1994 PRICE INDICES OF OPERATING COSTS



Prior to establishing its annual guidelines, the Rent Guidelines Board (RGB) is obligated by law to examine operating and maintenance costs that are incurred by owners of stabilized buildings. In the early 70's, the RGB relied heavily on its Price Index of Operating Costs for Rent Stabilized Apartment Houses (PIOC) to measure changes in these charges and costs. However, since the late 70's, some critics as well as Rent Guidelines Board members felt that additional data was needed to determine the profitability of stabilized housing beyond an annual price survey.

The PIOC measures the price change in a market basket of goods and services which are used in the operation and maintenance of stabilized buildings. The original PIOC expenditure weights and market basket were devised by the U.S. Bureau of Labor Statistics (BLS) which was retained by the RGB as the PIOC contractor from 1970 to 1981. From 1982 to 1990, the PIOC was prepared by private consulting firms. In 1991, the RGB staff's growing expertise and familiarity made it possible to move the PIOC "in house." This is the fourth year that the RGB staff has produced the PIOC.

In order to address the ongoing concerns about the accuracy of the PIOC methodology in estimating cost changes, the RGB commissioned the PIOC contractors to undertake various PIOC-related studies in the 80's. However, for a variety of reasons, these studies did not lead to substantive changes in the PIOC market basket, methodology, or the way the study was administered.

Beginning with the 1991 PIOC, many changes have been made to facilitate the data collection process and to insure the quality of PIOC price data. Staff has reorganized and computerized the PIOC vendor database, updated the mailing list for the owner survey, and completely redesigned the owner survey mailing materials. In addition, price quotes for fuel oil are gathered on a monthly basis rather than once a year.

Following completion of the 1993 PIOC, further efforts have been made to improve the quality of data collection and our understanding of the PIOC. These efforts and improvements allowed us to hire fewer data collectors for a shorter period of time each year since the PIOC was brought "in house". In 1991 twelve temps were hired for a ten week period while this year half as many data collectors worked six weeks to complete the survey.

Since 1989, RGB staff has completed a substantial amount of research designed to evaluate the accuracy of the PIOC. The major topics of concern have been the reliability of the 1982 expenditure study (which re-weighted the PIOC components), the overall accuracy of the PIOC, and the precision of various PIOC components.

The availability of landlord income and expense (I&E) information from the Department of Finance made it possible to examine the reliability of the PIOC expenditure weights. In general, the I&E information confirmed that the PIOC weights are fairly accurate. In recent years staff has also been able to compare actual increases in costs (Finance I&E data) with changes in the PIOC. Last year we found that the PIOC measurement (5.5%) was higher than the I&E data would suggest (3.4%). This year's comparison found a 4.2% increase in both I&E costs and in the PIOC from 1991-1992. This comparison further supports the accuracy of the Price Index.

An effort to gauge the accuracy of the PIOC by comparing its findings with actual expense data will continue. While the controversy concerning the accuracy and legitimacy of the PIOC may never be fully resolved, efforts will be made to improve the PIOC on both an administrative and technical basis.

Rent Stabilized Apartments

Summary

The overall increase in the Price Index of Operating Costs for Rent Stabilized Apartment Houses in New York City (PIOC) between April 1993 and April 1994 was 2.0%, the lowest increase since 1978. In last year's PIOC projection we predicted a low Price Index "due to smaller increases in the Taxes and Utilities components." As it turns out, eight out of the nine Price Index components either remained the same or increased at a slower rate than last year's PIOC.

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Change in Components of the Price Index of Operating Costs
for Rent Stabilized Apartments, April, 1993 to April, 1994
Taxes 2.3%
Labor Costs4.3%
Utilities Costs2.1%
Fuel Costs-0.5%
Contractor Services0.9%
Administrative Costs3.7%
Insurance Costs0.8%
Parts & Supplies1.0%
Replacement Costs1.6%
Overall 2.0%


Declining worldwide oil prices, falling property tax assessments, and the inability of contractors to raise prices were some of the manifestations of economic weakness or lack of inflationary pressures which are reflected in this year's PIOC.

