Conundrum: How To Bill When Submetering (Profits And Losses Depend On The Answer)

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How should leasing parties measure and allocate the costs of electricity or other meterable utility services? To answer that, let’s settle on some common terminology. You can measure demand and consumption by one of these three methods: (a) master metering (when one meter for the entire building is used to “bill” the tenants); (b) direct metering (when each tenant, and the common areas, get its own meter and deals directly with the utility provider; and (c) submetering (when there is a master meter and each tenant also has a submeter for its own space – one that “fits between” the master meter and the leased premises).

[And, while we’re at it, all of today’s posting applies equally to gas and steam service metering and submetering.]

[And, while we’re at it, today’s posting is quite long. Close the door; put your phone on “Do Not Disturb.” Don’t think that you’ll print it out and read it later; you won’t. If your leases only say that utility services, such as for electricity, will be submetered, but they don’t describe how the billing for the submetered service will be done, it could be very worthwhile for you to plow through.]

Using a master meter, without also having submeters, requires the use of an allocation formula. Most commonly under this approach, the electric bills are hacked-up, pro rata among the tenants, based on the relative floor areas of their respective premises. For simple office buildings where tenant usage is relatively interchangeable, that might work out just fine. But, it you have a dry goods store that is open for 54 hours a week (6 days – 9 hours each) and there is a restaurant at the property with the same amount of space, but it is open from 9 until 6 every day of the week, you’re not going to be very happy “sharing” the electric bill with that higher energy user operating 84 hours a week (56% more than you are operating)  and having more lighting, cooking equipment, etc. It is possible to adjust for all of that by the use of “energy surveys,” as is often seen in office leases, but our experience is that such surveys aren’t done regularly and then only when the landlord thinks it is getting shorted. Another disadvantage is that there is little incentive for energy conservation.

Direct metering makes a great deal of sense if you can get the utility provider to establish separate service lines for each space and the government (fire) officials don’t have objections to multiple services to the same building. (They tend to like a single power cut-off so that they can easily turn off all of the power without “forgetting” one source of live electricity). Sometimes, especially with older buildings or where a very large space is being subdivided, the cost of installing separate service to each store is, plainly put, prohibitive. Lastly, where the cost per unit of electricity goes down as usage rises, it might actually be less expensive to “share” a master meter. [By way of example, apartment houses usually get a “commercial rate” much lower than the “residential” rate because of the lower cost to the utility company when it provides a single service. So, it is common for such building to have a master meter and for the individual apartments, nowadays, to have submeters.]

If, for whatever reason, you wind up with a master meter – submeter arrangement, willingly or reluctantly, you might want to focus on how the landlord’s bill will be allocated to the tenants. To let the cat out of the bag, we’ll tell you about the common practice for apartment houses, one permitted by governmental regulation in places where they think about those things. Basically, for a master metered – submetered apartment house, the landlord buys the electricity “wholesale,” and resells it to its tenants at “retail.” Yes, it treats each residential tenant as if it had its own meter and was “buying” electricity at the higher residential rate. Thus, the residential landlord sends each tenant the same “size” bill as if the tenant were buying the electricity directly from the utility company. The “spread” is the landlord’s profit.

If a retail tenant and its landlord like that same system, one which, in effect, says that in return for you, the landlord, dealing with the utility company, if you can make a profit when you allocate the monthly electric bill, go ahead. “I, the tenant don’t care that much because, if I bought directly from the electric company, I would be paying the same amount. Yes, bill me using my submeter reading applied against the rate tariffs for the service I would be buying from the electric company.”

Those tenants who feel they bought into a “retail” community with its “downsides” such as the need to abide by rules and abide by other tenant’s exclusive use rights might also feel they should be entitled to the benefit of the community’s “group purchasing power.” That translates into – “landlord, you can’t make a profit on the electric service.”

And, all of that assumes that the master-meter’s bill would be lower than the sum of all of direct-meters’ bills, if there were direct meters. That’s not a sure thing.

Here’s why (maybe).

Ruminations challenges its readers to take a set of electric meter readings, apply the utility provider’s tariff to those readings, and come anywhere close to matching the utility bill for that period. We’re taking on no risk when we say: it can’t be done. We think that’s true even if all electric services come from one provider, something that is less and less common today as “your old, tried and true, electric company” just distributes electricity to you from another company that signed you up to “buy” its electricity.

If our premise is correct, how much more true would it be when applied to the submetering bill you get from a landlord?

Before we get to the submetering conundrum, we’re going to talk about some generalities when it comes to electric charges. You can skip down to where we return to talking about submetering proper, but your patience in plowing through the next nine or ten paragraphs will pay off when you get to our submetering thoughts.

Rate tariffs are all over the place, differing from company to company. Even within a particular company, you’ll find a slew of different tariffs, pricing electricity differently for “this kind of customer” versus “this other kind of customer” or for “this type of use” versus “this other type of use.” But, for commercial customers, you’ll generally find four categories of charges on your bill.

