Friday, December 11, 2009

New York City Approves Plan for More Submetering

The New York City Council adopted a new law that adds to the landlord impetus to shift rising electricity bills to tenants through submetering. The new law encompasses large commercial tenants, such as street-level businesses in residential apartment buildings. The new City legislation defines its coverage as follows:
COVERED BUILDING. As it appears in the records of the department of finance:(i) a building that exceeds 50,000 gross square feet (4645 m 2 ), (ii) two or more buildings on the same tax lot that together exceed 100,000 gross square feet (9290 m 2 ), or (iii)two or more buildings held in the condominium form of ownership that are governed by the same board of managers and that together exceed 100,000 gross square feet (9290 m2).
Most large New York City apartment buildings would exceed the 50,000 gross square foot threshold in the law.

The only specific exemption from the "covered" buildings in the law is for real property classified as "class one pursuant to subdivision one of section 1802 of the real property tax law." That law defines "class one" as one, two and three-family residential real property.

Thus, large apartment buildings are "covered" by the new law. A further provision, however, gives a reprieve to residential tenants in covered apartment buildings, because the law goes on to exempt residential tenants who reside in buildings that are "covered" by the new law:
COVERED TENANT SPACE. (i) A tenant space larger than 10,000 gross square feet (929 m 2 ) on one or more floors of a covered building let or sublet to the same person, or (ii) a floor of a covered buildinglarger than 10,000 gross square feet (929 m 2 ) consistingof tenant spaces let or sublet to two or more different persons.

Exception: The term “covered tenant space” shall not include dwelling units classified in occupancy group R-2 or R-3.
Under the New York City Housing Code, occupancy groups R-2 and R-3 include residential tenants living in apartment buildings so they are not required to be submetered by the new law.

When we initially looked at the new law, we saw that apartment buildings are "covered" buildings, but did not immediately notice the further exemption of residential tenant space within "covered" apartment buildings.

Thus, contrary to an earlier version of this post, residential tenants are not required to be submetered under the new law.

Commercial tenants in "covered" buildings with more than 10,000 square feet of space will eventually have to deal with their landlords for measured electric service in the future under the new law. If their experience proves to be anything similar to that of residential tenants, they may wish they had direct utility service from Con Edison.

Green Illusion?
With the cost of inefficient structures and HVAC systems growing as electricity prices rise, and with growing public concern about the environment, submetering is promoted as a "green" policy, and even better, a private market solution requiring no direct public expenditures.
an initiative to submeter apartments and commercial spaces would make everyone aware of their energy use and accountable for it directly, thereby encouraging behavioral energy conservation.
Betty Cremmins, Building Sustainability for PlaNYC, Carnegie Council, Dec. 8, 2009.

published an article urging passage of the new City legislation saying that "Sub-metering will ensure that tenants have the information and incentive to be more efficient in their energy usage." New York City's Buildings About to Get Greener, NRDC Dec. 7, 2009. The "information" of course, is a bill from the landlord for electric service that once was included in the rent. A letter to the New York Times from proponents of the new law enthusiastically joined in the chorus to embrace landlord resale of electricity to tenants through submetering on this "green" rationale:
And the addition of a new submetering requirement will lead to the end of the kinds of commercial leases where tenants pay a flat rate for energy and thus have no incentive to be efficient. This is a major step and one that will lead to efficiency gains almost as large as the capital upgrades would have been.
Rohit Aggarwala and James Gennaro, In New York City, a Bill to Enhance Energy Efficiency, New York Times, Dec. 7, 2009.
With the new data that will be generated by these [submetered electric] bills, a building’s performance will be exposed. This will allow sustainability measures to be defined and subsequently assigned value. Once they are assigned value, sustainability and energy efficiency will move from nebulous concepts that people talk about to concrete solutions that people will act on – either in the form of investment decisions, or by altering their energy usage.
Eldad Gothelf, Will Energy Usage Data Lead to Different Behavior and Alter Investment?, Zone, Dec. 11, 2009. Mayor Bloomberg is quoted as saying submeters
will give tenants who currently pay energy costs at a flat rate the ability to see how much they're actually consuming. And if they consume less, they'll save money.
Mayor to tell U.N. climate conference about greening of NYC, Staten Island Advance, Dec. 13, 2009.

Undoubtedly there is some degree of "behavioral energy conservation" after tenants begin to see bills for their own usage. But there is a serious lack of impartial, peer reviewed research on the issue. It may be difficult to isolate reductions due to submetering from other factors, such as those due to simultaneous installation of energy efficiency measures, or the normal impact on consumption from rising Con Edison prices, or cost variations due to a coincidence of less severe weather conditions after submetering was installed. Reports citing large and unrealistic post submetering energy savings due to tenant behavior changes relied on by New York state agencies such as the PSC, DHCR, and NYSERDA, are not peer reviewed studies, but are typically authored by consultants to landlords -- who profit substantially from submetering conversion.

Submetering is clearly preferred by landlords, whose Con Edison bills have become unpredictable due to deregulation, with large month to month variations in bills and price spikes that hit cash flow and cannot be recovered promptly through rent increases.

Submetering is also preferred by other entities that seek to bundle properties and securitize their cash flow from rents, because submetering shifts erratic electricity prices to tenants, stabilizing the rent revenue stream to investors. See Why is Submetering Attractive to Apartment Owners?, PULP Network, July 10, 2009.