Last year the tax rate rose a scant two-tenths of a percent, and since fully two-thirds of stabilized buildings had reached their maximum assessments, values did not increase much either, resulting in a low tax increase (3.1%). This year tax assessments actually decreased but an increase in the tax rate still resulted in a property tax increase of 2.3%.

Labor costs were up 4.3%, a smaller increase than last year (5.6%). The rate of increase in labor costs has been extremely consistent during the past eight years, ranging from 4.3% to 5.7%.

As we noted in the 1991 PIOC report, Contractor Services and Administrative Costs are largely labor-based and depend to a great extent on the strength of the local economy. Although economic conditions in New York City have improved slightly, inflationary pressures are still firmly in check. As a result, increases in the Contractor Services and Administrative Costs components (0.9% and 3.7% respectively) are among the lowest in the last ten years.

In last year's fuel oil projection we assumed a "slight upward production capacity, gradually increasing demand for petroleum, and close to normal weather conditions." The net effect was to have been a 5.7% increase in fuel prices. Our projection was undone by weak economic conditions worldwide and declining crude oil prices. As a result, fuel oil prices declined by 0.5%.

The utilities relative rose moderately, mainly due to the Water Board's freeze on water and sewer rates which was effective during the year. Since water and sewer charges now constitute 56% of the utilities component, the overall increase in utilities was only 2.1%.

Unlike last year, changes in insurance costs were lower than the overall PIOC increase. Increases in the Parts & Supplies and Replacement Cost components, which have been fairly consistent (and low) over the past nine years, continued to follow the same pattern. Prices for Parts and Supplies increased a meager 1% while Replacement Costs were up 1.6%.

Elements of the Price Index

Owner Survey

The owner survey gathers information on management fees, insurance, and non-union labor from building managers and owners. Survey forms, accompanied by a letter describing the purpose of the PIOC, were mailed to the owners or managing agents of stabilized buildings. If the survey form was returned, the owner/manager was contacted by an interviewer to verify the information and to obtain additional information if necessary. All of the price quotes of the owner/managing agents were confirmed by calling the insurance and management companies and non-union employees.

The sample frame for the owner survey included approximately 39,000 stabilized buildings which registered with DHCR in 1991. A stratified sampling scheme was used to choose about 6700 addresses from this pool for the owner mailing - about 500 more than in 1993. The number of buildings chosen in each borough was proportional to the concentration of stabilized buildings in that borough. Nearly 13% of the 6700 surveys mailed out were returned to the RGB. A total of 538 of these contained information which was used. The number of verified price quotes in 1993 and 1994 for the owner survey is shown in Appendix B.1.

Fuel Oil Vendor Survey

Fuel price information has been gathered on a monthly or bi-monthly basis for the past two years. A monthly survey makes it possible to keep in touch with fuel vendors and to gather the data on a consistent basis (i.e. on the same day of the month for each vendor). Calling vendors each month minimizes the likelihood of misreporting and also reduces the reporting burden for the companies which don't care to look up a year's worth of prices. Finally, the monthly survey shifts some staff work out of the very busy Spring period.

Only a few vendors declined to participate on a monthly basis. Several of these did agree to provide two year's worth of data in April 1994. The number of fuel quotes gathered this year was comparable to last year and is contained in Appendix B.1.

Tax Computations

The list of buildings used to compute the change in taxes included all properties which registered at least once with DHCR between 1984 and 1989. As was the case last year, a list of in rem buildings was obtained from the Department of Housing Preservation and Development. These buildings had been vested by the city and were not, in effect, privately managed rental buildings. They were excluded from the tax analysis.

