How to Avoid Common Mistakes in Submetering Applications

The Essentials of Submetering Applications

utiliVisor: How often do you find that building owners and property managers are unaware of the regulations around submetering?

McManus: Fairly regularly. Not all building owners and property managers are aware of the regulations around submetering, which can be a problem, for example from a timing perspective. In our view, it's always best if owners come to us about a year before a new construction project or a substantial rehabilitation project—one that has no residents at the time that they're working on their project. We like clients to get to us about a year out before they're going to be moving residents in, that way it gives us enough time to draft the application that will need to be submitted to the New York State Public Service Commission (PSC), which is the New York State governmental agency that's charged with overseeing submetered electricity to residential tenants. That gives the PSC and their staff enough time to review the application and issue a written decision.

But we've certainly had instances where property owners are unaware of the laws and regulations that govern submetering and come to us much later in that process. It becomes challenging to get their application drafted and approved in a time frame that works for them because some of the elements of the timing are statutory and they can't be dispensed with.

For example, after the application is filed with the PSC, it has to be noticed in what's called the State Register, and that starts a 60-day statutory comment period, when anyone can submit comments to the PSC about the application. So that 60 days needs to run before the PSC is even legally allowed to determine the petition. And then when you count the queue of other applications to the PSC, that's why we recommend that owners come to us about a year in advance to draft their application, get it filed, and get it approved.

It doesn't usually take a year, but out of an abundance of caution, that's what we recommend. So that way an owner knows pretty definitively that they should have their PSC submetering approval in hand before any residents start moving in, and that way they'll be able to start charging residents for submetered electricity on day one. Because if they wait, they're going to be in a situation where they can't charge residents for electricity and the building owner will be absorbing the cost of that electricity until they get submetering approval and are allowed to bill residents for it. So there's a strong monetary incentive to be out in front of that and get that done early to make sure you have that on day one.

utiliVisor: Are there regulatory obstacles owners might not be aware of?

McManus: I wouldn't refer them as obstacles as much as requirements. There's nothing that we can't help owners get through in order to be able to submeter electricity. But there are a number of boxes that certainly need to be checked in order to do it lawfully.

The first one we already talked about, that's the application to the PSC for submetering approval. That's a big piece of starting submetering approval, but it's not the only one. Owners also need to understand that there are other contractual and regulatory requirements that they will need to follow through on before they're going to be able to administer submetering.

For example, if it's a rental building, then the lease is going to need to refer to and disclose submetering to the residents and explain how billing is going to be conducted. And those types of disclosures, not only do they need to be made contractually in the form of the lease, but they also need to be made from a regulatory perspective as well. New York and its Public Service Law has a section entitled the Home Energy Fair Practices Act (HEFPA), and that requires certain disclosures to be made to residents about, for example, how the rate for electricity is going to be calculated. So not only do you need that PSC approval, but there are certain documents and disclosures that need to be provided to residents prior to submetering beginning in order for it to all be compliant.

Typical Factors to Consider

utiliVisor: Are certain types of buildings trickier than others when it comes to writing a submetering application?

McManus: Yes, there can be some elements that we need to be on the lookout for to draft the application the right way and have the right disclosures. One example would be if the building is heated electrically. So if it has baseboard electric resistance heating, that triggers some additional requirements that need to be satisfied in order to get PSC submetering approval. And it could also raise other issues with the availability of funds for low-income residents, what are known as HEAP (Home Energy Assistance Program) benefits. It’s good to have an attorney that's representing you in this process because it's not just taking a form and inserting a few pieces of information and a few documents and saying “Now I may submeter electricity.”

Some of those requirements are only going to be triggered if there are certain factors about the building, whether it's electric heat or certain factors about the residents, whether it's market rate versus rent-regulated or some type that only a lawyer is really going to be able to parse through the legal language in the statute, and then the regulations and then apply those to the particular facts for a building and its tenant population.

A part of this process that can be underappreciated by people is they think applying to submeter can be sort of cookie cutter and that anybody can do it. And that’s not the case because if you miss something because of the building’s make-up or the resident populations make-up, that could lead to some severe consequences down the road.

Staying Clear of Noncompliance Risks

utiliVisor: What are those consequences?