One is based on your peak demand – what is the maximum amount at which you drew electricity during the prior billing period? This is measured in “kilowatts.” Ten 100 watt light bulbs burning at the same time draw 1,000 watts of electricity – that’s a kilowatt because “kilo” means one thousand, hence “one thousand” watts is a “kilowatt.” Traditionally, electric meters sampled “demand” every 15 minutes and the highest level ever reached during the month constituted your peak demand for that month and part of your electric bill is based on that number. So, if you turned on 100, 100-watt bulbs for only the instant that your electric meter was measuring your “demand,” you’d get a bill based on a peak demand of 10 kilowatts. [100 times 100 is 10,000, and each thousand is a “kilo,” so you have 10 kilowatts.] This is especially important in some industrial uses because big motors draw a lot of “start-up” power even though they draw far lower power while actually running. In fact, that’s why industrial facilities with a lot of such motors devise ways to prevent the start-up of more than one such motor (or similar device) at the same time – “lock-outs.” New, “high tech” meters measure demand on a continuous basis.

Another charge on your bill is based on how much electricity you actually consume – the “consumption” charge. Ten 100 watt light bulbs burning for one hour consume one kilowatt-hour of electricity. Yes, ten 100 watt light bulbs, when burning at the same time, “demand” one kilowatt of electricity and if you make that demand for one hour, you’ve used one “kilowatt-hour” of energy. The electric meter just keeps adding up how much energy you are using, just like a gas pump at the service station. In the case of a gas pump, you read “it” when the tank is full and then reset the pump to zero. In the case of an electric meter, you read “it” at the end of every billing month, and compare that reading to the one at the end of the previous month.

A third kind of charge is for miscellaneous items such as a fixed monthly meter charge which varies depending on who owns the meter. There are monthly adjustment charges imposed for all kinds of reasons, understandable and inexplicable. Try these out for size, whatever they might be: a “System Benefits Charge” and a “Renewable Portfolio Standard Charge.” You might see a “Reactive Power Demand Charge,” though retail users probably wouldn’t trigger that item. There are items like a “Market Supply Charge” and a “Merchant Function Charge,” but some tariffs set a maximum total consumption charge, effectively capping the effect of these deep, dark, and mysterious items (like those of the Rouffignac caves). We only describe these kinds of charges to convince readers that our opening contention about the impossibility of figuring out your electric charges is correct.

The last kind of charge are taxes. Some are ones you’ve never heard of before. Some are applied to “this” item, but not “that” item. Many are ways for our governmental authorities to “hide” a tax behind the utility provider’s skirt.

To get us to the topic of “submetering,” we’re going to introduce one more “factor,” that of “incremental pricing.” Not every “kilowatt” is charged for at the same rate. Not every “kilowatt-hour” is charged for at the same rate. In some localities, where consumption is encouraged, the more you use, the cheaper it gets. In others, where “conservation” is the word of the day, the less you use, the cheaper each unit of usage is priced. There is seasonal pricing in some localities, generally resulting in higher prices for electricity in the Summer months. There are special (usually lower) rates for electricity devoted to heating. Low Tension (Voltage) Service may be priced higher than High Tension Service. All in all, understanding Dante Alighieri’s Inferno might be easier. [Has any reader ever read any other part of his entire poem?]

For illustrative purposes, we’ll mix tariff charges from different companies. Here is one company’s “Demand Delivery Charge, per kilowatt of maximum demand.” “kW means kilowatt”:

Low Tension (Voltage) Service during June, July, August, and September:

First 5 kW (or less) $117.14 per month (that’s $23.43 per kW)

Next 95 kW $ 21.62 per kW

Over 100 kW $ 20.94 per kW

Are you confused yet? We want to show you a much more drastic difference in price tiers, one that a particular utility company applies to “consumption,” how many kilowatt-hours (“KWH”) of electricity did you use in the month?:

For all kWh not greater than 200 hours times the kW billing requirement:

  • Charge per kWh for first 19,500 kWh – 7.648 ¢
  • Charge per kWh for kWh over 19,500 kWh – 5.400 ¢

For all kWh in excess of 200 hours and not greater than 400 hours times

  • the kW billing requirement:
  • Charge Per kWh for all kWh 2.819 ¢

For all kWh in excess of 400 hours times the kW billing requirement:

  • Charge per kWh for all kWh 1.568 ¢

Even if this “utility talk” seems like the gibberish that it is or if the math doesn’t pop out at you, under this utility company’s rate tariffs, the more you use, the cheaper it gets.

Here’s what we’ve all been waiting for: the SUBMETERING conundrum.

Basically, when it comes to electricity in some locations, the more you use, the less it costs. So, if it were the month of July, and each of 10 tenants consumed 19,500 KWH (kilowatt-hours) of electricity that month, and each had its own electric meter, each would pay $1,491.36 for electricity consumed. All told, with each tenant having its own meter, the total of 10 bills would be $14,913.60 (10 times $1,491.36). On the other hand, if all the tenants were “on the same meter,” the 195,000 KWH of electricity would cost $10,968.36 (trust us) OR LESS (depending on the relationship of consumption to peak kW demand that month). That’s only $1,096.84 per tenant. That’s a potential savings for each tenant of $394.52 IF THAT’S THE WAY THE SUBMETER BILLINGS WILL BE CALCULATED.

