Controlling Utility Costs

Landlords search for new methods to pass water, energy expenses back to tenants

• How to pass back the costs
• Technology spurs submetering trend
• How to deal with resistance from tenants

In the first half of 2001, apartment owners were breaking into a sweat over the prospect of rapid increases in energy costs. By the end of the year, that threat had faded, but owners were still looking for ways to control their costs for energy. Meanwhile, the quest to manage costs for water continue unabated as prices for that essential commodity continued to rise.

For thousands of owners of older apartment buildings with central heating and cooling, the reduction in fuel and electric costs in the last half of 2001 did not eliminate the need to conserve or to find ways to pass back energy costs to tenants.

Demand for help from owners with natural gas-fired boilers increased dramatically in 2001, said Phil Neeves, vice president of Energy Billing Systems, Inc., in Colorado Springs, Colo. The demand for “energy cost recovery” methods also rose for National Water & Power, which has previously mostly focused on water submetering, said Bill Griffin, vice president and general counsel of the Santa Ana, Calif., firm.

Submetering of water and sewage usage has been adopted by a large number of apartment owners in recent years, but, until 2001, there had been little demand for ways to pass back central heating and cooling costs to tenants. Now, Energy Billing Systems and National Water & Power are hustling to respond to the demand.

There is “enormous interest” in doing something to recover heating and cooling costs, said Griffin. The first landlords to try to implement such measures are generally the same ones that have pioneered water metering for individual units, he added. Of the 25 million apartments in America, he estimated that one-third could make use of some energy cost recovery system.

How to pass back the costs

There are only two ways to pass back those costs. The first is to estimate each tenant’s usage and share of costs based on the square footage of the apartment or number of occupants. This is sometimes called the Ratio Utility Billing System or RUBS. This has one major drawback: With costs going up as fast as they were, tenants generally did not like being asked to pay substantially more money based on nothing more than an estimate of how much energy they actually consumed.

The other method is to measure actual usage. In the case of water or in-unit gas-fired heaters, landlords can install meters to measure the actual flow of water or gas. But where there is a central boiler and chiller, it’s necessary to use “check metering,” Neeves said. Instead of measuring actual utility use, this method relies on measurements that can be used to closely approximate actual usage.

The advantage is that it’s far more accurate and easier to get tenants to accept. The downside is that it involves significant upfront equipment installation costs.

For its clients, Energy Billing System measures the time that the fan runs in each apartment and the temperature of the water in the heating or cooling unit. It then uses this data to estimate actual usage of gas for heating and electricity for central cooling. Neeves said the resulting calculations are generally within plus or minus 6% to 8% of actual consumption.

He estimated the cost of installing such a system at $180 to $250 per apartment, plus monthly service charges for meter reading and billing of $2.60 to $3 per unit per month. He said the payback period could be as little as six months, depending on how an owner’s leases are structured and how quickly they can be revised to require tenants to pay these costs.

National Water & Power installed a system for measuring heating and cooling use for a major national developer at a luxury high-rise project in Bethesda, Md. The system measures “fan run time” and relay data by radio. National Water & Power will use the data to calculate each tenant’s share of costs and send bills.

Most of National Water & Power’s customers use RUBS as a way to pass back water charges to tenants. In most states, this doesn’t present a problem, but in some states, landlords using the system could face regulatory obstacles.

Griffin noted that in Texas, state law explicitly gives landlords the right to pass back costs through RUBS or metering. This eliminates any uncertainty about the regulatory situation that could deter owners from installing submetering or check metering equipment, he said.

Technology spurs submetering trend

The fast-growing trend toward water submetering in large apartment complexes owes its expansion to new technology, says Griffin. “Automatic meter reading is the technology that made this business possible for apartments.”

Submetering is installing individual water meters in each unit so that tenants may be billed for their consumption. When meter readers had to enter tenants’ apartments, the concept never caught on, because of privacy and liability concerns. All that changed in the late 1990s, with the advent of radio transmitter-based meter-reading systems.

Automatic submetering works like this: a Pulse Meter Transmitter is attached to the face of each unit water meter. (Those meters can usually be hidden in closets.) The transmitter converts the data from frequent, regularly timed readings to a digital signal. Repeaters, situated around a large complex, receive those signals from the transmitters and amplify them for transmission to a central receiver. The receiver converts the signals to data and relays them to a computer, where they generate monthly tenant water bills.

This new technology makes members of the submetering trade association, the National Submetering and Utility Allocation Association (NSUAA) in Highland Park, Ill., optimistic. The NSUAA has even created a new membership category for apartment owners and managers.

For more information, call (847) 681-8475 or write to NSUAA, 1866 Sheridan Road, Suite 210, Highland Park, IL 60035-2545.

“Soon, almost all new (large apartment building) construction will be sub-metered for water,” predicts Marc Treitler, 2000-2001 president of the NSUAA, and general counsel of Viterra Energy Services, San Diego. (Viterra and NW&P are the two largest nationwide providers of water submetering and ratio-analysis bill systems. The industry also includes more than 20 smaller players.)

