North Central / Regional Reports

Strategic Approach To Energy The Right Prescription For Hospital System

December 13, 2002
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CHICAGO, IL — The delivery of patient care may be the primary mission in the healthcare business, but controlling costs and mitigating risk in today’s economy can distract even the most proficient of caregivers. Here’s how a 10-hospital system in metropolitan Chicago took a strategic approach to developing an energy initiative that saves over $1 million a year in utility costs while enhancing the environment of care.

Two years ago, sensing impending changes in a volatile energy landscape, Advocate Health Care’s management believed the time was right to take a more strategic approach to energy and utility resource management and to reassess the imminent risks and opportunities.

What Advocate had in mind was to strengthen its position as a premier healthcare provider, but not become an energy expert in a restructured energy industry. The goal was to better manage utility resources so as to achieve optimal savings without compromising patient and employee comfort. Advocate also needed assurance that its total utility budget — nearly $14 million annually in gas and electricity across the 10 hospital locations — was being managed professionally for all of its facilities in the most proficient and sensible manner possible, for both the short and long terms.

A key to the implementation of a new energy initiative, according to Deborah Rohde, vice president of facilities and construction, was for its facility council to address energy issues using an outsourced, independent energy services company which was not affiliated with an energy supplier. This led to the appointment of Siemens Building Technologies for Advocate’s strategic energy program.

“The facility council comprises facility managers from each hospital who meet monthly to address system-wide issues,” explains Rohde. “The strategic issue of energy is now addressed regularly and thoroughly by the council. Siemens is an important player in that process because they serve as our advisor on all energy-related matters.”

Initially, Advocate had eyed aggregation for energy procurement with a local healthcare association. But when Advocate’s senior management learned that there might be a better way to buy energy competitively, they requested proposals from five consulting companies, then narrowed the field to Siemens — the only one of the companies at the time with experience in performing competitive electric procurement work in other parts of the country. Siemens was also an independent, unbiased energy procurement firm and was not an energy producer or marketer.

Siemens provides five energy services as part of the three-year contract with Advocate: electric and gas procurement, load profiling, utility bill monitoring, strategic energy planning, and high-level energy consulting services. These services were originally projected to save Advocate approximately $500,000 each contract year in gas and electricity costs, but have generated more than twice that amount so far.

Additionally, the utility bill monitoring services have validated and resolved over $450,000 worth of disputed bills with local utilities, resulting in a significant amount of credit, while constant attention and advisement regarding billing rate changes and improvements in self-generation strategies have netted an additional $100,000 in savings or avoided cost.

The most valuable service in the contract, Rohde points out, is the competitive energy procurement for deregulated electricity and gas, for two reasons: complexity and dollar value. “This is a very complicated marketplace with factors like pricing options and derivatives,” she continues. “It’s like a foreign language to the lay healthcare person who doesn’t do this every day. That is why the hospital system outsources the intricate work such as procurement and utility bill monitoring.”

For Advocate, Rohde is essentially the chief energy executive responsible for the bottom line results of this strategic energy program. The CEO and CFO also look to her to manage the risks inherent in dealing with the changing energy industry.

The sheer volume of potential savings can be extraordinary, as Rohde is quick to note. “In a business where we work hard to get a 1 to 2 percent profit margin, energy savings that amount to about $1 million becomes quite significant.”

But in Advocate’s business model, the savings target from professional energy procurement services was not necessarily the primary goal. In fact, Rohde admits that there was no guarantee that the savings would reach or surpass the $1 million mark. What was equally important to Advocate was the peace of mind in knowing that their energy programs were being managed and addressed by experts whose core expertise was strategic energy services.

Besides savings and avoided costs, Advocate is pleased to have a proactive strategic energy program in place that appropriately addresses senior management concerns of perceived risks, before they even ask, such as energy supply reliability for critical operations, supplier credit-worthiness, legislative rule changes, regulatory rate changes, due-process for supplier selection, energy price volatility, and avoidance of tightly bundled, long-term, supply/demand contracts which are difficult to unravel.

The risk management aspect of strategic energy services is vitally important to Advocate. Siemens’ job is to help management find a balance between the levels of risk they are willing to assume and the resulting savings they receive. This was the surest way, Advocate reasoned, that they can enjoy the optimal utility cost savings every year after the business risks are mitigated.

