After 10 years of legislative and regulatory wrangling, New Jersey’s Board of Public Utilities (BPU) has reversed a long-standing ban on sub-metering in rental housing by permitting newly constructed, multifamily rental developments to implement potable water sub-metering, where end users pay for their own consumption rather than a fixed amount or percentage of the whole building’s usage.

The measure is expected to save billions of gallons of water per year. Sub-metering encourages people to conserve because they are fiscally responsible for paying the bill and held accountable for personal usage.

The change will have implications for lawyers as well, affecting residential lease agreements and addenda, landlord-tenant law, landlords’ and builders’ contracts with sub-metering companies, and other potential legal issues.

With the new regulation, New Jersey joins the other 49 states in permitting at least some form of sub-metering. See In the Matter of the Petition of the N.J. Apartment Ass’n for an Order Authorizing the Use of Sub-Metering to Advance Water Conservation in New Residential Apartment Bldgs. , BPU Docket No. WO1106038, Aug. 18, 2011 (the 2011 Order). This significant step resulted from the New Jersey Apartment Association’s (NJAA) work to legalize sub-metering — an effort that spanned a decade and six governors.

The 2011 Order approving the NJAA’s petition to permit sub-metering is one of the first implemented energy policy recommendations from Lt.??Gov. Kim Guadagno’s bipartisan Red Tape Review Commission Report of April 2010. The need to revisit New Jersey’s restrictive policy on sub-metering in rental housing was listed as a specific policy recommendation in that report.

This is a significant development for a number of reasons. For owners, the cost of an uncertain commodity is moved off property balance sheets, leading to increased property values. Instead of paying a theoretical fixed charge for water in their monthly rent, tenants are able to actually control their water costs and implement conservation techniques to lower their living expenses. Finally, from an environmental perspective, sub-metering has been shown to have conservation benefits ranging from 15 to 39 percent or more. If only one quarter of New Jersey’s apartments were sub-metered, this would result in a savings of at least 2.25 billion gallons per year. See “Water Conservation and Economy in New Jersey Through Sub-Metering of Water in Multi-Family Rental Housing,” prepared by the NJAA, dated January 2005.

What Is Sub-metering?

Unlike other utilities in New Jersey, water companies or municipal utility authorities (MUAs) are not required to direct meter and bill end users in multi-family developments. As a result, in most instances, the utility or public-owned water system ends at a “master meter” that measures all of the water usage at a property. Sub-metering enables end users to pay once for their own water usage, rather than all users in a building or property either paying the same regardless of consumption as part of their rent, or paying an arbitrary fixed amount in addition to rent known as “RUBS.” Most commonly, a property owner or manager will hire a sub-metering firm to install utility grade sub-meters and then read them monthly. The sub-metering firm then bills each resident for the amount of water actually used. After collecting the payments, the money is turned over to the property owner to pay for water service to the master meter.

New Jersey’s Regulation of Sub-metering

Sub-metering in New Jersey has a complicated history and regulatory scheme, including different rules depending on property location and commodity provider. Some properties are served by a BPU-regulated utility, while others are served by a MUA. While most electric and gas service is provided by regulated utilities, and therefore subject to BPU jurisdiction, water service is split evenly between BPU-regulated utilities and MUAs.

MUAs that provide utility service are, with few exceptions, not subject to BPU regulation. As a result, while MUAs have the power to regulate sub-metering, most do not, leaving landlords to determine whether they have the authority to sub-meter and, if so, under what terms.

Unlike MUAs, utility companies are subject to BPU jurisdiction. While there are no statutes or regulations governing sub-metering, the BPU takes the position that in the case of Sixty-Seventh S. Munn Corp. v. PSE&G , 106 N.J.L. 45 (1929), the New Jersey Supreme Court left the decision whether to permit sub-metering to the BPU’s discretion.