McManus: They are all set forth in the submetering regulations in New York, and they can range from the PSC withdrawing its approval for a building to submeter electricity to rebilling residents for their electricity at some other rate, or some other penalty provision proceeding with the PSC where they would impose civil penalties.

For example, one of the potential penalties that folks point to a lot and that's explicit in the Part 96 submetering regulations in New York is that if a submeter doesn't comply with the submetering regulations, then the PSC may reduce the rate that the building may charge to residents by up to 40% of what's known as the rate cap, which is the same rate that the local utility can charge to a direct-metered customer. That's a substantial loss on a month-to-month basis for every one of the units in the building.

utiliVisor: How might a property owner be noncompliant but not realize it?

McManus: One of the things we see a lot that owners don’t always realize – either because they don't get good advice or it falls off their radar - is that they need to provide certain disclosures under HEFPA to residents upon move in or the case of a rental renewal, and in all cases annually. So if those documents and disclosures are not being provided to residents, that can get you in that non-compliance situation we talked about where your rate cap could be reduced by up to 40%, or your ability to submeter electricity may be taken away from you in total.

Another one is that in New York there's a requirement that submetered electric bills be provided to residents within 30 days of the building receiving its bill for mastermetered electricity. Sometimes there can be a lag of 2–3 months from when that mastermetered electric bill comes in to when owners turn bills around to the residents. Technically speaking, under New York submetering regulations, that would be another instance of non-compliance. So there are a few ways that someone who is not fully informed by an attorney about the legal requirements for submetering in New York can get themselves in a noncompliance situation.

utiliVisor: What happens if a property is no longer allowed to submeter?

McManus: The PSC is not going to want master-metering with what's called “rent inclusion,” where electric is effectively baked into rent. That's no longer permissible in New York in new or rehabbed buildings. So you might be in a situation where you need to switch over to utility direct meters. That would come at significant expense because that likely would not be something that one could just plug and play in their building. 

That would be something that maybe would require building out a separate meter room and would have significant electrical expenses that go with that. It could also be that the electricity continues to have to be provided, but maybe at no cost to residents for some period of time. In short, the parade of horribles there can potentially be very bad.

Residential v. Commercial and Baking In Energy Usage

utiliVisor: Is there a significant difference in terms of legal requirements for buildings with residential tenants vs. buildings with commercial tenants?

McManus: There is. Typically, the PSC does not require approval in advance to submeter commercial tenants in a building, but submetering approval is always required for residential tenants. And the rate cap that exists for residential tenants does not exist for commercial tenants. That's considered to be an arm's length negotiation between the building owner and its commercial tenant.

utiliVisor: We recently talked with a developer with a lot of affordable housing where he was submetering. But what he said to us is, “I'm not getting paid at all. I'm thinking in the future of just charging them a flat rate or even just eating it and then taking the $120 I get from the city each month for utilities and kind of wrapping that into the rent cost.” What’s your reaction to that idea?

McManus:There are a lot of potential elements to that [situation], going from the age of the building and whether it's allowed to submeter and if so, what does their PSC approval order look like. And then the different regulatory constructs that that building may be under, whether it's from the PSC as a submetered building, whether it's an HPD (Housing Preservation & Development) or a DHCR (Division of Housing and Urban Renewal) building, and what other state or city agencies regulate that building and where different dollars may be coming for those residents for rent versus utility costs. But just at a very high level, the PSC has prohibited rent inclusion (i.e., baking electricity into the rent). So if someone was to do that, particularly where they've already been approved by the PSC to submeter electricity, that could raise a number of problems with the PSC and also potentially with the local utility. The utilities have tariffs that govern their actions that say that if a building – again this is at a very high level – that if a building is not individually metered with their meters, the utility’s meters or with submeters that have been approved by the PSC, then that utility can't serve the building. So if the utility became aware of a situation like that, it could say, and it would be justified, that it can't provide service to that building under its tariff. And it could potentially stop serving the building. Making a decision like that raises quite a few legal issues that an owner would want to consider before taking any steps along those lines.

That one is sort of the advanced class. In fact, once you start wrapping in other state agencies and a rent-regulated tenant population, then it becomes more of a multi-discipline review than it is just straight PSC submetering approval.

