SANTA MONICA RENT CONTROL BOARD MEMORANDUM

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Howard Davis
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1 Item 14A SANTA MONICA RENT CONTROL BOARD MEMORANDUM TO: FROM: Santa Monica Rent Control Board J. Stephen Lewis, General Counsel FOR MEETING OF: February 9, 2017 RE: Recommendation to the City Council that it outlaw Ratio Utility Billing Systems for all rental properties in Santa Monica. Subject Matter The Santa Monica Rent Control Board will consider the proposal of Commissioner Flora to recommend that the City Council outlaw Ratio Utility Billing Systems for all rental properties in the city. How This Agenda Item Originated This item was originated at the direction of Commissioner Todd Flora, who directed that this item be placed on the agenda. Discussion With the passage of SB 7, the California Legislature has taken real action to promote individual water conservation. As of 2018, the new law will require the submetering of newly-constructed multifamily projects and allow the submetering of existing ones. The law provides various safeguards to ensure that the meters will be properly installed, calibrated, and maintained for accuracy, and will promote a reliable mechanism for tenants in master-metered buildings to track, and to be held financially responsible for, their own actual water use. This promotes the public-policy goal of encouraging water conservation because, studies show, when people are able to track their own water use and are required to pay for it, they conserve on average between 15 and 20%. 1 1 Metering in California, Pacific Institute (Sept. 2014). See also Tanverakul, S. A., and J. Lee. (2013). Residential Water Demand Analysis Due to Water Meter Installation in California. World Environmental and Water Resources Congress 2013: Showcasing the Future. American Society of Civil Engineers; Beecher, J., P. C. Mann, Y. Hegazy, and J. D. Stanford. (1994). Revenue Effects of Water Conservation and Conservation Pricing: Issues and Practices. The National Regulatory Research Institute,

2 As of next year, by making a one-time investment, Santa Monica landlords will be able to save money over the long term while at the same time benefitting the environment. Regrettably, some owners of Santa Monica rental property have declared their intent to achieve this money savings by passing on water charges to their tenants without submetering and without achieving the conservation that submetering is intended to foster. The mechanism by which they intend to do this is RUBS billing. RUBS Ratio Utility Billing Systems are, as the name implies, nothing more than systems for billing tenants for utilities. It is not, as is sometimes suggested, a means of tracking individual units water use or promoting conservation. Under a RUBS system, the owner of a master-metered building devises a formula which could be based on unit size, number of occupants, number of bathrooms, or some other factor as a stand-in for actual data about how much water each unit might use. This fictive relationship between the amount of water used by the entire building and that used by each unit is the ratio of ratio utility billing system. The water bill is then divided, according to this ratio, among the units. If, for example, one apartment in a three-unit building covers 50% of the structure s floor area, with the other two units covering 25% each of the remainder, the water bill would be split accordingly, with 50% of the bill being passed through to the larger unit, and 25% to each of the smaller units, on the theory that the larger apartment uses half the water consumed at the property and the other two units evenly consume the rest. This system undoubtedly saves the landlord money, as the landlord s entire water bill is simply passed through to his or her tenants. But it has no known conservation effect. 2 And it is easy to understand why; the amount that a tenant is billed has no relation to how much water he or she actually uses. A tenant who knows that his neighbors use very little water won t mind using a bit more himself especially if the conservation-minded tenants are in the larger unit, getting the larger bill. To the extent that it has any effect on water use, RUBS billing has been shown to have a small, albeit not statistically-significant, water wasting effect. 3 Because RUBS has been found to have, at best, no water-conservation effect, and has been found to be susceptible to abuse, it has been discouraged by the United States Environmental Protection Agency, banned outright in some jurisdictions, 4 and tightly regulated in others. 5 The State of 2 Federal Register Vol. 68, No. 246 (Dec. 23, 2003) p Mayer, Towler, et al., National Multiple Family Submetering and Allocation Billing Program Study, Table ES Massachusetts, Mississippi, North Carolina 5 e.g, Texas; Tennessee 2

