Getting inside multifamily's utility management operation
- By Wendy Broffman
- Published June 2016
Whether you are a global warming believer or not, the national recognition of climate change means the multifamily industry is facing a myriad of advances in technology and new local, state and federal regulations, some of which carry penalties surcharges for noncompliance.
"In many states we're seeing an increase in the trend to mandate submetering for any residential and commercial new building construction. Around eight states already have the law in place, up from around three states five years ago," said Martin Levkus, VP and general manager of YES Energy Management, Inc., one of four Santa Barbara-based Yardi, Inc., platforms aimed at multifamily property owners. Yardi was founded 35 years ago and is one of the pioneers in the utility management field.
These jurisdictive actions mainly focus on geographical requirements. For instance, in the Northeast, electricity is mostly master-metered by a utility and submetered for each apartment unit, while water is submetered in the South, said Levkus.
Some states are proactive about legislating reductions in energy consumption, but some still balk at interfering with consumer protection rights.
"More often than not, legislation is drafted for the purpose of either energy conservation or consumer protection-but not both," said Jeffrey Peterson, EVP and general counsel of AUM, which opened its doors 22 years ago as a small regional utility conservation company focused on water, but soon expanded to offer resident billing, invoice processing and a full suite of energy management services for multifamily communities. Today AUM also serves the needs of student housing and commercial properties.
"If a bill is created for consumer protection, it may eliminate utility billing or at least severely limit the program. The result is legislation that appears to protect consumers, but does nothing to encourage conservation. Striking a balance between the two objectives can be difficult to maintain with many parties involved," said Peterson.
History of energy conservation
The issue of energy conservation emerged during the 1974 oil embargo energy crisis, when Congress enacted a voluntary program for improving energy efficiency in both new and existing buildings.
When the second energy crisis wave hit in 1979, Congress implemented mandatory energy efficiency requirements for buildings, but abolished the program in the mid-80s when crude oil prices fell, leaving efficiency regulation in the hands of local and state governments, where it largely remained until several federal bills were enacted.
The most recent federal legislation includes the Energy Policy Act of 2005, which mandated metering of all federal buildings by October 1, 2012, and the Energy Independence and Security Act of 2007 that required a 30 percent reduction in total facility energy use, relative to 2003 levels, by 2015. Under the same bill, metering for natural gas and steam will be required by October of this year. More are expected.
The impact of the energy crises changed the way utilities are consumed in the United States and forced owners to take a hard look at how consumption affects their bottom lines and decide how best to shift the burden of those costs back to the end-user-the residents-thereby nudging renters into taking responsibility for their own usage.
The energy crunch also gave rise to companies like AUM, YES Energy Management, Inc., Conservice, NWP and others-experts in the field of energy management and utility billing, whose goals are to help owners handle the inordinate amount of work involved in billing residents for utility usage and making sure residents are not overbilled, which can trigger a nightmare of consumer litigation.
These companies led the field in developing devices that would read usage from each multifamily unit and bill residents according to their individual consumption, thereby allowing the property owner to recoup the entire cost of a resident's energy usage within the unit.
The only two ways to pass back the cost of utilities to the resident are through either submetering or a ratio-type (RUBS) billing program that uses square footage or the number of people living in the unit as a basis for allocating costs, a system that is less accurate than submetering and does not take into account residents' personal usage habits, explains Aimee Cox, COO of billing services at Conservice, a firm that provides a broad range of energy management services to multifamily, single-family, campus and military housing, as well as commercial properties.
The latest trend
Included in the rent for years, like electricity was prior to the 1970s, water was the final utility to come under scrutiny in the mid-1990s, when increases in wastewater treatment costs put pressure on owners to shift those costs to the renter.
In states on the east and west coasts, current drought conditions and ensuing energy reduction mandates in those states, are adding to the pressure for owners to pass water costs on to residents and reduce their properties' consumption.
"Most multifamily owners would only retrofit for submeters where it is legally required and many states and counties allow for RUBS to be utilized as an alternative, avoiding the capital outlay for the retrofit," said Dimitris Kapsis, EVP and Chief Energy Officer of AUM.
Thanks to the increase in state and federal legislation that mandates submetering for any new construction, more multifamily owners than ever before are being forced to submeter.
"For areas without mandates, it still comes down to an owner's business decision. Sometimes they align with sustainability goals, but typically it comes down to a cost benefit analysis and ROI opportunity.
"While we are seeing some incentives to submeter (from utility companies and lenders), they don't provide enough opportunities to really elicit change," said Levkus.
He is seeing more incentives on the energy management side-like LEED certification on the entire building and energy efficient alliances-but admits they typically don't impact the decisions or higher cost to submeter.
"We are hoping in the future there are more incentives, not just mandates, to help drive decisions for submetering," he said.
In spite of the lack of incentives, Yardi Systems, Inc., parent company of YES Energy Management, considers energy conservation to be an important cause in the interest of industry operations, as well as environmental responsibility. The company believes that education and recognition will be a key to adoption of energy best practices. Accordingly, for the past two years, it has awarded energy grants to major industry organizations such as the National Apartment Association (NAA), Institute of Real Estate Management (IREM) and the Building Owners and Managers Association (BOMA) for commercial buildings.
"We have challenged these organizations with the mission of developing compelling education programs that will help real estate owners and managers understand the cost benefits of energy sustainability," said Matt Eggers, VP of energy management for Yardi. "As part of their charge, we also want to see industry awards and recognition for successful deployment of energy practices and reduction," he said.
All interested parties realize that submetering is the key to promoting conservation, said Conservice General Counsel Marc Treitler, who agrees that submetering mandates and even discussions of such mandates cause more owners to incorporate submetering into their designs.
"We see this in California currently where water submetering is not yet mandated but is a topic of heavy legislative activity," he said.
Texas was the first state to mandate water submetering followed by Georgia. Several larger cities have followed suit, including San Diego, Denver and Miami.
Last year, the governor of California made the concept of mandatory water submetering on new apartments part of his "drought package." The result was SB7, which is actively moving through the legislature. "On the gas and electric side, the concept of mandating metering to promote conservation has been a theme since the 1980s, when many states enacted mandatory legislation to combat the high energy prices," said Treitler.
Michael Foote, Director of Regulatory Services for NWP, explained that his company is involved in about five or six pieces of legislation each year typically focused on mandating submetering on new construction at a future date.
"But, we have to defer to our partners in the operation and management of multifamily. We don't want to impose duties on them they don't want to have imposed. Currently there is legislation being worked on in Ohio and California and another bill that was signed into law in Florida, as well as regulatory actions in New Jersey and Connecticut-all aimed at fairly getting a reduction in utility usage," said Foote, whose 27-year-old energy management firm was recently acquired by RealPage.
AUM also has been working on more balanced legislation across a number of states, especially in California, given the state's severe drought conditions.
"We are helping to drive legislation that will promote submetering to encourage conservation, while protecting tenants through setting billing limits and requiring information disclosure," Peterson said, referring to California's SB7, the senate bill that would require the installation of water meters in each unit of newly constructed apartments.
Passage of the bill has failed several times in the recent past.
Foote explains that California, which is progressive about reducing water usage, is also progressive in the belief that there is a duty to protect the consumer and that happens at the state's weights and measures office.
"These are the same guys who regulate everything from berry baskets to milk jugs to taxi meters and gas pumps, including meters used in commercial