Information on assessed value, tax exemptions, and tax abatements was obtained from the Department of Finance for the approximately 31,000 stabilized buildings. This data was used to compute a tax bill for each stabilized building in FY '93 and FY '94. Each building's tax bill was "weighted" based on the number of stabilized units in the building. The change computed for the PIOC is simply the percentage increase in aggregate taxes levied from FY '93 to FY '94.

As in prior years, the Open Balance Register (OBR) was used to "check" the tax computations. The OBR consists of actual bills and payments by landlords. There was no significant difference between the traditional method of computing the tax increase and the OBR method.

Vendor Survey

The Vendor Survey is used to gather price quotes for contractor services (e.g. painting), administrative costs (e.g. management and attorney fees), parts & supplies, (e.g. mops, toilet seats) and replacement costs (e.g. refrigerators). As in prior years, an effort was made to update the vendor database by adding new vendors and deleting those who no longer carry the products in question. Vendor quotes were obtained in person and over the telephone. The method used depended on the particular product or service being priced (e.g. all painters were contacted by telephone due to the difficulty of meeting with them during business hours).

The procedures used for gathering price quotes were unchanged from prior years. The number of price quotes was about the same as in 1993. For a detailed description of the items priced and the number of price quotations obtained for each item, refer to Appendix B.1.

Other Items

In addition to the items previously discussed, a number of other pieces of information are needed to complete the PIOC. They are:

These items are used in computing some of the labor components, changes in utility costs for electricity, gas, steam, and telephone, and the cost-weighted change in fuel prices.

Changes in PIOC Components

Taxes

The tax component is based entirely on real estate taxes. The change in taxes is estimated by comparing the aggregate taxes levied on rent stabilized apartment houses in FY 1993 and FY 1994 (For additional detail on how the tax computation compares to last year, see the earlier section on "Elements of the PIOC"). The tax data was obtained from the Department of Finance.

Taxes levied on rent stabilized apartments increased by 2.3%, the lowest rate of increase since 1984. The increase was largely due to a hike in the tax rate; property assessments actually dropped.

The chart Components of Tax Change, 1988-94 disaggregates the increase in real estate taxes into changes in billable assessments, and the tax rate, tax exemptions, and abatements. Changes in assessments and the tax rate usually have the biggest impact on real estate taxes. The influence of changes in exemptions and abatements is often negligible. We have grouped these with the tax rate for purposes of illustration.

Most of the overall tax increase this year can be attributed to the increase in the tax rate (4.6%), although expiring abatements and exemptions also played a role. This is in contrast to last year where increasing assessments contributed the lion's share of the tax increase.

This year the change in billable assessments was -4.7%, the first drop in valuation since fiscal 1983. The change in assessments was highly variable by area: assessments in lower Manhattan decreased by 6.2% while increasing in upper Manhattan by 0.6%. Assessments also increased in the Bronx (1.2%) but decreased in Brooklyn, Queens and Staten Island by 1.4%, 6.0% and 8.3% respectively.

This variation in the change in assessments by borough carried over to changes in the overall tax cost. Queens and Staten Island actually had lower tax bills this year than last year - their taxes dropped by 0.5% and 2.0% respectively. Lower Manhattan experienced a tax increase of 0.8% while taxes on buildings in upper Manhattan rose 7.9%. Brooklyn and the Bronx saw tax increases of 6.4% and 8.8%. Interestingly, areas with the highest tax increases, upper Manhattan and the Bronx, also were least affected by changes in exemptions, implying that fewer exemptions have been expiring there than in the city as a whole.

Labor Costs

The labor component is based on several measures of labor costs, including union contracts (wages and benefits), non-union wage increases as measured by the owner survey, and changes in social security and unemployment insurance. The overall increase in labor costs this year was 4.3%, falling below five percent for the first time since 1976. The 1994 labor component is the lowest increase in 18 years, and may be a harbinger of even lower increases in the future if the recent 32 B-J contract is an indicator of future trends.