The BPU’s policy prior to the 2011 Order permitted sub-metering of electric and gas service in: 1)??industrial or commercial buildings; 2) publicly financed and government-owned buildings; 3) cooperative housing or condominiums; and 4) eleemosynary (charitable) institutions.

Historically, the BPU explicitly prohibited sub-metering electric and gas, and, by extension, water, in rental housing. A significant factor behind this prohibition of sub-metering appears to have been an institutional distrust of landlords and, to a lesser degree, the lack of reliable technology at the time the BPU was formulating its sub-metering policy.

The 2010 NJAA Petition

On Dec. 9, 2010, Archer & Greiner, P.C., acting as attorneys for NJAA, filed a petition with the BPU requesting the legalization of water sub-metering in newly constructed, multifamily rental housing. The narrowly crafted petition was designed to build upon sub-metering’s inclusion as a key policy recommendation in the lieutenant governor’s bipartisan Red Tape Report, and to steer clear of the historically most contentious issues that have blocked sub-metering in New Jersey, such as conservation issues in retrofits, the appropriateness of rent reductions and rent control issues.

Overwhelming evidence of the conservation benefits of sub-metering was submitted by NJAA, including a 2004 study by the U.S. Environmental Protection Agency (EPA), which found an average water savings of 15 percent after sub-meters were installed in multifamily rental communities. See “National Multiple Family Sub-Metering and Allocation Billing Program Study.” Dartmouth University also conducted a study that year, which identified savings of 20 to 32 percent. See “Wireless Sub-metering and Water Conservation — Is it Worth Doing?” (Tuck School of Business at Dartmouth Report.) These studies concluded what most people accept as a simple reality; sub-metering encourages conservation because people are accountable for their personal usage.

Sub-metering also eliminates for building owners an unpredictable utility expense which has been rising faster than inflation, and places that expense with the party who can directly control the usage and, thus, the cost.

After eight months of extensive discovery and meetings with BPU staff and the New Jersey Division of Rate Counsel, the BPU adopted the 2011 Order permitting water sub-metering in newly constructed rental housing.

The Meaning of the Order

Under the Order, sub-metering is permitted in new construction, subject only to the terms of the lease and, critically, the definition of sub-metering . The BPU’s convoluted definition of sub-metering boils down to the following: Sub-metering is permitted when the primary consumer (the utility’s customer of record, that is, the building owner) charges the tenant for actual usage, provided that the sum of such charge(s) shall not exceed the cost incurred by the primary consumer for providing the utility commodity. In addition, the sum of such charge(s) may not exceed the amount that the utility serving the primary consumer would charge a private residential customer for the same service. The resale of water for profit is prohibited.

The phrase new construction has been defined broadly and permits sub-metering in new construction and, in some cases, renovation of existing rental multifamily housing:

Any building, where, as of the effective date [of the Order], pipes, service lines or other water infrastructure has not been installed beyond the utility company’s meter, will be permitted to sub-meter . .. Repurposing existing buildings for residential use will be considered new construction and such buildings will be permitted to sub-meter pursuant to this order, only if, as part of the conversion, all existing pipes, service lines or other water infrastructure beyond the utility company’s meter are removed and new pipes, service lines or other water infrastructure are installed.

In order to sub-meter, a lease provision or addendum must clearly lay out the responsibilities of the property owner or manager, sub-metering company and resident. The sub-metering program must be designed so that the property owner does not inadvertently make a profit, and the cost of installing the sub-meters and any associated equipment may not be directly passed on to the residents. The program must meet the BPU’s definitions of sub-metering and new construction . Finally, the sub-meters used at the property must, of course, meet all other applicable laws and regulations .

The 2011 Order does not affect sub-metering water in properties that are serviced by MUAs, nor does it permit sub-metering of water in existing apartment buildings. The battle to permit sub-metering in existing apartment buildings — and the billions of gallons of water that could be saved — is left to another day, and is sure to be a controversial and hotly contested issue.