Utility Billing Alternatives in Master Metered Apartment Buildings

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1 Background Paper Number: 27 Date: January 11, 1999 Updated: June 1, 2009 Utility Billing Alternatives in Master Metered Apartment Buildings I INTRODUCTION Asking that tenants conserve water is not unreasonable. In fact, it is consistent with the policy of the State of California that provides the waste or unreasonable use or unreasonable method of use of water be prevented. (Water Code 100.) Rental property owners have learned that applying this policy to tenants, can result in significant savings of both water and money. However, methods and devices used by rental property owners and utility billing companies have come under fire recently. Utility billing companies have entered the service market in California to help owners recover their costs from tenants for utilities (water in particular) that were previously considered part of the rent. While individual units in apartment buildings are generally sub-metered or individually metered for electricity and gas, most apartment units built before 1980 are not sub-metered for water and sewer use. Utility billing companies have, therefore, devised allocation programs to help rental property owners recover the cost of water from their tenants. Two types of systems or devices are used: (1) Ratio Utility Billing Systems (RUBS); and (2) sub-meter devices that are attached to each individual unit to measure water use. Some sub-meters are designed to measure the total water flow out of the unit and others are designed to measure only hot water use. Under RUBS the total water usage in a building is divided between the individual units and is based on factors such as number of fixtures, unit size, number of occupants, etc. RUBS is particularly attractive to owners because it provides a way to recover the cost of utilities without installation and administration of a potentially expensive sub-metering system. Water savings resulting from RUBS, however, may not be as effective as some owners desire because tenants do not have a direct incentive to reduce usage, since calculations do not take into consideration one specific tenant s conservation efforts. Page 1

2 RUBS has recently become the subject of unfair business practice lawsuits throughout the state. On the other hand, use of a legitimate sub-metering system can result in water savings because tenants have an incentive to reduce their personal usage, including their willingness to report water leaks to management. Use of these allocation methods resulted in numerous complaints by tenants to the California Public Utilities Commission (CPUC) who are concerned about water and sewer bills they received from property owners or utility billing companies. In response to these complaints and inquiries, the PUC opened an investigation of water and sewer charge allocation methods used by multi-unit apartment complex and mobile home park owners. A decision from the PUC was handed down in May of This paper provides a review of the current laws and regulations in place in California concerning utility services and charges. It also provides an overview of the regulations in place in other states. And, finally, it includes information about the recent investigative order issued by California s Public Utilities Commission. II CALIFORNIA LAW: BILLING TENANTS FOR WATER USE Under California law, a property owner or other company that provides gas, electricity, or water and requires tenants to pay for these utilities, without use of sub-meter, is a public utility and subject to the regulations of the Public Utilities Commission. If appropriate sub-metering is used, the owner is exempt from the CPUC s regulations. Sub-metering systems, however, are still regulated by the Department of Food and Agriculture, Weights and Measures Division. In several recent opinion letters, the PUC has expressly disapproved allocation methods other than legitimate sub-meters. 1. Sub-metering An owner or billing company that charges tenants for utilities based on sub-metering, is exempt from regulation by the CPUC so long as tenants are not charged more than they would pay if billed for the utility directly. The accuracy of a sub-metering system, however, is regulated by the Weights and Measures Division of the Department of Food and Agriculture. Section of the Business and Professions Code provides as follows:... It shall be unlawful to sell or use for commercial purposes any weight or measure, or any weighing, measuring, or counting instrument or device, of a type or design which has not first been so approved by the department; provided, however, that any such weight, measure, instrument, or device in use for commercial purposes prior to the effective date of this act may be continued in use unless and until condemned under the provisions of this code. 1 Page 2