We are assuming, at this point, those who have never done these calculations themselves feel some dizziness and don’t want to see any further calculations, not even of what happens if unit prices go up as consumption increases. We also assume that those readers who have done these calculations before don’t need such an illustration.

Readers, however, you aren’t going to get off that easily. You have to suffer through the “demand” side of electric billing. Many, many electric rate tariffs include a charge, as explained earlier, for the peak “demand” reading in any billing period. Essentially, this is to pay for “the size of the pipe (or transmission wires)” needed to make sure that you can get your “peak demand draw” at any time. You (or any other user) might consume very little electricity, but when you do, you might need a lot all at once. Think of a system of fire hydrants. Rarely is water drawn from them, but when it is, you want a torrent. So, you need to install (and pay for) “fat” pipes to get all of the water you need at once. You could consume the same amount of water even with a “skinny” pipe, but it would take a long time to get it all, and the building would be ashes by then. Fat pipes cost more than skinny pipes. People who need fats pipes pay more than do people who need only skinny pipes.

Submeters, like direct meters, measure both consumption and demand. Here is an example when it comes to the part of an electric bill that covers “demand.” Pretend that a building has two users, each with one hundred bulbs of 100 watts each, each burning 14 hours every day. That’s 10,000 watts (10 kW) of “demand” for each of them. If each had its own electric meter, that one meter would reflect a peak demand of 10 kW. When the two users are on one master meter, that meter would indicate a peak demand of 20 kW. If the first 10 kW of demand charge was at $10 per kW and the rest were at $5 per kW, here’s what we would get: With each user having its own meter, each would get a bill for $10; with a master meter, the total bill would be $15. Should each tenant pay $10? Should each pay $7.50? And, here’s the ringer – should the tenant who turned its lights on first pay $10 and the one who turned its lights on once the meter was already reading 10 kW of demand pay only $5, the incremental cost of “adding” another 10 kW of demand?

Expand that “question” about allocating demand charges over 35 tenant spaces and add the question of how to handle consumption charges when there is incremental pricing (in some places upwards and in others, downwards), and you’ll start to get a feel for what is going on. And, don’t forget that submeters are usually read by third-party billing companies, for which service, a charge is added to the tenant’s bill.

So, “what’s a man to do when he’s lovin’ two? And he don’t wanna lie but he can’t tell the truth”? [Usher, from What’s a Man to Do?]

Even if you think that landlords shouldn’t make a profit on the “resale” of electricity (or other utility services), you certainly don’t think landlords should take a loss. To remain both profit and loss free, landlords will need to allocate electric costs to all of the submetered users on a single basis. So, unless you have a special or unique situation, you ought to be looking at “average” pricing. If you have a special situation, you ought to go for direct metering if the cost of doing so doesn’t wipe out the advantages of doing so.

Now that we know how electric service is priced, the following lease provision might make sense:

If the Leased Premises is not serviced by separate meters to measure Tenant’s consumption of any meterable utility service, a submeter will be used to measure Tenant’s usage share of that utility service, and Tenant must pay to Landlord Tenant’s proportionate share of the cost of such utility service. Once each calendar month, Landlord will bill Tenant for Tenant’s share of the submetered utility service’s cost. Landlord’s bill (“Submetering Invoice”) must include a copy of the related utility providers’ bill or bills (each, a “Supplier Invoice”) for Landlord’s master meter and a calculation of Tenant’s proportionate share of the cost of the metered utility service. Tenant’s proportionate share is the fraction calculated using: (a) as its numerator, the consumption, as measured by Tenant’s submeter, for the same billing period as that of the Supplier Invoice(s) used to prepare the Submetering Invoice; and (b) as its denominator, the consumption, as measured by the meter used by the utility provider(s) in calculating the cost for consumption on the Supplier Invoice(s). If the cost of a particular utility service is also based on a demand charge, Tenant’s share of such demand charge will be based upon the average unit cost for such demand for the period covered by the Submetering Invoice. All taxes and miscellaneous charges included on Supplier Invoices will be included within the calculation for that part of each Submetering Invoice that is based on consumption of the utility service, and not within that part based upon the demand charge (if any). If Landlord engages an independent submeter reading service, each Submetering Invoice may include a charge to reimburse Landlord for the cost of such service, but the monthly charge shall not be more than fifteen dollars ($15.00).

For special circumstances or special arrangements, you’ll want to customize your lease provision to cover how bills will be calculated for submetered utility services. This can be a very fact-sensitive provision in your lease and, if the “deal” is that utility “re-billing” won’t be a landlord profit center, you’ll want to make sure that the allocation scheme is “fair” to tenants as a group (because the “fractions” have to add up to “1”) and doesn’t reach into the landlord’s pocket.

This is the point in our posting where we invite readers who understand this topic to share their comments with the rest of us. Just scroll down to “Speak Your Mind” and share away.

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