There has been some variation in the sub-components which make up the labor component. In recent years the wage portion of labor costs has typically lagged behind benefits. Last year, for instance, fringe benefits rose 16%. The rate of increase in fringes was down sharply this year - to 5.2%.

Utilities

After a year in which the increase for the utility component of the PIOC increased substantially (12.7%) there was a very moderate increase this year of 2.1%. Last year all expenses, except for telephone costs, showed double-digit price increases while this year only gas costs reached the double-digits.

The utilities component consists primarily of electricity, natural gas, and water & sewer charges. Telephone and steam costs are a small part of the utilities index. In the case of most utility components, changes in price are measured using the PIOC specifications (i.e. the quantity of electricity, steam etc. being purchased) and the changes in rate schedules. Water/Sewer costs are based on actual billings from the Department of Finance.

In previous years utility information was generally obtained by calling particular companies (e.g. Brooklyn Union Gas) or the Public Service Commission. Staff has continued the effort made last year to track the change in utilities throughout the year rather than exclusively during the busy months of the PIOC survey. During the past twelve months a concerted effort was made to document all aspects of the utilities component by requesting detailed rate schedules and definitions of the terms used by rate regulators. Some minor changes were made in the calculation of the utilities sub-components as a result. The RGB is now in a much better position to track changes made by regulators and to project utility rate increases.

Due to the Water Board's freeze of water and sewage rates for 1994 there was only a slight increase this year of 1.0%. Over the past several years water and sewer charges had risen so quickly they had a large impact on the utilities component resulting in high increases. With the lack of such a large increase in water and sewage costs this year the overall rise in the utilities component is the lowest since 1991.

Electricity costs showed a decrease this year, down about 8.0%. Electricity costs have traditionally been measured on an April-to-April basis rather than a cost-weighted basis (as in the case of fuel oil and gas).

Gas costs increased considerably this year, rising about 15%. Gas, like fuel oil, is measured largely on a "cost-weighted" basis which takes both price and heating degree days into consideration. A small part of the increase in gas costs was due to colder weather during this year's heating season, but most of the increase can be attributed to rate increases and changes in the fuel adjustment factor.

Fuel Oil

The fuel oil component measures changes in the price of three types of fuel oil - #2, #4, and #6. The PIOC includes a different weight for each of the fuel grades which reflects the percentage of rent stabilized units using the particular type of fuel oil. In the current year's PIOC, #6 oil accounts for half of the fuel oil component while the other two grades make up roughly 25% each.

To calculate changes in fuel oil costs staff gathers monthly price data from fuel oil vendors and weights the data using a degree day formula. The number of degree days is a measure of heating requirements.

This year was decidedly colder than the previous year, mostly due to an unusually cold January. Offsetting the colder weather, however, were lower fuel prices for much of 1993. As a result, fuel prices actually dropped by 0.5%. In fact, a demand driven increase in fuel prices in February, immediately after the coldest spell of the winter, dampened the drop in fuel prices for the year. Without the February price rise, fuel costs would have been 3.2% lower than the previous year. The chart Percentage Difference in the Cumulative Fuel Oil Bill, 1993-94 as a Percent of 1992-93 illustrates the effects of the severe cold and fuel price rise by tracking the difference in the cumulative fuel bills between last year and this year. As the chart shows, landlords' fuel bills were 4.0% lower than the previous year as of December. However, cold weather and higher prices drove prices up, before finishing the year with a .5% decrease.

This decrease in price was experienced by users of #2 and #4 fuel oil; #6 fuel oil users experienced a price increase. Among the various grades of fuel oil, the changes in price were: #6, +0.9%, #4, -2.1%, and #2, -1.9%. As is usually the case, the price swing for #6 fuel oil was somewhat greater than for the other grades. This is probably due to the smaller number of price quotes for #6 oil and greater price volatility for this grade.

