Beyond billing residents for utilities: growth in technology and the systems that support resident utility billing have opened doors to new opportunities for cost recovery.

During the past several years, as utility costs have risen substantially while rents have stayed relatively flat, apartment owners have increasingly embraced the practice of billing residents for the utilities they consume. Resident utility billing has helped apartment companies protect their net operating income (NOI) and increase the value of their assets in a challenged market place.

"At Simpson Property Group, we believe that billing our residents for utilities is no longer an optional practice" said Tim Rogers, Senior Vice President, Operations for Simpson Property Group. "In today's market place, recovering utility costs has truly become a requirement for maintaining strong financial performance at our apartment communities. We have also expanded our current program to include our provider's energy management offering. This program has helped further drive down our expenses, create operational efficiencies and ultimately strengthen our bottom line."

Now, as resident billing programs become more sophisticated, new energy management solutions and expanded resident invoicing options are available to community owners as enhancements to the traditional resident utility billing offering. These programs can help managers stimulate operational efficiencies throughout their organization, gather valuable trend data, spotlight additional opportunities to reduce and recover costs, and further improve collections onsite while boosting overall resident satisfaction.

"The apartment industry seems to have finally come to the realization that rents cannot keep up with rising utility costs," said Anna Mentas, Vice President and Controller for the multifamily property management division at SARES REGIS Group. "We are pleased to see increased market-place adoption of resident utility billing, a practice which allows us as property managers to continue to operate a solid business while remaining competitive with other apartment communities in our neighborhoods."

Today's comprehensive billing and utility management service offerings consist of three main components: utility cost recovery, energy management and convergent billing. Energy management and convergent billing both allow apartment professionals to continue to improve their bottom line while creating efficiencies within their organizations and providing residents the best service possible. When all are combined in a single package, these services represent a complete utility management and billing solution.

Utility Cost Recovery

The strongest driver for the adoption of resident utility billing programs has been the ability for apartment owners and managers to offset rising expenses, especially in a highly challenged rental housing market place where revenues are not growing at the same rate as costs. Utility cost recovery results in significant cash flow for communities and portfolios of all sizes and also has an effect on the overall property value. (See table, page 79.)

There are two key steps in the utility cost recovery process: the assignment of charges to residents and the delivery of bills to each occupied apartment so residents will know what to pay.

There are two primary ways resident utility billing providers distribute the monthly utility charges among residents: submetering or RUBS., (See sidebar, above.)

After charges have been allocated to each apartment unit, the resident utility billing provider mails an invoice to each resident. The funds generated from resident utility payments are then directed back to apartment owners to offset each community's utility costs.

Utility cost recovery efforts supported by resident billing continues to be the cornerstone of managing utility costs for many owners and managers.

Energy Management Services

When combined with effective utility cost recovery (via resident billing), energy management services now available to apartment owners and managers provide an expanded and comprehensive utility cost management solution. One option is for apartment communities to outsource the processing and payment of local utility company bills, shifting this function from the management to a resident utility billing service provider.

Because utility bills often represent 30 percent to 40 percent of all invoices processed onsite, processing and paying them can be an expensive endeavor in terms of both hard costs (the cost of cutting checks, postage, etc.) and soft costs (time spent sorting, coding, researching, etc.). In fact, one firm estimated in a report published in 1997 ("Managing Accounts Payables Benchmarking Survey," Institute of Management and Administration) that the cost of processing a single invoice was somewhere between $10 and $16. Not only can outsourced bill processing help reduce these costs, but it could also help diminish costly utility bill payment errors and late payments. Bills are paid by processing experts who have a core focus on timely and accurate payment.

In addition, outsourced utility bill processing allows a resident billing provider to obtain bills for a community directly from local utility companies. In this way, the program eliminates the need for property management staff to intercept and send utility bill information to the provider, which not only reduces the workload for onsite staff, but also allows charges to be more accurately and quickly distributed to residents.

Finally, by processing and paying utility bills for a community, a resident billing provider can gain access to and control of information that will facilitate the delivery of additional energy management service components. (See sidebar, above.)

Energy management programs work hand-in-hand with resident utility billing to enable a utility cost management solution that maximizes every dollar saved and recovered to drive stronger financial performance for apartment owners and managers.

Convergent or 'Rent' Billing

If energy management programs represent an expansion of utility cost management solutions available to the apartment industry, convergent billing programs represent an expansion of resident billing solutions.

Several national resident billing providers have been in the business of generating utility bills to occupants of apartment communities for many years. These providers, over time, have built technical infrastructures to support increasingly advanced billing services. Now that these sophisticated billing structures exist, there has been a recent, inevitable shift in the market place toward invoicing residents not just for their utility consumption, but for all of the monthly costs associated with their lease agreement.

