Living Economics

Water consumption dropped 10 – 15% in a 100-unit rental apartment building in Tustin, CA after tenants were billed separately for their water consumption.

Because half the nation's 25 million apartment units share common water systems, water fee is included into many tenants' rent. But as water becomes scarcer in the warmer and drier states of California, Texas, Arizona and Florida, landlords have retrofitted their common water systems with wireless meters to facilitate separate water billing.

Similarly, tenants did not pay for their energy consumption separately until the energy crisis of 1970s.

Separate billing has essentially turned utilities from a fixed cost into a variable cost. When they are a fixed cost, the marginal cost of additional consumption is zero. So consumption would not stop until the marginal benefit is zero. But when utilities are a variable cost, the marginal cost of additional consumption is positive. So consumption would stop well before its marginal benefit becomes zero. Hence the goal of resource conservation is served by metering and billing individual consumption.

But there is a limit to how much resources can be conserved through separate billing. In fact, separate billing alone might have discouraged energy conservation. A poorly insulated apartment will take more energy to heat due to massive heat leakage. The amount of energy saved by turning down the thermostats might be more than offset by the amount of energy leaked. If the tenants are separately billed for their energy consumption, there is no incentive for the landlord to insulate the apartments. And because the tenants do not own the property and do not stay long enough to recoup the cost of insulation, there is no incentive for them to insulate the apartments either.

In other words, by internalizing the cost of energy consumption to the tenants through separate billing, metering has in effect externalizing the cost of energy leakage. The end result is a net waste of valuable energy.

Unless there is a federal or state energy efficiency standard for housing, there is no incentive for landlords to incur the cost of energy conservation. Although investment in energy efficiency generates a positive return over the life cycle of the housing units, it typically increases the front-end cost by 20- 25%. These additional costs can be recouped only over 20 to 25 years through annual energy saving. Without a government energy efficiency mandate or government subsidies, landlord investment in energy efficiency would only increase the immediate rental cost without offering any offsetting competitive advantage. Specifically, individual landlords need not incur these costs in a tight rental market where the renters are likely to overlook the issue of energy efficiency. In a depressed rental market, those landlords who invest in energy efficiency would be disadvantaged if they must charge higher rent to recoup the energy-efficiency costs.

But if it costs more to build new energy generating plants than to encourage energy conservation, it might make sense for local utility companies to offer subsidy to landlords to insulate their apartments or to home owners to purchase more energy-efficient home appliances. Such offers is also a tacit recognition by local utility companies of the de facto rights¹ of landlords to pass the cost to tenants and home owners to hold on to old less energy-efficient home appliances.