3 California has declined to declare a state policy for or against RUBS billing, leaving such policy-making to local jurisdictions. 6 As a jurisdiction that has been dedicated to water conservation, Santa Monica should discourage, if not outright forbid, RUBS billing. First, there is little sense in allowing the practice, when it undeniably removes any incentive that landlords might have to save water, since it allows them to pass through the cost of wasteful water usage to tenants. But second, and more fundamentally, allowing RUBS would remove any incentive that the owner of an existing multi-family building might have to implement the water-saving submetering system that state law now encourages. After all, why bear the expense of buying and installing submeters if the property owner can get the same money savings by simply passing water charges through to tenants, regardless of how much water specific tenants actually use. Members of Action Apartment Association have recently expressed the intent to avoid rent limitations by utilizing RUBS to segregate their overhead for water from other rent so that they can pass any increases in their water costs directly to their tenants, regardless of how much water any tenant actually uses. But this is not exclusively a rent control issue. Every owner has an incentive to maximize his or her income. That is probably to be expected; landlords are, after all, in business to make money. But, to the extent that RUBS billing might be used to circumvent rent ceilings, it could violate the rent-control charter amendment. And, regardless of a building s rent-control status, the city, as steward of the public interest, has a duty to promote the public welfare. The city and state have both declared that the public welfare depends on real water conservation. That goal would seem easier to meet if all stakeholders, landlords and tenants alike, have a sufficient and tangible interest in achieving that goal. RUBS billing removes that sufficient and tangible interest. Action Apartment Association sued the Board last year, seeking a judicial declaration that the Board cannot forbid RUBS billing. The theory stated in Action s complaint was that, by allowing landlords to establish the initial rent for new tenancies, Costa-Hawkins allows landlords to include in the rent a RUBS billing charge. During the course of the litigation, Action s theory shifted to an assertion that, because a RUBS billing charge is not rent, the Board has no right to regulate it. But because the Board has neither adopted any regulation relating to RUBS billing nor taken any action against any identified landlord with respect to the practice, the Superior Court last week granted a motion to dismiss Action s suit against the Board, concluding that it was an improper request for an advisory opinion. But the court s decision allowed Action to amend its complaint. Given that Action s 6 See, SB 7, amending Cal. Civil Code (c). 3

4 latest theory appears to be that the Board has no authority to address RUBS billing, and given the likelihood that Action will continue try to find some way to sue the Board on that theory, it is Commissioner Flora s view that the Board should recommend that City Council, whose police power is broader than that of the Board and undoubtedly extends to enacting water-conservation measures, do what Action asserts that the Board cannot, and forbid RUBS billing within the City of Santa Monica. Finally, the Board has discussed the possibility of allowing landlords to pass through to their tenants some or all of any fines that might be imposed on property owners for excessive water use. The Board has expressed the view that such pass-throughs would be warranted only for landlords who have implemented all water-saving measures, which would seem to include submetering. The Board has also expressed some concern that there is an unfairness inherent in allowing the pass-through of fines in the case of master-metered buildings because the pass-through would adversely affect even the most water-conserving tenants, lessening the burden on water-wasting tenants, and could allow landlords who engage in common-area water wasting practices to escape liability for fines altogether all of which would undermine the conservation goals that such fines would be intended to promote. A city-wide ban on RUBS billing would clear the way to allow the Board to approve the pass-through of excess-wateruse fines to those who, in fairness, should bear them: those individual tenants whose own water use is excessive, or landlords who have failed to conserve water in common areas. RECOMMENDATION Staff recommends that the Board discuss Commissioner Flora s proposal. If the Board reaches a consensus in favor, staff recommends that it vote to direct staff to transmit to City Council the Board s recommendation that the City Council enact an ordinance forbidding the practice of RUBS billing in the City of Santa Monica. 4

SANTA MONICA RENT CONTROL BOARD

SANTA MONICA RENT CONTROL BOARD TO: From: Board Commissioners J. Stephen Lewis, General Counsel Board Meeting: June 14, 2012 Re: Proposed Regulation 3034 (2012 Annual General Adjustment) Introduction As