Contractor Services

The Contractor Services component is composed of sixteen items, the most important of which are repainting and plumbing repairs. The rate of increase in the Contractor Services component fell from 2.5% last year to 0.9% this year. This is the lowest increase in the history of the PIOC.

The impact of the recession, which was first apparent in the results of the 1991 PIOC, continues even though we are considered to be in a recovery period. Continuing pressure on contractors to keep their customers has forced them to maintain or reduce their prices. In this year's survey about four-fifths of the painters reported that their prices either remained the same or even decreased, mainly due to lack of business. As a result, the increase in repainting costs was less than one percent, almost one percent less than last year.

Plumbers, like painters, struggled to maintain prices for their services. As was the case last year both PIOC plumbing "specs" showed an increase but the change was slight - 1.1% and 1.6% respectively. The greatest changes in the Contractor Services component were seen in the area of elevator maintenance. While there were moderate price increases for elevator maintenance in the 1993 PIOC, each of the three elevator "specs" showed decreases in 1994. Old elevators were replaced with new units resulting in fewer repairs which in turn have lowered monthly service contracts. Due to the lack of substantial price hikes in these areas, the recent trend of low increases in the Contractor Services component has continued.

Administrative Costs

The administrative costs component consists mainly of management company fees and attorney and accountant services. Advertising fees, along with the cost of certain office supplies, are also a part of this component but they have only a minimal effect on the overall increase. Since 1991 we have seen increases of about two to three percent. This year's increase in administrative costs was somewhat higher, 3.7%.

Management fee quotes, which make up nearly two-thirds of the administrative costs component, are obtained from owners and are verified by calling management companies. The data is used only if the management company has no equity interest in the apartment building. The number of management fee quotes was similar to the number obtained in the 1993 PIOC. This year's increase of 3.9% in management fees is lower than the average increase over the last five years (5.3%).

Fee quotations were obtained from accountants and attorneys based on specifications in the PIOC. Unlike last year, these costs have increased faster than the past year's increase in the CPI. The 1994 PIOC saw a rise in attorney fees of 3.3% (an increase over last year's 2%), while accountant fees increased 4.2%.

Insurance Cost

Information on insurance costs and coverage (i.e. deductible, value, coverage change) was obtained through the owner survey. The survey staff used a policy number and the name of a contact person provided by the management company or building owner to confirm the 1993 and 1994 price quotes with the insurance carrier. To insure that the PIOC accurately measures the effect of changes in the price of insurance coverage, the influence of changes in coverage is statistically removed in the computation of the insurance component.

A total of 523 verified insurance quotes were obtained, compared to 443 in 1993. The PIOC survey team was exceptionally successful in gathering insurance quotes this year. In part this was due to their diligence, but some of the credit can be attributed to changes in survey methods made last year.

This year a new variable was added to the insurance section of the Owner Survey in order to determine if lead paint coverage was being removed from insurance policies. Only 13 respondents indicated that the lead paint coverage was indeed removed from an owner's policy. As a result, this new variable had little effect on the insurance cost component.

Recent changes in insurance have been rather moderate, ranging from -.6% in 1989 to 4.4% in 1991. This year's increase of 0.8% is quite typical.

Parts and Supplies

Increases in this component have been fairly consistent and generally low since 1983. This year prices showed the same rise as last year- only 1%. Given the low weight of the parts and supplies component in the PIOC (less than 3%) and the small price increase in this component, parts and supplies had no significant impact on the overall PIOC increase this year.

Replacement Costs

The replacement costs index is less significant than the Parts and Supplies component, accounting for slightly more than 1% of the price index. Last year's increase, although it was only 4.2%, was the highest since 1982. This year's replacement costs component continues a previous series of low increases. The slight rise of 1.6% had very little impact on the overall increase in the PIOC.