VRF & Submetering

utiliVisor: Do buildings with VRF for heating or cooling have different requirements? 

McManus: Yes, depending on the type of system and whether it’s going to be billed to residents and how. It may be that the system is not considered to be submetering in New York, which is good because then it may not implicate the need for PSC approval.

That being said, VRF does raise its own independent contractual issues that an owner is going to want to consider. For example, if you're going to have a VRF charge to residents, you can't just impose that on residents without some disclosure of that in the lease. So you're going to want to explain how heating and cooling is provided, how that use is going to be measured, and how it's going to be billed to residents. Even though it may not be submetering and may not be subject to PSC jurisdiction, it's definitely something that you are going to want to have lease language about so that you can lawfully collect that from residents.

It depends on the system, and again, this is where having a lawyer is helpful because we understand the law and we understand the technical elements of this, and we can put those together to help an owner determine whether or not PSC approval is required. Because there are VRF systems, for example, if there's a one-to-one ratio with outdoor compressors to the unit, that would be electric heat and would be submetering. But if it's shared by multiple units, it may not be submetering, particularly if it's the run time of the unit that's being measured as opposed to the electricity that's being consumed. It's a nuanced review that needs to be done, and it's one that raises certain legal and technical issues that have to be considered together in order to make the right determination about whether it's submetering and if it is getting PSC approval – and if it's not, still making sure that you have your contractual disclosures in place in the lease.

utiliVisor: Wasn’t there a project we worked on with you, John, that was VRF and it was not a 1:1 ratio? They (the indoor units) were sharing condensing units and you didn't call it submetering. You called it an allocation or a distribution because you didn't want to say use the term submetering for that setup.

McManus: Right. So in those in those types of instances, if we make a determination that the VRF system is not submetering, we don't want to use that word. And what we what we want to do instead is describe it for what it is, which is that the system is typically measuring the run time that a particular unit is consuming the services from the VRF and then that is being calculated into a rate. Typically, it's converted into a per kilowatt hour charge and then a rate is multiplied against that and then charged to the residents. But that's one that you want to be very careful with in terms of making both the initial determination about whether it's submetering or not and then making sure that you're describing it correctly to the residents of the building so that you can lawfully collect that charge from residents going forward.

utiliVisor: Would there be a legal issue if the lease language wasn't what it needed to be and it got too close to “submetering”?

McManus: Possibly, but the big issue would be if the lease language wasn't correct and you're sending bills to residents and someone decides they're not going to pay. And now you're going to need to potentially go to court to recover that amount. And when you get in front of the judge and the judge asks, “Where in the lease did you explain that this has a VRF and how the billed amount is going to be calculated?” If you're an owner and you can't point to where it's clearly disclosed and clearly described, you may not be able to recover that cost. 

Regional Variations in Submetering Regulation

utiliVisor: This last question is unfair, but just out of curiosity, do you have thoughts about how this [submeter regulations] works in the rest of the country?

McManus: Yes, and that's where it can get complicated for an owner, particularly if you have properties across several states, because submetering varies quite a bit from state to state and in some cases even city to city.

I'll give you an example. New York requires PSC approval prior to commencing the submetering of electricity to residential tenants. But there are some states, like Massachusetts, that outright prohibit submetering electricity. They can only be billed by the utility via direct metering. So it would be easy for property owners if everything was uniform across the country, but unfortunately it's not. And it varies quite a bit from whether it's permissible to submeter, whether it's impermissible, and then as you start getting into the details, like the rate cap, that can vary quite a bit from state to state as well.

In New York, we allow up to the local utility’s direct-metered rate and then there are other states that can get a little more granular and say you have to justify what your administrative costs are and you can only charge up to that amount. That’s why it one should consult with a knowledgeable attorney in any state where one is looking to develop a property that’s going to have residential electric submetering to ensure that it is being done right in that state or that locality. It's the old saying “penny-wise, pound foolish” if you don't take the steps that you should, because the long-term consequences can be severe.

*About John McManus

John McManus is a partner at Harris Beach Murtha with 20 years' experience in energy regulatory compliance. 

Learn more about the energy work of Harris Beach Murtha.