Water Utilities Policy Don't Make Sense for Multifamily

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Water Utilities Policy Don't Make Sense for Multifamily

John Deyrup
Member since 2020 · 7 posts · 0 votes

There are three issues around water utilities work that don't make that much sense to me. These issues are likely to get much worse due to the lack of investment of in water infrastructure and climate change in the coming years.

1. Tiered schedules treated differently for apartments vs single family homes

2. Billing being tied to a property

3. Lack of incentives around water conservation/efficiency

Tier Schedule:

Water bills in our area are billed on tiered rates based on usage so that apartments will pay the higher tier rate even though there are multiple families living at the location; e.g.

Pricing:

<= 2000 cf / $6 per 100 cf
> 2000 cf / $9 per 100 cf

Two families in separate houses using 2000 cf/month each

House 1: $120: (6 * 2000 / 100)

House 2: $120: (6 * 2000 / 100)

Total Bill Paid: $240

Two families in a multifamily using 2000 cf/month each, are treated as one billing location for usage rates

Unit 1: $120: (6 * 2000 / 100)

Unit 2: $180: (9 * 2000 / 100)

Total Bill Paid: $300

I am not sure what the policy benefit of charging 50% more for people living in apartments/multifamily is; I would assume that it is cheaper for the city to maintain piping to one location vs two locations. Am I missing something about why families living in the multifamily should pay more?

Bills Being Tied to Property:

Utility bills are not tied to a landlords property for gas and electric. What is it about water bills that requires them to be tied to the property owner?

Issues around conservation/efficiency:

I don't think the incentives work properly for any of the utilities. Landlords should be incentivized to increase unit efficiency and tenants should be incentivized to use less resources. With heat and gas the landlord has almost no incentive to increase the efficiency of the units because the tenant pays for all of the utilities. There is an incentive for the tenant to use less energy, but there is only so much they can do without building improvements. With water the tenant has no incentive to use less water, but the landlord has an incentive to make water usage more efficient.

I am not sure what the right solution; it could be cost sharing in utilities, requiring utility usage to be made public so renters can compare rent + utilities, or some other solution. I don't directly bill my tenants based on water usage, but all of my costs are reflected in the rent so both landlords and tenants pay for this.

CTA: Is anyone interested in forming a group to petition state and local governments about this issue. 

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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
5y

I'm going to answer this since I've spent a good part of my life working in public utilities (specifically w&s)

1. You generally get a minimum consumption with that type of billing, so it's apples to apples. Example: fixed rate of $10 for the first 1k gallons, $2/thousand for everything beyond that. If you had 10 units in an apartment building, you should get 10 minimums and then the same overage, so in this case you'd have $100 for the first 10k gallons, $2/beyond. PM me a link to your water utility company and I'll look at their rate structure and explain it to you. If they don't do that, then your argument makes sense because a)the MFH is being penalized because they are not getting credit for residential units, and b)it is generally cheaper for the utility to maintain fewer connections for more people than the other way around. I would trade 100 SFHs for a 100 unit apartment building in my organization all day long. There are exceptions to this - very tall units might require auxiliary pumps or greater storage tank sizes, etc - but in terms of infrastructure in the ground density is cheaper. MFH also tends to use less water per unit than SFH because residents typically do not water gardens, wash cars, or use anywhere near the same amount of water for non-personal use (drinking, bathing, cleaning).

2. In an ideal world, when the utility is a non-profit entity (government or non-profit run), the water charges would be attached to the unit because a)that's where the service was consumed, and b)non-paying customers offload the cost of doing business from the business owner (the landlord) to the public (the utility). Every time someone runs off without paying a bill, the rest of the rate payers have to make up those costs by paying a few cents more in their water rates. That's unfair to those who do pay. Since the utility has no control over who the landlord puts in the unit, why should they have to eat the loss? That said, reality is that many states have allowed RE owners (and that includes me, since I own a bunch of rental properties) to pass that cost on to the public. When I was in Ohio, our utility had virtually no lost revenue, since water bills were tied to the property and anything unpaid simply became a tax lien. That put the landlord responsible for making sure they either paid the water bill themselves, or (what most did) just got a copy of the bill, and booted non-paying tenants or took the unpaid bill out of their deposit. 

3. Utilities are tough when it comes to conservation. Conservation can both be a savings and a loss to the utility; it depends on the nature of the utility and where they are on their sawtooth. What I mean by sawtooth is this: the cost for providing utility services generally resembles a downward-sloped sawtooth. If you had to build a water system to provide 10k gallons per month for one person, and it cost $1 million to operate per month, your costs would be $100/gallon ($1mil/10k gallons). As you added customers, the incremental cost would be relatively small, since some large costs are fixed - laying pipe, buying filter systems, etc - and other incremental costs (more chlorine, for example) are small. So it might be that after awhile, it cost $2 million to operate per month to serve 1000 customers 10 million gallons/month, which puts your cost at $.20/gallon. So you have this downward trend, except that maybe 1000 customers is your limit, and to serve 1001 customers you need a second filter system which costs another $500k/month to operate, so now your cost per month for 1001 customers is $.25/gallon - not as much as when you were serving one person, but more than serving 1000k people. That's your reverse sawtooth.

