Don’t Get Shocked by Your Electric Charges

Lease Tips™

Don’t Get Shocked by Your Electric Charges

November 10, 2009

Electric charges are a significant part of building operating costs. Most leases require the tenant to pay for electricity used within the premises for lighting, computers and other equipment. Except for very large leases where the tenant usually shops rates directly with utility suppliers, the tenant’s electricity charges are governed by the terms of its lease.

Given the high volatility of utility rates, these costs must be monitored to ensure ongoing compliance with both the spirit and letter of the lease.

There are various types of provisions in leases that govern how electricity is to charged. These include:

Stipulated Electric Charge
Electric Rent Inclusion Factor (ERIF)
Actual Charges as Measured by Submeter
Actual Charges as Measured by Survey

Stipulated Electric Charge

This is common in suburban office leases. There is a fixed amount of additional rent that the tenant agrees to pay for throughout the lease term to cover the cost of electricity. This is different from common area electric (such as that used for the central HVAC plant and corridor lighting) which typically is included within the general expenses for the building and charged according to how the lease is structured (see Demystifying the Difference between Net and Gross Leases).

Electric Rent Inclusion Factor (ERIF)

The ERIF is common in urban markets. In these clauses, there is a portion of the rent earmarked to cover costs of electricity. This amount increases as utility rates, taxes, fuel charges and other factors change over the term of the lease. Given the complexity of these factors, charges must be carefully monitored to ensure ongoing landlord compliance.

Actual Charges as Measured by Submeter

In many cases, landlords find it desirable to install their own submeters to measure tenants’ consumption of electricity. The Landlord then bills each tenant according to a rate schedule specified in the lease. Submeters raise a number of concerns, including:

Measurement of the correct space. Because these are privately installed and tenant configurations change, it is common for submeters to measure other tenants’ spaces or common areas of the building.
Calibration of submeters. You need to ensure that the landlord frequently recalibrates and checks the performance of the submeters.
Accuracy, honesty and independence of the meter reader. Be sure the landlord has employed a reputable firm to perform these duties.

Actual Charges as Measured by Survey

Here, the Landlord retains experts to estimate how much electricity each piece of equipment in your space is using and calculates charges pursuant to terms or rates set forth in the lease. If consumption is being measured by survey, there are similarly a number of issues that can affect your billing, which include:

Specific equipment and areas being surveyed. Be sure that the survey is limited to the lighting and equipment within your premises.
Assumptions regarding level of use, hours of operation, and actual amounts of energy being used. Many devices have their maximum energy draw listed on their face plates. Be sure that the landlord is not assuming that each device is always drawing the maximum.
Frequency of surveys. This is especially important if your operations change (i.e., changes to hours of operation, equipment or staff).
Substantiation of charges. Your lease should provide for the landlord to give you the data supporting its conclusions about your energy use¸ and provide for a logical and orderly mechanism to verify and challenge it.
Cost of updated surveys under the lease. Be sure you have the right to request/demand an updated survey. Address who will pay for it.
Accuracy, honesty and independence of the surveyor. As with submeters, be sure that the landlord has employed a reputable firm to perform these duties.

Application of the Proper Rate Schedule

If your usage is measured by submeter or survey, it is the landlord’s responsibility to apply the appropriate rate schedule to calculate your bill. The amount it pays to its utility company is driven by two components: consumption and demand.

Consumption. This is the amount of electricity you are drawing over time. Think of it in terms of a water bill: how much total water have you drawn for the period?
Demand. This is the measurement of capacity – i.e., the maximum amount of energy you request at any given time. Again, using the water analogy, how big must the pipe be to satisfy your requirements? This is a key determinant in most commercial utility rate schedules, because it drives how much capacity the utility system must be prepared to deliver. Not all landlords charge separately for Demand, but most pay a demand charge to their utility providers.

Issues that come up with respect to rates include:

Utility rates vs. the average cost per unit of consumption for the building. Depending upon your operating characteristics, one method may have a distinct advantage over the other.
Changes to landlord’s energy rate or method of purchasing energy. This is especially important as some jurisdictions have regulated utility markets and others are deregulated.