Subscribing to Submetering

by Jeffrey Steele

Image by mraybin/iStockphoto.com

At the 60-unit Cheverly Crossing in Hyattsville, Md., owners were vexed by high utility spending on water, sewer, electric and gas. The owners called on a submetering maker, H2O Degree, for utility submetering devices. By spurring resident conservation and leak reporting, the submeters in short order enabled the property to cut utility costs in half.

The growing trend of submetering offers a wide variety of benefits, among them utility conservation, a reduced administrative burden, stabilized rents, decreased operating costs, a higher property value and improved cash flow.

And a number of noteworthy submetering developments with national ramifications have taken place in the last several months.
In early March, the IRS issued a combination of final and temporary regulations on submetering for LIHTC housing. They allow owners to submeter and bill for property-generated energy, which isn’t provided by utilities. Charges to renters are regarded as part of the utility allowance, as if the resident were a customer of record with a utility. These charges are treated like submetered water and sewer charges, allowing owners to use a unit’s consumption and costs to calculate utility allowance.

The IRS declared that at regulated properties, water and sewer services to residents can feature a submetered methodology, in which the amounts are part of the utility allowance. Or they can use a Ratio Utility Billing System, or RUBS, approach, in which the amounts are regarded as part of gross rent.

In the meantime, the National Conference of State Legislatures weighed in on submetering by declaring the practice can be managed by non-electricity-, gas- or water-producing third-party entities that resell utilities to customers behind the utility meter.

Utility submetering can also be the installation of an additional meter on the customer side of a utility meter to obtain data about a specific end use or uses inside a facility. Utilities may install these meters on specific appliances as part of utility-managed interruptible service rates or demand response.

“Most times, the requirement to install submeters is driven by regulations of the municipality,” noted Barney Pullam, vice president of business process with Chicago-based Waterton, which owns and manages more than 20,000 units from Stamford, Conn., to San Diego. He noted that regulations have changed over the years, but “some states and municipalities now require that if a property wants to bill back the utility, the property has to do submetering.” He pointed to North Carolina, which does not allow an owner to bill back water and sewer without submetering.

In fact, statutes, regulations or rulings govern utility submetering in 22 states and three counties, as well as Washington, D.C. A number of states—among them Alabama, Arizona, California and Texas—have separate provisions for water and electricity, while at least three states—Alabama, Connecticut and Maryland—require approval from a utility commission for some submetering policy components.

Sunshine states updates
A law enacted in Florida in July and proposed legislation in California would impact property owners’ approach to submetering in two of the nation’s most influential states.

As a result of Florida HB 491 passing the House Regulatory Affairs Committee in February and the resulting law going into effect on July 1, Florida apartment owners whose properties are individually metered are a step nearer to exemptions from utility regulations.

The law specifically exempts from regulation as a utility any person reselling water service to tenants or to individually metered residents at prices that do not exceed the purchase price of water plus the actual cost of meter reading and billing, capped at 9 percent of the actual cost of the service.

The Florida Public Service Commission now regulates rates and service of water and waste water utilities in 37 of 67 counties. A study committee found customers such as apartments and condominiums have little investment in equipment and lines needed for water service, and don’t have to be regulated by the PSC. As a result, apartment owners should find it easier now to submeter their properties, particularly if using third-party billing companies.

On the other hand, the California Legislature has produced submetering legislation adverse to the apartment industry. Introduced in 2015 and reintroduced in 2016 by State Sen. Lois Wolk (D-Davis), SB 7 would require submeters for new construction, despite rent control that keeps owners from recovering costs associated with water use.

The Water Measurement Law requires every water purveyor to require, as a condition of new water service on or after Jan. 1, 1992, installation of meters to measure water service. SB7 would add to the Water Measurement Bill the following requirement: Water purveyors that provide water service to multi-unit residential or mixed-use structures with residential units constructed after Jan. 1, 2018, would have to measure water quantity to each dwelling as a condition of new service and permit measurement to be by individual meters or submeters.

The legislation would not require owners of existing buildings to install submeters for dwelling units. It does address the maintenance of submeters, as well as the billing of water service by property owners or third-party billers and notice and disclosures to renters. The state legislature sent the regulation to the governor’s desk on Aug. 31.

The upside
Submetering offers several benefits. It allows the owner to pass on to residents “those expenses that have been increasing and are out of the control of the landlord,” said Mark Durakovic, principal of third-party property management firm Kass Management, whose portfolio consists of more than 9,000 residential units in Chicago. And since residents pay only for what they use and no more, the goal of conservation is advanced when residents realize their usage levels will be reflected in the amount they pay.

About 40 percent of Waterton’s communities use submetering systems, particularly for water and sewer, Pullam said. He listed conservation as a primary reason for submetering, as well as “to recapture the property owner’s expense for the residents’ usage.”

Water is the utility most likely to be submetered, Pullam said, estimating that 85 percent of rental properties constructed during the current boom are submetered. That is followed by gas and then electricity, which often is already being submetered by the utility provider.

Submetering is more likely to be installed in new developments, according to Julie Johnson, senior vice president & director of management services for Chicago’s Draper & Kramer, which manages 10,000 apartments in Minneapolis, St. Louis, San Antonio and Chicago. “It’s more cost-prohibitive in the older buildings.” On average, installing submetering in buildings under construction runs about $150 a unit, Pullam estimated, whereas opening up existing walls could double the cost.

“The other challenge is in high-rises,” he said, since “there may be multiple points of entry where water is coming in to feed an apartment,” with water running up the risers.

Originally appearing in the October 2016 issue of MHN, the Energy Issue.