This natural evolution toward convergent billing has occurred not only because resident invoicing services are already available, but also because monthly charges assessed by apartment owners to their residents have become increasingly detailed and dynamic. At many apartment communities, resident balances may include rent, month-to-month or short-term lease fees, discounts and credits, facility charges such as garage fees and others.

This trend has made unit pricing a more exact and more profitable endeavor, but has also complicated things for residents who no longer clearly understand what they owe or for what they are expected to pay.

Therefore, by providing one bill to each resident detailing monthly charges for their unit, managers are offering their residents the information necessary to understand and pay their balances in full.

In addition, convergent billing helps reduce occurrences of "short" payments at a community and the subsequent need for staff to collect small balances. Managers will also field fewer calls from residents inquiring as to what their total balance will be or who is questioning how their charges for the month have been calculated.

NSC MEMBERS WHO PROVIDE UTILITY SERVICES

For a complete listing of NSC members who provide utility services, see pages 88-94 in UNITS of visit the NAA Web site for online listings at www.naahq.org/suppliers/nsc_sup_guide/

RELATED ARTICLE: State legislatures tread through water billing issues.

BY RACHEL ARNOLD

In 2005, a handful of state legislatures debated issues involving submetering and ratio utility billing systems (RUBS) with regard to water billing. As each state may regulate the practices independently, legislation can look quite different from one jurisdiction to the next.

Kansas--Defining a Public Utility

Kansas, after discussing these issues for approximately the past four years, passed S.B. 63 during the 2005 legislative session. The bill essentially states that an apartment community owner who bills residents for water using a submeter and does not charge more than the rate charged by the city or water district shall not be considered a public utility and not be subject to the jurisdiction of the state corporation commission. S.B. 63 remained silent on the issue of RUBS and also prohibited the pass-through of fees for billing services.

In response to the bill, the staff of the Kansas Corporation Commission (KCC) filed a request for an investigation into whether a property owner constitutes a public utility when providing water, gas or electricity to its residents through a master meter or submeters when billing separately from rent.

In the request for investigation, staff cited that there is a formal complaint pending with the KCC related to gas charges from the property owner to the resident. Staff also explained that the KCC previously addressed this issue informally by stating that a property owner who separately bills residents for utilities could be construed as a public utility. KCC staff is now requesting a formal declaration and definitions to clarify this practice.

Specifically, the staff is asking the KCC to determine if:

* Property owners who submeter their water, gas or electricity for the purpose of charging residents for their utility usage constitute a public utility;

* Property owners using an allocation (or RUBS) method for charging residents for their utility usage constitute a public utility;

* The practice of RUBS billing should be prohibited or regulated by the commission (or some other governmental body); and

* Property owners employing either submetering or RUBS programs should be allowed to pass certain kinds of fees on to residents, such as monthly billing administration fees.

Property owners in Kansas have been mobilized to contact the KCC on this issue to educate them on the practices of owners and the importance of allowing residents to be billed for their utility use.

Massachusetts--Amending the Sanitary Code 

The Massachusetts Department of Public Health (DPH) is in the process of developing regulations that will permit the implementation of Chapter 417 of the Acts of 2004, amending the state sanitary code to authorize water submetering in residential units.

Under the new submetering law, enacted in December 2004, a property owner may install submetering equipment to measure the water used in each apartment unit, provided the meter meets standards of accuracy and testing and a meter is installed for each unit in the building and for the common areas so that all water is measured by both a primary meter and a submeter.

In addition, a property owner must certify that a unit is eligible for the imposition on the resident of a charge for water usage; that all showerheads, faucets and toilets are water conservation devices; that all toilets and the submeters were installed by a licensed plumber; and that the meter is in compliance with the standards of testing and accuracy. A unit becomes eligible for submetering upon commencement of the lease of a new resident either when the unit is being occupied for the first time or when the previous resident vacated voluntarily or was evicted for a breach of the lease.

A property owner may not charge for submetered water usage unless the resident has signed a written rental agreement that clearly provides for the separate charge and discloses the details of the submetering and billing. A property owner may only recover the actual cost of the water provided to the submetered units and may not charge for any water usage in common areas. A property owner is not permitted to recover any servicing, administrative, meter-reading or other similar fee. A property owner may impose a charge for water on the resident of a dwelling unit that is connected directly to a meter installed by a water company.

Residents have the right to request a test of their submeter, and if it is found to be measuring more water than is being used, the property owner must replace the meter, pay for the test and rebate the resident for any overpayment. In the event of a leak, a property owner must rebate the resident by the amount attributable to the leak.

Prior to the passage of this legislation, submetering and allocation billing were not permitted in Massachusetts.