3 a. Water sub-metering systems In 1983, the California Public Utilities Code was amended to exempt apartment owners who provide water through a qualifying sub-meter system from regulation as a public utility. (AB 1005 (Costa 1983)) The bill analysis stated that the bill was simply codifying existing PUC practice, which was to treat residential sub-metering systems as nonutilities. The exemption reads: Any person, that maintains a mobile-home park or a multiple unit residential complex and provides, or will provide, water service to users through a sub-meter service system is not a public utility and is not subject to the jurisdiction, control, or regulation of the commission if each user of the sub-meter service system is charged at the rate which would be applicable if the user were receiving the water directly from the water corporation. PUC This exemption only applies if the user (the tenant) is charged at the same rate as if he/she received the water directly from the water corporation. The PUC has issued an opinion stating that tenants cannot be charged a startup fee or other ancillary charges in connection with a (water) sub-meter service system. By example, a company hired by an apartment owner charged meter fees and new account fees in addition to charging for sub-metered water at a higher rate than charged by the local water company. All of these charges were found illegal by the PUC since state law only allows an owner to charge for water at the same rate that would be applicable if the user received water directly from water corporation, and the statute does not authorize any additional fees. The CPUC required the billing company and the owner to refund all excess payments with interest. PUC CPUC file No. 650 Opinion letter re: Foxchase Apartments & National Water and Power 11/20/97 letter by Dean J. Evans, Director Water Division. In summary, according to the PUC, an owner who sub-meters cannot (1) charge tenants for more than their actual usage, (2) charge a higher rate for a tenant s actual usage, or (3) charge additional fees to cover administrative costs. b. Regulation of Sub-metering Systems by the Department of Agriculture Although the Public Utilities Code clearly exempts residential water sub-metering systems from its jurisdiction, water and other utility sub-metering systems are regulated by the Department of Agriculture s Weights and Measures Division. California law states that a person is guilty of a misdemeanor if he/she uses: for determining the charge for a service any measuring instrument which is not kept at a fixed location, which does not bear a current or previous year s seal, and which, upon test by the sealer, is found to be incorrect, unless a written request for an inspection of the measuring instrument has been made to the county sealer. However, the use of any measuring instrument used by a public utility in connection with measuring gas, electricity, water, steam or communication service subject to the jurisdiction of the PUC is exempt from this chapter. (Business and Professions Code Section ) Page 3

4 This section of the Business and Professions Code is enforced by the Weights and Measures Division. As a result, sub-metering systems run by a utility such as PG&E are regulated by the PUC. However, since apartment owners and utility billing companies with sub-metering systems are not public utilities that are subject to the jurisdiction of the PUC, they are regulated by the Department of Agriculture. State law allows an annual charge to be levied for the inspection or testing of submeters. Business and Professions Code Section (g) allows annual fees as follows: (g) For marinas, mobilehome parks, recreational vehicle parks, and apartment complexes, where the owner of the marina, park, or complex owns and is responsible for the utility meters, the annual fee shall not exceed sixty dollars ($60) per marina, park, or complex, and a fee of up to two dollars ($2) per device per space or apartment. Marinas, mobilehome parks, recreational vehicle parks, and apartment complexes for which the above fees are assessed shall be inspected and tested as frequently as required by regulation. For more information about water submeters and steps to compliance see CAA s overview at: ATE=/CM/ContentDisplay.cfm 2. Use of Other Utility Allocation Systems: RUBS The CPUC is not likely to permit the use of other allocation systems for utilities originating from CPUC-regulated companies. The CPUC has opined that if an owner gets the water, electricity, etc., from a regulated utility it must be provided in accordance with that utility s tariff. The tariffs of CPUC regulated utilities1 (which have the force of law) forbid them from providing utilities to owners who resell the service by breaking out utility expenses on an apartment by apartment basis, other than through sub-metering. While not in concert with the May 2001 CPUC ruling, the CPUC staff issued a memorandum indicating that owners cannot bill their tenants for utility services based on square footage, fixture counts, or any other factors applied to the property s total consumption. See Opinion Letter from CPUC Principal Counsel Hallie Yacknin to Ken Lake, Division of Measurement Standards (Sept 15, 1998). If an owner receives the services from a non-cpuc regulated utility, such as a city, county, or other publicly-owned municipal utility, that utility s allocation system and rate requirements will apply. For example, the City of Santa Clara does allow allocation programs, but no service or handling charges are allowed. Owners who receive a utility service from a non-cpuc regulated utility should contact that utility to determine appropriate allocation methods and rates. 3. California Legislation In 2000, Senator Debra Bowen (D-Redondo Beach), introduced SB 2127 with the stated intent to quell the primary frustrations expressed by tenants over water billing practices within the rental housing industry. SB 2127 provided that a property owner who Page 4

