paid to the “Utility Costs” line item.  Initially this attention will be spent choosing the best electric provider and billing procedures.  Afterwards, it should become a matter of policy to closely monitor the electricity expenses of your property.  With this data in hand, you will be able to routinely evaluate whether or not you need to make a change.  After deregulation, you now have the option to make changes.