ENERGY SUBMETERING;
SPECIAL REPORT — July 2007

BOMA California Members
Await Precedent Setting Decision

Rule 18 is an historic relic that was presumably designed to protect utilities from competition .  In effect, Rule 18 requires that commercial building electricity costs be absorbed in rental charges and prevents building owners from charging tenants for electricity costs that in any way relates to an individual tenant's electricity usage.   This Rule discriminates against commercial building tenants by shielding them from opportunities for effectively responding to rate signals for managing their energy costs,   forces inequitable allocations of energy costs among tenants, and causes inefficient energy consumption by building tenants. 

Inequity in cost allocation is an unavoidable result of the electricity costs being absorbed in rent and allocated to tenants on a  per square footage basis.  Those tenants who use energy parsimoniously pay the same energy charges per square foot of space occupied as do the very energy intensive tenants.  By definition, some tenants subsidize the energy consumption of other tenants simply because Rule 18 forbids measurement and measured usage to determine the allocation of building energy expense.

This cross-subsidization also implies inefficient consumption patterns among tenants.  

The subsidization of energy intensive tenants by less energy intensive tenants implies that the unit cost of electricity to the energy intensive tenant is below tariff rates, which encourages more consumption by that tenant than if he had direct metered utility service, was aware of his consumption levels, and faced the actual tariff rates.  In contrast, the low energy intensive tenant faces unit costs higher than the tariff rate and would be inclined to use less than the efficient levels of energy.  Under Rule 18, neither tenant has the necessary information and incentives for efficiently managing his energy consumption.

Inefficient tenant energy consumption constrains the level of total building energy efficiency that can be achieved, which also inflates operating costs and suppresses the asset value of buildings.   Inefficient tenant energy consumption in commercial buildings also amplifies the peak of the electric system load profile and total electricity costs.

Regulator recognition of the effects of Rule 18 on system load and regulator interest in harvesting demand response has finally created the opportunity to modify Rule 18 so as to allow sub-metering of tenant use and billing in accordance with measured usage.   Regulator recognition of the implications of Rule 18 has come from many years of effort by BOMA Members such as Greg Husebye and Craig Sheehy and recent intervention by BOMA-Cal in CPUC rate proceedings.  As a result, BOMA has resolved the sub-metering issue with PG&E and filed a BOMA/PG&E Settlement Agreement with the CPUC on April 27 as part of PG & E's Phase 2 Rate Proceedings.  Assuming that this Agreement is supported by the CPUC (and we believe that it will be), it would be the most significant accomplishment of BOMA Cal's CPUC advocacy to date.  BOMA's rate advocacy has saved Members a ton of money, millions, really, and our work to move commercial rates closer to the "cost of service" model will continue to reduce our subsidy of other classes or users. However, this Sub-Meter Agreement will permanently - and legally - change the way in which building owners can allocate, and bill the costs of electricity to their tenants, and will bring more equity to their tenants' energy costs, facilitate tenant energy cost management, enhance building energy efficiency, reduce building operating expense, and ultimately build asset value. 

At this point, we are waiting for a final decision from the Administrative Law Judge (ALJ) assigned to the matter, and a final CPUC vote.   

A final note, those building owners who are currently sub-metering tenant usage in conflict with Rule 18 will be able to continue to do so without concern about potential utility reprimand. 

For more information or questions please contact BOMA California Energy Committee Chair Ken Cleaveland.