5 allocated water and sewer charges for each tenant s dwelling unit (but who did not provide separate water and sewer meters for each unit) was required to disclose any billing arrangement in a lease or rental agreement with tenants. Owners would have been required to disclose in any advertisement that water and sewer costs were billed separately from rent. SB 2127 included intent language, providing that it was not the intent of the Legislature to condone or authorize the practice by apartment owners to bill tenants for water service without providing separate metering for the individual apartments. The bill was eventually pulled by the author after considerable opposition was registered by consumer organizations and individuals who were concerned that the bill would, in fact, condone existing practices by owners who bill tenants for water when no sub-meter existed for each rental unit. In 2002, a second bill AB 12XX was sponsored by the California Apartment Association and authored by Assembly Member Joseph Simitian (D-Palo Alto). It gave rental property owners who owned master-metered apartment buildings the authority to allocate water bills to tenants based upon the number of tenants or the square footage of each unit (RUBS). The bill was never heard in the Assembly due to a disagreement by third party billing companies over the language of the bill. In 2007, CAA introduced AB 1173 (R-Keene), that bill, like AB 12XX intended to set standards for the rental housing industry as it related to RUBS. The bill died in the Assembly Appropriations Committee. III PUC INVESTIGATION Initial Investigation - On December 17, 1998, the California Public Utilities Commission announced it would open an investigation into the activities of multiple unit residential complexes, mobile-home parks, and their respective billing agents with respect to the charges and collection of money from tenants or other end users for water or sewer services. The investigation was instituted in response to escalating inquiries from legislators, public agencies, and newspapers and several informal and one formal complaint from tenants who were billed for water and sewer service by apartment owners or their authorized billing agents. The CPUC Water Division conducted a preliminary investigation and wrote to several apartment owners and billing agents advising them of the law and requesting their compliance. These letters were based on the CPUC s interpretation of the code sections discussed above. Initially, the CPUC s interpretation was that: (1) apartment owners and their billing agents who charge for water service were public utilities under the Public Utilities Code 216 and 2701, unless they are exempt because they use an appropriate sub-metering system and (2) that any apartment owner or his/her billing agent charging for sewer service was a public utility since the California law does not authorize any private entity to charge for sewer service. The CPUC staff concluded that any rates charged by the owners and billing companies for water services (unless through exempt sub-metering) and all sewer service rates were unlawful because none of the owners or billing companies were certified public utilities. Page 5

6 CPUC RULING MAY 16, 2001 After two years of investigation, and two preliminary orders, the PUC issued its final rule in May of The PUC concluded as follows: If a private entity is selling (or reselling) water or sewer service for compensation and it has dedicated its property to public use as outlined in case law, it falls under the CPUC s definition of a public utility. 2 If a public utility is not declared to be a public utility, then the CPUC has no jurisdiction to regulate its rates and services. On the other hand, 80 percent of potable water comes from water providers, such as municipal public utilities, municipal utility districts, etc., none of which the CPUC regulates. These utilities have jurisdiction over private entities who resell and/or distribute water. The CPUC jurisdiction is decidedly limited when it comes to the protection of tenants from allegedly unfair charges targeted for water or sewer service imposed by landlords whose practices are not presently being scrutinized by any other government entity. Virtually all multi-unit apartments that resell water service quality as public water systems subject to the panoply of Safe Drinking Water laws and regulations administered by the Department of Health Services. (Health and Safety Code Section (h). 3 (Endnotes) 1 This does not apply to cities counties and other publicly-owned municipalities that provide utility services 2 The Supreme Court has held that an office building owner was not acting as a public utility though he maintained boilers, pumping engines, hot water heaters, and other equipment in the office building basement for the purpose of supplying tenants with light, heat, and hot water service. Story vs. Richardson (1921) 186 Cal The Commission held that owners of a tract of land containing rental homes had not dedicated their facilities to public use by providing water and sewage services, for a fee, only to their tenants. Barnes v. Skinner D slip op. at 8-9 (1976) 79 CPUC California s Safe Drinking Water laws describe the Legislature s intent to improve drinking water quality. Under this Act, a Public water system means a system for the provision of water for human consumption through pipes or other constructed conveyances that has 15 or more service connections or regularly serves at lest 25 individuals daily at least 60 days out of the year. A public water system, therefore, retains part of the responsibility for ensuring water quality to the levels required by state and federal law. Page 6

7 STATE COMPARISON - RATIO UTILITY BILLING SYSTEM (RUBS) & SUBMETER LAWS & REGULATIONS April 2006 State RUBS Submeters Administrative Fees Late Fees Common Area Deductions Other California Law is silent Yes No for Submeters Not Mentioned Not Mentioned Submeters are regulated by Department Of Weights and Measures. Submeters must be certified before use. Local counties govern annual fees and inspections of submeters. Connecticut Law is silent Yes Yes Late fee of $5 For Sub-meters New Jersey Law is silent In 2004 the State Board of Public Utilities ordered the Creation of a Sub- Metering Working Group to Consider Issue of Submetering Not spelled out in the law Extensive Regulations for customer complaint resolution. Monthly leak detection reports required. Property owners must provide Information about Conservation each year to tenants. N/A N/A N/A Submetering prohibited under current law for areas of the state not covered by municipal Utilities Authorities (MUH). about one-half of the State falls under MUA s, and they have the individual authority to make decisionss about submeters and RUBS. No known action at this time. Massachusetts While not specifically mentioned in the law, RUBS would not meet the definition for legal water billing Yes, as of December 2004 No service or Handling charges Allowed Not allowed Common areas must be Separately metered Owner must read meter on the day of tenant move in and move out. First and final bills must match manual read. Only new tenants may be billed. No billing at time of renewal. Non-payment of water bill is considered a breach of the lease. North Carolina RUBS Not Allowed Yes N/A Not allowed for submeter bills N/A Product of the 980 Ninth Street, Suite 200, Sacramento, CA (800)