Rent Stabilized Lofts

The overall increase in the loft price index was 2.2%, only slightly more than the increase in the apartment index (see table below). Even though the overall increase in the loft price index was very similar to the increase in the apartment index, some of the weights used in the loft index are quite different. Attorney fees have a weight of about 1% in the apartment PIOC, but comprise 11% of the loft index. Since legal fees rose 3.3%, the effect was to increase the loft index relative to the apartment index. However other factors worked in the opposite direction. Fuel costs dropped more for lofts than for apartments since fewer lofts use #6 fuel oil. The 4.6% increase in labor costs had less of an impact on lofts than apartments since labor costs are not weighted as heavily for lofts. All of these factors combined resulted in the increase of 2.2%.

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Change in Components of the Price Index of Operating Costs
for Rent Stabilized Lofts, April, 1993 to April, 1994
Taxes 2.3%
Labor Costs4.6%
Utilities Costs3.0%
Fuel Costs-1.5%
Contractor Services0.9%
Administrative Costs, legal3.3%
Administrative Costs, other3.6%
Insurance Costs0.8%
Parts & Supplies1.0%
Replacement Costs1.6%
Overall 2.2%

Rent Stabilized Hotels

The hotel price index methodology was first developed by the consulting firm USR&E based on its findings in the Report on the Analysis for Expenditure Data for the 1985 Price Index for Hotels. It includes separate indices for each of the three categories of hotels (due to their dissimilar operating cost profiles) and an index for all hotels.

The overall increase for hotels was 1.2%, somewhat less than the increase for apartments. The changes for the various building types were: rooming houses 2.7%, SROs 2.1%, and hotels 0.4%. This disparity among building types is largely due to different tax changes. Taxes for rooming houses increased by 6.1% and SROs by 1.0% while taxes for hotels decreased by 4.7%. Utilities costs also went down for hotels (-1.0%) while increasing for rooming houses (3.1%) and SROs (1.6%).

Differing tax costs were most responsible for the smaller change in the hotel index than the apartment index. The tax relative was computed using a list of hotel buildings compiled by HPD for the 1991 HVS, as was the case for the past two years. This year taxes actually decreased by 0.5% while apartments experienced a 2.3% increase in taxes. This difference is due to a drop in the billable assessed value for hotels (-2.9%) and a smaller increase in the tax rate (+2.3%). Assessments for hotels decreased 7.3% from the previous year and SRO assessments decreased 1.3%. Rooming house assessments increased 3.8% in the same period.

The increase in labor costs was 4.6%, somewhat more than for apartments. This increase was driven by large increases in unemployment and social security insurance which are afforded more weight for hotels than apartments.

Fuel costs decreased by 1.1%, a greater decrease than for apartments. This is due to the fact that rooming houses use #2 fuel oil rather than #4 or #6.

The increase in utilities costs was very slight (0.1%). Substantial increases in natural gas costs were offset by reductions in the price of electricity, resulting in nearly unchanged costs.

Contractor services rose faster in hotels, largely due to an 8% increase in linen and laundry service. Replacement costs actually decreased by 1.5% because of a drop in the price of dressers, mattresses, and box springs. Administrative costs, insurance, and parts and supplies rose at about the same rate for both hotels and apartments.

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Change in Components of the Price Index of Operating Costs
for Rent Stabilized Hotels, April, 1993 to April, 1994
Taxes -0.5%
Labor Costs4.6%
Utilities Costs0.1%
Fuel Costs-1.1%
Contractor Services2.7%
Administrative Costs3.6%
Insurance Costs0.8%
Parts & Supplies1.0%
Replacement Costs-1.5%
Overall 1.2%

1994-95 PIOC Projection

Summary

Overall, the PIOC is expected to grow by roughly 3.4% between 1994 and 1995. Projected changes in the index's separate components are shown alongside actual increases observed from 1993 to 1994 in the chart 1994 PIOC and Projected Increases for 1995.

Taxes +3.1%

Real estate taxes have steadily grown into the most important single cost component in the PIOC, comprising over one quarter of the cost index. From 1985 to 1992, growth in taxes tended to exceed overall expansion in the PIOC. Declining tax assessments and fairly stable tax rates have reversed this trend over the past two years.

