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By Elizabeth Miller

Those in the rental housing industry often wonder, “Is it really worth it to complete and submit a utility passthrough?” The answer is yes; follow the rules of the San Francisco Rent Board, submit the petition in accordance with those rules, serve the increase in a timely fashion and, like any other passthrough, it will be granted.

At the inception of the PG&E passthrough, the paperwork was minimal. All landlords had to do was complete a single worksheet provided by the San Francisco Residential Rent Stabilization and Arbitration Board, attach it to the annual increase notice and collect the increase. However, due to ever-rising costs and large increases disputed by some tenants, the process as of November 1, 2004, is now under the oversight of the Rent Board, which regulates utility increases as it does most other passthroughs.

The current utility, or PG&E, pass-through exhibits characteristics shared by both the capital improvement passthrough and the annual attached worksheet of the early years. The PG&E passthrough is computed, added on to the annual rent increase, and submitted to the Rent Board with the possibility of a hearing—each petition evaluated on merit and each calculation questioned based on the evidence submitted. While the capital improvement passthrough is guaranteed a hearing before an administrative law judge at the Rent Board, the PG&E passthrough may or may not be scheduled for hearing. The submitted petition is examined and granted, or a hearing is scheduled to answer questions the administrative law judge may have on the submitted materials.

Should the possibility of a hearing deter landlords from giving the passthrough? Absolutely not. However, each building or unit should be evaluated to see if the amount of time spent and/or money invested by hiring a professional to process this passthrough will be worth it in the end. Let’s look at the example of a 2-unit building in which the tenants pay their own gas and electric bills. In this example, the only common area electric bill might be a front porch light at the entry way or the common area hallway lights outside the units. The increase in costs could be a matter of cents.

If the increase is only a few cents, should the landlord spend valuable time preparing the paperwork, making copies, and possibly sitting through a hearing? Even though at first glance this seems to be a question easily answered, it might not be a simple monetary yes or no for every landlord.

Even though the increase is small now, the base year remains intact and the basis for comparison until 2009, as long as the passthrough is administered consistently every year. Without a doubt, energy costs will rise, giving owners a larger passthrough every year, a few cents this year possibly translating into dollars as time goes by.

Therefore, the small building owner in this case should consider the PG&E passthrough now and be consistent in the future. Tenants won’t likely object to
a small annual increase, and the passthrough’s inclusion every year will make it seem as if it is just another part of the annual rent increase.

Like the small building owner, the larger multiunit building owner should look to the future to see if it’s worth submitting a PG&E passthrough. Consider, for example, a building that has been passing through this cost since its inception with the base year first established and consistently administered over the years; depending on the circumstances, the monetary gain could now be very large.

When it was first administered in small increments, it might have meant a very small percentage of increase, but to those tenants who have remained for decades under the same tenancy agreement, the amount each month is in some circumstances a huge percentage of the monthly gross from each unit. Some long-term tenants could now be paying over $200 per month to the owner.

Besides the future monetary ramifications, the current gain for the multiunit building owner can be significant. Take, for example, a 50-unit building that absorbs all of the utility costs for common areas as well as the units. Using the base year of 2002 and computing each base year consistent with the move-in year of each tenant, the revenue could be $9 per unit per month in the first year. This number was an actual number for a building of this size in San Francisco last year.

If each unit is eligible, the amount of increase to the total income for the building would be $5,400 in the first year, a sum previously paid out but not recouped by the building owner. In a large building that incurs all energy costs, the possibility of a hearing is certainly worth it in the first year, and will be worth much more 20 years down the road. We all must ask ourselves—when the opportunity is given to us through the rent ordinance to raise the rent, shouldn’t we take advantage of that opportunity?

Additionally, in a world ever more aware of the conservation of the earth’s resources and the costs of waste, tenants forced to pay increased utility costs may
be more conscious of energy use. Leaving the light on in the kitchen 24 hours a day may become something to pay for instead of a right to be taken for granted. Through possible energy conservation, utility bills could be reduced for both the small and multiunit owner.

At first glance the PG&E passthrough looks almost impossibly complicated.
Tenants must be evaluated upon their move-in date as to their own base year. Each base year used is processed as a separate petition. The costs must be computed by the number of rooms in each unit, and if the building has a fee-based laundry used by all or some of the tenants and not separately metered the laundry’s energy costs must be deducted from the calculations.

However, once the calculations are done in the first year, the concurrent years should already have an established base year for long-term tenants and should not be as difficult to complete since there is data from the year or years before. Every year after the first should be easier and come with greater benefit. Each year must be calculated along with the annual rent increase, passing through rising energy costs only to those who benefit from the energy used.

The Rent Board has been called anti-landlord by some owners for the many rules of the Ordinance enforced and anti-tenant by some residents for the ability through the same Ordinance to pass through costs, such as a new roof or the above-mentioned inflationary costs. But, through these same rules, the owner has been given the option to recoup a partial amount of inflationary utility costs. Whether the property has a small or large number of units, landlords should take advantage of this opportunity. By monetary gain or conservation, the landlord will benefit in the long run by passing through utility costs to those who actually benefit from the use.

The owner who looks into the utility passthrough will find that, not only is there a chance of the passthrough being granted, but by following the rules and regulations it will be granted. Whether or not the paperwork seems to be too complicated, the utility passthrough, through generated revenue or a possible decrease in costs, is money in the bank; the earlier it is begun the greater the benefit in the long run for all.

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The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Elizabeth Miller is the petition specialist with Property Management Systems and can be reached at 415-661-3860. Copyright © 2008 by SF Apartment Magazine. All rights reserved.