8 STATE COMPARISON - RATIO UTILITY BILLING SYSTEM (RUBS) & SUBMETER LAWS & REGULATIONS April 2006 State RUBS Submeters Administrative Fees Late Fees Common Area Deductions Other Santa Clara, California Yes. Specific allocation formula mandated Minnesota Yes. Tenant must be given notice of total utility cost for the building Owner shall communicate the reasonable allocation method Texas Yes. Rental agreement must clearly state method of calculation. specific formula mandated Not Mentioned No service or Handling charges allowed Yes Attorney General has opined that fees are not allowed Yes No for RUBS 9 % Service Charge of costs related to submetering allocated to each submetered unit Not Mentioned Owner responsible for all water used for irrigation and other common area uses Within 30 days of request by the City, the owner must submit 4 consecutive quarterly water billing summaries for audit City may inspect and examine Owner s billing procedures from time to time Not addressed Not addressed Upon tenant request, owner must provide copy of actual utility bill for the building up to 2 years Yes. 25 % Deduction when no part of common area metered Tenants with lease of one year or more must be Given information about energy assistance (gas and electric) for low-income households 90-day rent freeze after submeters installed Owners who intend to Bill tenants for submeters or RUBS must Register with Conservation Commission Owner s records must be available for tenant Inspection Law Mandates specific information on bills to tenants Product of the 980 Ninth Street, Suite 200, Sacramento, CA (800)

9 STATE COMPARISON - RATIO UTILITY BILLING SYSTEM (RUBS) & SUBMETER LAWS & REGULATIONS April 2006 State RUBS Submeters Administrative Fees Late Fees Common Area Deductions Other Seattle, Washington Yes. Advance 90-Day Written Notice of Methodology Billing Practice must also be posted in conspicuous place Yes. Must inform tenant of required access to the unit to repair, maintain, and read meter Bills must show meter reading; current and previous $2 per utility per month not to exceed a cumulative service charge of $5 per month $5 per month Plus interest at a rate not to exceed 1% per month tenant can pay up to 30 days after receipt of bill Violation of law considered deception and fraudulent business practice Owners prohibited from disclosing to a 3-Party Billing Company a tenant s personally identifiable information. owner can provide name of tenant 2-Year Record Retention. Must be available to tenants upon their request Third Party Billing Companies must be registered and licensed to do business. bill must include specific information Virginia Yes. Must be covered lease Rockville, Maryland Yes. Specific lease language mandated. Specific formulas mandated Yes. Must meet requirements of state Corporation commission Actual costs of administrative Expenses and Billing Charged by 3-Party Provider, including, monthly Billing Fees account Set-Up Fees account move-out charges Up to $5 if tenant pays later than 15 days of mailing $1 per unit per month Yes. Seasonal common area usage must be deducted; 15% landscape 10% laundry rooms 10% swimming pool & other Amenity that uses water Upon request of tenant, Owner shall test the Energy allocation Equipment without charge every 24 Months. Owners must provide tenants with a report 10 days after test. Tenant may inspect and copy owner records. Owner may charge fee to copy. Upon request of Tenant, the owner must make specific records available: current and previous year Mandated information for each utility bill Owner required to Register with Housing department Product of the 980 Ninth Street, Suite 200, Sacramento, CA (800)

10 STATE COMPARISON - RATIO UTILITY BILLING SYSTEM (RUBS) & SUBMETER LAWS & REGULATIONS April 2006 State RUBS Submeters Administrative Fees Late Fees Common Area Deductions Other Arizona Yes. Rental agreement must contain a disclosure that lists utilities that are charged separately and must specify the amount of the administrative fee. Yes Yes. Actual charges imposed by billing company on the owner plus an administrative fee for the owner s actual administrative costs. Silent Silent The bill format for each billing period shall: separately state the costs of the charges for the period together with the opening and the closing meter read and the dates of the meter readings; show the amount of the administrative fee. 90 days notice require for existing tenants before the owner can bills separately. May allocated per tenant; by square footage; per unit type; per number of fixtures; or any other method that fairly allocates the charges Georgia Yes. Must be disclosed prior to any contractual agreement. Yes Yes Yes Not spelled out in the law Owners granted authority to charge tenants for water so long as the total charges do not exceed total charges paid by the owner plus a reasonable fee for establishing, serving, and billing for water. Product of the 980 Ninth Street, Suite 200, Sacramento, CA (800)