Rohde also emphasizes that there are other mission-critical issues relating to energy that transcend cost savings and risk management. These include keeping operating rooms running without interruption, improving indoor comfort levels, and increasing the total environmental quality of patient care. These issues require strict attention to proven, best practices and procedures for healthcare institutions.

To help develop an accurate load profile for Advocate sites, Siemens installed over 60 meters and recorders in strategic locations throughout all of the hospitals in order to capture energy usage data. Comprehensive load profile information was provided in a much more timely fashion than Advocate had previously been able to obtain by its own inspection of monthly utility bills.

The engineers and operators at each location are now e-mailed daily load profile reports for their equipment and buildings, while the managers and directors receive weekly or monthly summary reports. This tool also allows Siemens and Advocate engineers to continually troubleshoot areas of unnecessary energy usage during high-cost peak periods, such as the one caused by the housekeeping staff at one hospital recharging battery-operated equipment while they went to lunch.

“Load profiling helped us identify anomalies in our hospital operations that we would have never uncovered under normal circumstances,” adds Rohde. “We were able to investigate these situations with accurate information and take corrective actions.”

In addition, the benchmarking of load profile information among all hospitals gives rise to more collaborative discussions among facility directors in determining why they are using more or less energy per square foot. Such discussions encourage discovery of more opportunities for energy conservation within the system.

Via utility bill monitoring, Siemens establishes energy baselines for each hospital based on historical utility bills. Siemens then collects monthly utility bills, audits each bill for errors, and compiles monthly tracking reports with information to help Advocate management understand the energy dollars being spent at each facility. Any significant trends in energy usage are also identified. In addition, the reports provide insight into energy cost factors, such as weather, occupancy, facility square footage changes, and changes in purchased energy costs.

Rohde admits surprise at the high amount of billing errors (over $450,000) made by energy suppliers and local utilities, a condition greatly complicated by deregulation. Each utility account at Advocate typically receives both an energy commodity bill (based on a negotiated supply contract) and a distribution utility bill (based on the published tariff). Siemens provides a methodical validation process that checks each supplier’s bill for contract compliance and audits each utility bill for accuracy of tariff calculation, including special riders for the large hospitals.

When billing errors are detected, Siemens works with the suppliers and local utilities to resolve the issues and recover credit on Advocate’s behalf. This saves significant time and headaches for the involved facility directors.

“It’s hard to imagine how we could handle this aspect of utility billing disputes without professional help.” Rohde observes. “Siemens helps us interpret utility data to our advantage, and to bring key energy decisions to the attention of senior management.”

Rohde recognizes that no hospital can manage and track what it doesn’t measure. Now, she believes, the organization has a proven business process in place to manage utility costs.

The consulting services, Rohde believes, are also a critically important management need. “They provide a high level of consulting services — the 30,000-foot level — that is of very high value to us in managing our facilities.”

One such high-level example involved analyzing relevant energy data for one hospital to solve their cooling problem. Siemens advised managers to consider modifying the chilled water distribution system rather than replacing an expensive chiller. Another example was to modify the layout of emergency generators at another hospital as opposed to adding expensive switches to maintain synchronization with the power grid. This measure achieved the desired load curtailment configuration at a fraction of the cost.

Another benefit of strategic energy services is that they enable Advocate to take maximum advantage of the utility’s curtailment programs that offer incentives to curtail loads or use emergency generators during peak periods. Siemens helps Advocate determine which program returns the highest incentive for the lowest risk, then works closely with each of the facility operators to assure that curtailment is achieved as planned.

Advocate’s success in utility resource management is built upon a partnership with Siemens to carry out the proven business process with discipline: 1) systematically organize and disseminate energy data and utility bill information to identify savings opportunities, 2) closely monitor existing energy contracts for appropriate actions, 3) provide advice and counsel to management on strategic energy-related matters, and 4) deliver regular performance measurement reports to track the progress of the energy program.

Jointly, Advocate and Siemens have established the foundational elements of a comprehensive strategic energy program. The next steps will be to:: 1) to implement a decision-making system for a five-year plan on how to invest capital funds to increase energy efficiency, 2) to fully utilize the load profile information as a day-to-day energy management tool, and 3) to infuse the energy conservation culture throughout every level of the organization. Advocate’s vision for a comprehensive strategic energy program is one that is embraced by senior management and practiced faithfully throughout the organization.

Article contributed by Siemens Building Technologies Inc., Buffalo Grove, IL.

Publication date: 12/16/2002

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