Minnesota--Third-Party Billing Fees

Minnesota's H.F. 680, introduced in 2005, would regulate disclosures and prorating of utility payments when the utility service for a common area is metered through an individual resident's unit. Further, property owners in single-meter residential buildings would be permitted to charge residents a utility billing service fee, limited to what a third-party service charges the property owner or what the utility would charge to bill and collect from individual residential customers, so long as it is disclosed in the lease agreement.

Property owners would also be prohibited from collecting in aggregate more than the amount billed by the utility for total utility services provided.

H.F. 680 remains in the House Committee on Commerce and Financial Institutions and will carry to the 2006 session.

Virginia--Water and Sewer, Submetering

Effective July 1, Virginia's H.B. 1590 permits the submetering of water and sewer in rented buildings. It states that submetering equipment for water and sewer service may be used in commercial and residential buildings if dearly stated in the rental agreement or lease for the leased premises or dwelling unit. With respect to water and sewer usage, property owners currently are authorized to use allocation billing systems, or RUBS, which do not measure actual usage. Water and sewer submetering equipment will not be subject to regulation by the State Corporation Commission.

Texas--Submetering to Allocation Switch

Texas H.B. 2434, introduced in 2005 by Rep. Robert Puente (D-San Antonio), would have required submetering on all new construction and virtually prohibited the ability of property owners to switch from submetering to allocation. The Texas Apartment Association (TAA) was able to work out a compromise so that the bill dealt solely with strengthening the rules governing the standards a property must meet before it could seek a change from submetering to allocation. While the legislation did not pass, it is reasonable to think that this subject may be addressed in rulemaking at the Texas Commission on Environmental Quality.

For information in Your Area

To find out more on this issue, contact the NAA Government Affairs Department at 703/518-6141 Ext. 106. For the states mentioned, contacts are as follows:

* Kansas: Freeman Smith, Ext. 117, [e-mail]

* Massachusetts, Minnesota: Carla Lochiatto, Ext. 120, [e-mail]

* Virginia, Texas: Rachel Arnold, Ext. 119, [e-mail]

SUBMETERING VS. RUBS

Submetering. The installation and use of utility submeters is one way to implement resident utility billing at the community. The investment required to install submeters is generally recovered quickly by the financial benefits of the resulting cost recovery program. In addition to helping recover utility-related costs, submeter-based recovery programs have been shown to more effectively drive down the consumption of natural resources.

RUBS. For apartment owners who cannot install submeters due to financial or structural restraints, RUBS (Ratio Utility Billing Systems) may be an option. Using a RUBS bill allocation methodology, each resident's charges are calculated by using a ratio of the community's total utility expense, rather than by tracking a resident's actual utility usage. RUBS requires no initial capital investment and is permitted in almost every state.

RELATED ARTICLE: Additional energy management service components.

Information Management. Outsourced bill processing enables a provider to present important utility cost, usage information and trend data to a property management team, helping improve the accuracy of forecasting and budgeting. This information will also be used by the resident billing service provider directly, specifically to power further energy management opportunities, including utility rate analysis and vacant unit utility cost management.

Bill Auditing and Rate and Tariff Analysis. Outsourced bill processing allows a billing service provider the ability to audit utility bills and--when overcharges are identified--to secure refunds for the owner. The provider can also conduct a rate and tariff analysis to ensure that utility charges are being assessed at the best possible rate structure for an apartment community and when they are not, to make appropriate recommendations.

Vacant Unit Utility Cost Moment. Outsourcing utility bill processing can enable the provider to audit all incoming utility bills received by the apartment owner for a specific apartment unit. These "assumed vacant unit" bills are compared against resident ledger files sent from the community, allowing the provider to identify whether the bill received for the unit is actually for a vacant unit or rather if a resident has failed to transfer (or maintain) service in his or her name.

When a unit is found to be occupied, the provider can review charges owed and bill the resident for usage, helping to recover the utility cost on behalf of the community. When a unit is found to be vacant and charges exceed a pre-determined threshold, managers are notified so they can determine the cause of the high costs and avoid them during future billing periods.

Michael D. Radice is President of NWP Services Corp. Contact NWP at 800/323-3178.

UTILITY COST RECOVERY FINANCIAL BENEFITS

          ANNUAL COST                  POTENTIAL INCREASE
# UNITS   RECOVERY POTENTIAL *         IN PROPERTY VALUE **

250       Up to $91,000 (or more)      Approximately $1,820,000
500       Up to $182,500 (or more)     Approximately $3,650,000
1,000     Up to $365,000 (or more)     Approximately $7,300,000
10,000    Up to $3,650,000 (or more)   Approximately $73,000,000

* based on NWP Services Corporation's average recovery by unit in 2004

** using a 5% cap rate to calculate