Now when people conserve utilities the effect depends on where you are. Let's say you're at the top of that sawtooth and you only have 1 customer. If that guy starts saving water, you are really going to be ate up in costs - you need him to use water. On the other hand, if you're at the 1000 customer level, you're maxed out. If 500 of those people start saving half their water, now you can add 250 people to the system for the same costs which improves your profitability. This holds true regardless of the utility. Gas utilities might need to bring on a new pipeline. Electric utilities might need to build a new generation station. Water systems might have to add pumping stations or extend lines. ETC. 

So for your third question there's no real answer. Smart utilities encourage conservation when they are near the bottom of that sawtooth, and encourage more use/more customers/more density if they are near the top. 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    I gave up tilting at windmills long ago. 

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y

    I'm going to answer this since I've spent a good part of my life working in public utilities (specifically w&s)

    1. You generally get a minimum consumption with that type of billing, so it's apples to apples. Example: fixed rate of $10 for the first 1k gallons, $2/thousand for everything beyond that. If you had 10 units in an apartment building, you should get 10 minimums and then the same overage, so in this case you'd have $100 for the first 10k gallons, $2/beyond. PM me a link to your water utility company and I'll look at their rate structure and explain it to you. If they don't do that, then your argument makes sense because a)the MFH is being penalized because they are not getting credit for residential units, and b)it is generally cheaper for the utility to maintain fewer connections for more people than the other way around. I would trade 100 SFHs for a 100 unit apartment building in my organization all day long. There are exceptions to this - very tall units might require auxiliary pumps or greater storage tank sizes, etc - but in terms of infrastructure in the ground density is cheaper. MFH also tends to use less water per unit than SFH because residents typically do not water gardens, wash cars, or use anywhere near the same amount of water for non-personal use (drinking, bathing, cleaning).

    2. In an ideal world, when the utility is a non-profit entity (government or non-profit run), the water charges would be attached to the unit because a)that's where the service was consumed, and b)non-paying customers offload the cost of doing business from the business owner (the landlord) to the public (the utility). Every time someone runs off without paying a bill, the rest of the rate payers have to make up those costs by paying a few cents more in their water rates. That's unfair to those who do pay. Since the utility has no control over who the landlord puts in the unit, why should they have to eat the loss? That said, reality is that many states have allowed RE owners (and that includes me, since I own a bunch of rental properties) to pass that cost on to the public. When I was in Ohio, our utility had virtually no lost revenue, since water bills were tied to the property and anything unpaid simply became a tax lien. That put the landlord responsible for making sure they either paid the water bill themselves, or (what most did) just got a copy of the bill, and booted non-paying tenants or took the unpaid bill out of their deposit. 

    3. Utilities are tough when it comes to conservation. Conservation can both be a savings and a loss to the utility; it depends on the nature of the utility and where they are on their sawtooth. What I mean by sawtooth is this: the cost for providing utility services generally resembles a downward-sloped sawtooth. If you had to build a water system to provide 10k gallons per month for one person, and it cost $1 million to operate per month, your costs would be $100/gallon ($1mil/10k gallons). As you added customers, the incremental cost would be relatively small, since some large costs are fixed - laying pipe, buying filter systems, etc - and other incremental costs (more chlorine, for example) are small. So it might be that after awhile, it cost $2 million to operate per month to serve 1000 customers 10 million gallons/month, which puts your cost at $.20/gallon. So you have this downward trend, except that maybe 1000 customers is your limit, and to serve 1001 customers you need a second filter system which costs another $500k/month to operate, so now your cost per month for 1001 customers is $.25/gallon - not as much as when you were serving one person, but more than serving 1000k people. That's your reverse sawtooth.

    Now when people conserve utilities the effect depends on where you are. Let's say you're at the top of that sawtooth and you only have 1 customer. If that guy starts saving water, you are really going to be ate up in costs - you need him to use water. On the other hand, if you're at the 1000 customer level, you're maxed out. If 500 of those people start saving half their water, now you can add 250 people to the system for the same costs which improves your profitability. This holds true regardless of the utility. Gas utilities might need to bring on a new pipeline. Electric utilities might need to build a new generation station. Water systems might have to add pumping stations or extend lines. ETC. 

    So for your third question there's no real answer. Smart utilities encourage conservation when they are near the bottom of that sawtooth, and encourage more use/more customers/more density if they are near the top. 

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  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    Water, sewer and trash are often tied to the property, but not always.  The reason why goes back to funding.  These services were often funded through bonds that the government--city. county, whatever-- took out.  The way the bonds get paid are through the payment on the utilities.  Thus the guarantee of payment of these bonds is the property.