Although New York remains committed to keeping its total real estate tax levy stable over the coming year, changes are expected to occur in the distribution of the tax burden among various types of property in the city. In particular, the share of the levy to be derived from Class Two properties (which encompasses rent stabilized buildings) is expected by to increase by 5% from 1994 to 1995. This increase, in turn, should cause the tax rate for Class Two buildings to grow by about 5% next year.

Class Two property includes co-ops and condominiums as well as apartments. Within the Class Two category, rent stabilized dwellings are classified as either "rental buildings" or "4-10 family buildings". Based on the preliminary tax roll, the Finance Department forecasts billable assessments for rental buildings to decrease by 1.7%, while billables for 4-10 family buildings are expected to increase by 3.5%. Overall, billable assessments for stabilized buildings, which are predominantly classified as "rental" buildings, should decrease by 1.1% from 1994 to 1995.

In the past, the Finance Department's preliminary tax roll, which is an estimate, has tended to be higher than the final tax roll, upon which taxes are actually calculated. Accurate tax projections must adjust for this "gap", which amounted to 1.1% for stabilized properties in 1993. Assuming that the discrepancy between the preliminary and final tax roll is also 1.1% in FY '95, billables should decline 2.2%. This decline in billables, combined with the projected 5% increase in the Class Two tax rate, should produce a 3.1% rise in taxes for rent stabilized buildings in the coming year.

Labor-Based Components
(Labor Costs +4.3%, Administrative Costs +3.4% and Contractor Services +1.9%)

Labor costs comprise the bulk of these three components. "Contractor Services" primarily concerns the work of plumbers and painters while "Labor Costs" are mainly associated with the wages and benefits of building maintenance workers (e.g. superintendents, porters, etc.). "Administrative Costs" largely consists of management, legal and accounting fees.

Among the three components listed above, "Labor Costs" should increase the most (by 4.3%) over the coming year. This projection was calculated from actual contract agreements made between building owners and unions representing building workers. In the case of non-union employees, growth in wages and benefits was projected from average increases observed over the past three years.

In a similar vein, projected increases in "Administrative Costs" (3.4%) and the price of "Contractor Services" (1.9%) were derived from average growth rates witnessed in both components during the past three years.

Fuel + 10%

The cost of fuel oil depends heavily on volatile political and economic variables as well as on short-term weather patterns that cannot be reliably predicted. Given these drawbacks (and barring unforeseen wars or natural disasters) fuel oil prices in New York City from 1994 to 1995 should be propelled upward by a combination of stable global production, a colder-than-normal winter and accelerating economic growth (and thus demand for oil) both at home and abroad.

The Energy Information Administration (EIA) currently projects that world oil prices will increase from $14.50 per barrel to $16.50 per barrel between the second quarter of 1994 and the second quarter of 1995. This projection is based on two major assumptions. The first holds that worldwide demand for oil will jump by one million barrels per day as the Japanese and Western European economies recover from recent recessions, while "Pacific Rim" nations such as China continue to develop. The second assumption is that global oil production will remain fairly stable, with increases in output from Middle Eastern OPEC nations off-set by declining production from both the former Soviet Union and United States and stable production from non-Middle Eastern OPEC countries.(1)

As the United States economy continues to emerge from the recession over the coming year, domestic demand for fuel oil is projected to rise. Projected growth in employment, industrial output and gross domestic product of roughly 2% between 1994 and 1995 in the face of a stable oil supply will place additional pressure on prices. If next year's weather patterns follow recent trends towards cooler average temperatures, short-run demand for fuel oil, particularly in winter months, will increase further. The EIA forecasts that these shifts in global and domestic demand, supply, and weather conditions will increase the price of fuel oil grades two, four and six by respectively 5%, 9% and 13%, for a weighted average increase of 10% between 1994 and 1995.