What submetering really can do is allow landlords to shed the burden of their energy inefficiency and volatile, rising electricity prices to tenants. This is recognized in the article quoted above extolling the new legislation:
For true change to occur, several other policies must be implemented along with the green building program. First, an initiative to submeter apartments and commercial spaces would make everyone aware of their energy use and accountable for it directly, thereby encouraging behavioral energy conservation. For spaces that are already submetered, an overhaul of the lease structure is needed to allow for "green leases." These leases include riders that encourage owners to implement upgrades that ultimately lower the utility bills for renters by promoting cost-benefit-sharing.
Betty Cremmins, Building Sustainability for PlaNYC, Carnegie Council, Dec. 8, 2009. The "green" dream, apparently, is that landlords and tenants will bargain over tradeoffs between rent and investment in energy cost reductions.

After submetering is accomplished, however, it could take a lot to "encourage owners to implement upgrades that ultimately lower the utility bills for renters," as this may not rank high on landlord priorities. For example, the capital cost of replacing inefficient HVAC systems, fixures and appliances or windows or improving a structure's thermal efficiency might be equal to an owner's down payment on his next building, or some other investment that would reap more than the savings from investing in efficiency measures.

Significantly, many landlords have chosen not to make investments in efficiency measures without subsidies, even though the cost savings would redound to them. Is it more likely that they will invest in efficiency measures after they have shifted the electric bills to tenants? Is it likely or realistic that tenants will finance investments in energy efficiency improvements to the landlord's structure and fixtures, the payoff period for which (when the initial cost of the measure is finally offset by energy bill savings) is longer than the tenant's lease?

The problem for tenants is that they have a short term interest in the premises and they neither own nor control the landlord's inefficient structure and fixtures.

The facile marketizer answer is that the rental market will take that into account. But the cost of moving to more efficient premises is very high, the cost to prior tenants of electric usage may not be transparent when rental decisions are made, attractiveness of location or other facilities may outweigh energy cost considerations, and so many tenants are likely to become saddled with the costs of their landlord's inefficiency, with no real remedy, particularly in areas where location is paramount for tenants.

Procedure for Commercial Submetering
In upstate areas, commercial property owners must apply for and receive an order of the PSC waiving the general prohibition against submetering on a building by building basis. In the Con Edison utility territory, howver, the PSC allows commercial submetering without PSC review. Apparently this reflects the interests of the New York City real estate industry, which dominated the PSC policy on submetering for much of the last century, with the exception of a 25 year period after World War II when residential submetering was completely forbidden and commercial submetering was slowed.

Statewide, orders of the PSC are required before any residential building is submetered. In a pending proceeding at the PSC, however, landlords are currently seeking further relaxation of regulatory requirements for residential submetering, which is generally illegal unless allowed by specific PSC orders. Their proposals amount to a call for complete deregulation. See Submetering Landlords Clamor for More PSC Deregulation of Electric Service, PULP Network, March 13, 2009.

The Residential Submetering Experience
Any notion that residential tenants would save with submetering is inaccurate, because rents do not go down enough when electric bills are shifted to tenants. See N.Y. Times Perpetuates Myth Supporting Unjust New York PSC-DHCR-NYSERDA Submetering Regime, PULP Network, August 28, 2009.

Also, landlords have been allowed by to dodge meaningful enforcement of utility consumer protections for submetered residential tenants due to the Public Service Commission's deregulatory tilt and minimalist approach to violation of provisions in its orders, which on their face appear to protect tenants, but which are regularly breached with impunity by landlords. See PSC Asked to Rehear Decision Retroactively Approving Four Years of Submetering without an Order Waiving the Prohibition against Resale of Electricity, PULP Network, March 25, 2009; Lax PSC Enforcement of Submetering Orders Allows Landlords to Overcharge for Electricity Sold to Tenants and to Circumvent HEFPA Protections, PULP Network, November 6, 2008.

Substantial rethinking and reform of the PSC submetering regime and its enforcement must occur to prevent more hardship and dislocation of lower income tenants before any additional residential submetering is rolled out under the "green" banner. Submetering is fraught with risks for residential tenants in a system that favors landlords. Rent reductions when submetering is implemented do not come close to the real cost of electricity:
Indeed, because of the potential hardships and potential displacement of tenants, every "green" residential submetering project should first be required go through a SEQRA environmental assessment of its impacts on the human population, e.g., the resulting economic hardship to tenants, and their potential displacement. This is needed to assure that the submetering is not used by landlords, with the aid of state agency orders and financial assistance from NYSERDA, as another tool to pry lower income tenants from their homes and replace them with tenants who pay higher market rents.

The implementation of submetering projects typically occurs after the four-month time to sue under CPLR Article 78 has expired. The submetering actions are typically the result of multiple state agency actions (PSC, DHCR, and NYSERDA), with no lead agency designated to assess environmental impact, as is required for environmental assessments. This, coupled with long time spans between seeking permission to submeter (accompanied with paper promises to tenants of benign impact and customer protection) and actual implementation sometimes occurring years later, and PSC non enforcement of even the minimal conditions in its orders, is resulting in unaffordability, hardship to tenants, and their eviction or displacement.

See PULP's web page on submetering for more information.

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