    Where I invest, in TN, the water and sewer are not tied to the property, even though they are still city managed.  So that is not always the case.  Here the water bills follow the tenant.

    0Reply
  • John Deyrup
    OP
    Member since 2020 · 7 posts · 0 votes
    5y

    Replying on the points:

    1. Scaling tier usage based on number of units is how I would assume that the water rates would work. In my area they don't scale based on number of units; I am not sure how common that practice is.

    2. I am not sure I see the benefit in offloading the cost of failure to pay on the landlords over utilities. The cost really should not fall on the utility or the landlord, and failure to pay utilities should follow the tenant around, and it does to an extent when the utility bears the cost. If a tenant tries too setup an account with a utility they will be denied unless they pay off the balance, unless the tenant moves out of the utility's service area.

    3. I am not sure how utility companies feel about this, but in my state the utilities have been decoupled for gas and electric, but not water. The intended result is that people are able to pay x dollars for utilities so the utilities get that amount and if a utility makes efficiency improvements then they get to keep more of that money. I suspect that this program can be challenging to operate, but the result on efficiency is pretty clear. The utility companies spend a lot of money on programs to encourage energy efficiency. 

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  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    5y

    "...I gave up tilting at windmills long ago. ..."

    EXACTLY...

    Water is like GOLD to these cities & towns & we're up here next to a huge source of water, abundant snow & continual rain, but billing disparities are incomprehensible. One city is forcing us to upgrade their old potable lead (Pb) pipe main connections at our cost, what happened to our infrastructure taxes/bonds etc.

    Then again we have picked up some nice opportunities at tax lien auctions for significant water/trash arrears.

    1Reply
  • John Deyrup
    OP
    Member since 2020 · 7 posts · 0 votes
    5y

    @Pat L. These things are easier to get changed than you would think; especially at the local level. I have seen it happen many times. At the federal level not so much.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @John Deyrup:

    Replying on the points:

    1. Scaling tier usage based on number of units is how I would assume that the water rates would work. In my area they don't scale based on number of units; I am not sure how common that practice is.

    2. I am not sure I see the benefit in offloading the cost of failure to pay on the landlords over utilities. The cost really should not fall on the utility or the landlord, and failure to pay utilities should follow the tenant around, and it does to an extent when the utility bears the cost. If a tenant tries too setup an account with a utility they will be denied unless they pay off the balance, unless the tenant moves out of the utility's service area.

    3. I am not sure how utility companies feel about this, but in my state the utilities have been decoupled for gas and electric, but not water. The intended result is that people are able to pay x dollars for utilities so the utilities get that amount and if a utility makes efficiency improvements then they get to keep more of that money. I suspect that this program can be challenging to operate, but the result on efficiency is pretty clear. The utility companies spend a lot of money on programs to encourage energy efficiency. 

    1. It's common.

    2. You don't see it because (I assume) you've never managed a utility system. I have, for many years. Yes, in Utopia the non-paying tenant would be forced to make the utility whole. In Reality, utilities absorb a not-insignificant amount of loss from non-paying customers in states where there is no coupling to the property, i.e. nothing to lien. What that means is: in the case of for-profit utilities (most gas and electric), the utility is going to raise rates for everyone else to protect the profit margin, while in the case of not-for-profit utilities (most water and sewer), the utility is going to raise rates and other costs to make up the operating loss OR is going to defer maintenance and capital investment in order to make up the loss. In all cases the paying customer loses. Utilities are a non-recoverable loss; you can't go down to the business and repossess the water or electric that's been used. There are other solutions but landlords would not like any of them - for example, the utility could charge a huge deposit to a non-property owner tenant, say 3-6 months worth of usage (since that is often how long it takes to get utilities completely disconnected depending on the state), but then many rental properties would have trouble being filled and landlords would complain. I have been on both sides of the coin here and I wouldn't like it if my utility company made it more difficult for me to fill my units, but I try to reduce risk to them by placing good tenants.

    3. Encouraging energy conservation by for-profit is done for two reasons: PR and profit. That's it. The advantage an electric company has to encourage turning down the thermostat or installing energy-efficient appliances is to reduce the need to either repurchase more expensive energy from the grid or have to invest significant capital into greater capacity plants or building new plants. They also get a good PR boost by looking to care about the environment, and they may as a side note, but they are primarily looking to be on the low point of that reverse sawtooth I told you about at the beginning of this thread. The same thing is true for non-for-profit (usually government owned/operated water & sewer, and sometimes electric & gas), only what they are looking for is the ability to defer/reduce the need for rate increases which raise the ire of the voting public. On the gov't side, we never get to "keep" improvements, only reduce the need to have to go back to the public for more money - which is a worthwhile goal, as we should always look to be as efficient as practical without damaging the long-term viability of the organization.

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