Insurance Costs + 0.8%

After a period of substantial increases in insurance costs, the insurance market stabilized in 1988 and has been relatively constant since then. In 1994, the increase in insurance costs of .8% was significantly lower than the projected increase of 2.1%. The projected increase of .8% for the 1994 PIOC is based on the latest three-year average.

Utility Costs + 1%

Utility costs consist of charges for the use of electricity, natural gas, water and sewer service, purchased steam, and telephone service. The first three items account for over 95% of the utility index.

The utility index should register the second lowest increase among all of the PIOC components over the next year. Con Edison will impose the last of the three consecutive increases in electricity rates on April 1, 1994. It is also likely that both Con Edison and Brooklyn Union Gas will file for rate increases in natural gas and steam during the 1994-1995 PIOC period. However, after several years of double-digit increases in water and sewer charges, it is likely that there will not be any increases in water and sewer charges during 1995. Without increases in water and sewer charges, which account for more than 55% of the utility component, utility costs will increase by only 1%.

Con Edison estimated its last of three consecutive increases in electricity to be close to 2.2%, although the actual changes in total costs for electricity will also depend on the fluctuations in the fuel adjustment charge and various tax rates. In other words, the price of electricity may rise more or less than changes in rates.

In addition to higher electricity charges, rates for natural gas and steam should also rise over the coming year. Con Ed and Brooklyn Union Gas plan increases for gas service of 2.3% and 2.1% respectively. These figures are tentative, as the actual rates of increase will be determined by the Public Service Commission in June 1994, although this should not have a profound effect on overall utility costs.

Last year, after several substantial increases in water and sewer charges, Mayor Dinkins and the New York City Water Board froze the water and sewer rates for Fiscal Years 1994 and 1995.

Without an increase in water and sewer charges, the combined increases among the other three types of utilities will produce an increase of 1% in utility costs in 1995.

Parts & Supplies + 1.5%

Parts and Supplies is a very small component of the PIOC, with a weight of less than 3% in the 1993 index. According to the average growth observed in this component over the past three years, the cost of parts and supplies should increase by 1.5% over the coming year.

Replacement Costs + 3.2%

This component's relative importance in the PIOC (as measured by expenditure weights) has fallen steadily in recent years. In 1993, it accounted for roughly 1% of the entire price index. Based on average price increases witnessed over the past three years, replacement costs should rise by 3.2% between 1994 and 1995.


Notes

  1. "Short-Term Energy Outlook", Energy Information Administration, United States Department of Energy, First Quarter, 1994.

Change in Components of the
Price Index of Operating Costs
for Rent Stabilized Apartments,
April, 1993 to April, 1994

Taxes                    2.3%
Labor Costs              4.3%
Utilities Costs          2.1%
Fuel Costs              -0.5%
Contractor Services      0.9%
Administrative Costs     3.7%
Insurance Costs          0.8%
Parts & Supplies         1.0%
Replacement Costs        1.6%

Overall                  2.0%
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Change in Components of the
Price Index of Operating Costs
for Rent Stabilized Lofts,
April, 1993 to April, 1994

Taxes                    2.3%
Labor Costs              4.6%
Utilities Costs          3.0%
Fuel Costs              -1.5%
Contractor Services      0.9%
Admin. Costs, legal      3.3%
Admin. Costs, other      3.6%
Insurance Costs          0.8%
Parts & Supplies         1.0%
Replacement Costs        1.6%

Overall                  2.2%
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Change in Components of the
Price Index of Operating Costs
for Rent Stabilized Hotels,
April, 1993 to April, 1994

Taxes                   -0.5%
Labor Costs              4.6%
Utilities Costs          0.1%
Fuel Costs              -1.1%
Contractor Services      2.7%
Administrative Costs     3.6%
Insurance Costs          0.8%
Parts & Supplies         1.0%
Replacement Costs       -1.5%

Overall                  1.2%
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