Submetering is coming on particularly strong in three large, fast-growing states with significant water supply problems: California, Texas and Florida. Reports from apartment owners who have tried submetering have been “fantastic,” says Barbara Vassallo, director for state and local policy at the National Apartment Association, Arlington, Va.

Adapting buildings smaller than 50 units may be impractical, but, as of 1996, about 46% of America’s apartments, or 9.4 million units, were in buildings of at least 50 units, according to the National Multi Housing Council. Already, about two million units are sub-metered, although that includes condominiums and mobile homes in parks, as well as conventional apartments, Treitler says.

Even many apartment buildings constructed with no thought of metering individual units can be profitably retrofitted, although the installation may be more expensive and complicated than new construction. But in some older buildings, especially ones in which several different pipes may feed a single unit, retrofitting may be prohibitively expensive.

Vendors’ charges to apartment owners range from $100 to $200 per installed meter for new construction to about $300 per meter for retrofits, plus $2 to $4 per month meter reading, billing and collection charge. (Some jurisdictions, such as Oklahoma, Texas, and Colorado Springs, Colo., bar apartment owners from passing along monthly administrative charges in water bills.) To sweeten the sale, some vendors finance installation of the meters for their apartment customers.

For apartment owners, the economics of submetering can be compelling. Griffin postulates a “typical” 285-unit complex, with average per-unit water charge of $27 a month for 130-160 gallons per day. Without sub-meters, water expense is $92,000 annually.

Allowing $19,000 for common-area water, which the landlord will continue to pay, submetering can save up to $73,000 annually. Griffin projects that submetering can actually recoup about $60,000 of that. In this example, if the landlord’s initial investment is $210 per unit for water meters and account set-up, and he pays $3 a month per unit for billing, collecting, and metering, he’ll recoup his investment in about 14.4 months. Meanwhile, tenants may use 1 to 6 million gallons less annually.

But submetering has had some embarrassing setbacks, as even the industry itself acknowledges. In Ridgeland, Miss., for example, submetering systems were installed on three new apartment complexes, when the state public services commission nixed the owners’ authority to issue individual water bills. The state takes the position that submetering makes an apartment owner a public utility, subject to regulation. The public service commission became involved because one of its employees was a tenant in one of the buildings.

Griffin says such problems are rare. “This business is relatively unregulated nationwide.” Lobbying is a high priority for the NSUAA, to make sure it stays that way.

Lately Arizona, Georgia, Minnesota, Oklahoma, and Oregon have established submetering laws that are acceptable to the industry, Treitler says. “We have no problem with reasonable regulation.”

How to deal with resistance from tenants

If you are considering submetering, you may encounter tenant resistance to paying water bills. The industry acknowledges that submetering can be a tough sell to tenants in markets with a good supply of unmetered competitors. But as water service costs rise rapidly across the country, more and more landlords take the plunge, and “as it becomes more and more acceptable, then it’s not a deterrent to tenants,” Treitler says. Educating tenants about water-saving measures also can help.

Treitler says the collection rates for apartment sub-meter water bills are more than 90%. But it’s the owner, not the submetering company, that has to absorb uncollectables. The industry warns landlords not to turn tenants’ water off for failing to pay their bills. (Some jurisdictions prohibit that anyway.) Instead, landlords can include provisions in their leases entitling them to withhold security deposit refunds for tenants who haven’t paid their bills.

When submetering is impractical, RUBS – Ratio, or Resident, Utility Billing Systems – may work out instead. RUBS bills tenants for water use based on formulas that may take into account relative square footage, the number of occupants, and/or the number and nature of plumbing fixtures in each unit. Ratio analysis has long been used to allocate utility charges in shopping malls.

RUBS, often offered by the same companies that provide submetering billing, cost apartment owners about $4 per month per unit, after a $10 per unit setup fee. Because the cost allocations are estimates, not measurements, some apartment owners shy away from them, and some cities and the state of North Carolina outlaw them. Nevertheless, Griffin says experience shows that the tenant-by-tenant charges resulting from RUBS closely track those from submetering.

By promoting water conservation, submetering can have important social benefits that transcend an apartment complex owner’s profit-and-loss statement. Besides stimulating tenants to use less water, submetering can help detect wasteful leaks. And, even where water is generally plentiful, east of the Mississippi River, some municipalities have had to impose building moratoriums because of insufficient sewage treatment capacity. Montgomery County, Md., is one such case. “A big sewage-treatment plant can run $100 million,” Griffin says.

Water submetering may be one of the last steps in the trend toward growing tenant responsibility for utility payments. “Fifty years ago, tenants paid only for telephones,” Griffin says. Nowadays, tenants pay an average of 85% of their utility costs: electricity, gas, cable and telephone; owners average only about $30 per month per unit for garbage and water/sewer service. “Owners like the idea of making residents responsible for something they can control,” Griffin says. They “want to be out of the utility business.”

Return to Table of Contents

Unauthorized duplication of articles in Affordable Housing Finance, Apartment Finance Today, or HousingFinance.com is strictly prohibited. All rights reserved and all copyrights held by Alexander & Edwards Publishing, Inc. Reproduction of this publication in whole or in part in any form, on paper or electronically, without written permission from the publisher is prohibited by law.