Ratio Billing in Apartments Leaves Renters in the Dark About Utility Costs

San Diego tenants suspect they’re paying more than their fair share of utility costs, but they have no way to prove it.

Their landlords are using what’s called ratio utility billing, a little-known method of charging tenants for utilities like water, sewer, trash and energy but also services like pest control or even parking. Landlords can divvy out the costs and charge tenants themselves, but they often hire third-party companies to come up with a formula to assign those costs, and then bill and interface with tenants.

But some companies and landlords aren’t sharing the math behind that formula, leaving renters unable to control their utility costs or conserve increasingly insecure resources in California like water.  

Teresa Morse in November of 2022 received a $137 water and sewer bill from Conservice, LLC, even though her lease said she wasn’t responsible for those water and sewer costs. In Morse’s case, the building she’d lived in for years sold to another company. When her lease term was up, it automatically turned month to month under a new property manager.

California landlords can change the terms of month-to-month leases, and add new utility charges, with a 30-day notice. But Morse says she hadn’t received a notice and by December, got another email informing her she was behind on unpaid utility charges. In a fervent Jan. 18 email to her landlord, Morse explained she didn’t understand these new water bills, and that hers was one of the few units in the building without a washer and dryer.

“While I do not have a problem paying my ‘share’ of anything, I refuse to be screwed over and made to incur costs that can’t be proven are mine,” Morse wrote, asking her landlord to explain the formula behind how water and sewer costs are divided.

In a February email, Richard Clabo of SRM Urban informed tenants that their utility costs were divided based on “occupancy and square footage” of each apartment.

“Unfortunately, this is the only way to bill non-submetered buildings,” Clabo wrote. “All residents are required to pay water and sewer per your change in terms agreement that was sent with rent increases.”

Morse refused to pay those utility bills until SRM Urban gave her a choice: Stay on her month-to-month lease with a monthly $250 fee or sign a year-long lease and accept the utility costs. She signed the lease and took on the new utility charges.

“I know I’m not the only person that’s going through this. I have a good job and I can’t even afford to live by myself in San Diego,” Morse said, who lives with her son. “Every day I’m worried something bad is going to happen and I’ll end up at my age not being able to find a place to live.”

How Ratio Utility Billing Works

Ratio utility billing exists because it’s difficult to track how much water or energy individual apartments use in buildings with one meter, called a master meter. Master meters give landlords one bill for water, one bill for sewer, and so on. Most buildings constructed before the 1970s are master metered. 

“With water rates going up the way they have been … oftentimes faster than inflation, ratio utility billing is a way to offset some of those increases but also have tenants pay for what they’re using,” said Joshua Howard, executive vice president of local government relations at the California Apartment Association, a lobbying group for multifamily property owners.

Tenants don’t always know how much of a utility they’re consuming, though.

Landlords can install submeters on each apartment to track exact utilities usage. But it can be costlier upfront since meter installation may require construction like digging into the building’s plumbing, Howard said.

“In a good amount of rental housing in California, there could be issues around asbestos in building materials or lead-based paint. Abating that can get very expensive,” Howard said.

By turning to ratio utility billing, landlords can hire third-party companies or can themselves divide utility costs among tenants under a formula of their choosing, typically assigning a portion of the cost by square footage or the number of tenants per unit.

Landlords can’t profit or charge more than the utilities cost under California law, other than passing along any fees they might pay a third-party company to handle billing. The alternative billing approach is supposed to fairly allocate those costs, said attorney John List during an online panel last year on the legal aspects of ratio utility billing.

“You want your … lease with the tenant to be as clear, fair and as understandable as it can be,” List said.

Dan Sharabi, co-founder and CEO of Livable, a third-party utility billing company, advised property owners during that June 2022 panel to be transparent with residents about their utility costs by sharing a redacted bill to prove how it’s divided.

“It can get pretty dangerous if more residents feel as though they’re being taken advantage of somehow. Legislators react to that,” Sharabi said. “It’s vital we tread lightly and approach this conservatively as we unlock this revenue.”

San Diegans Sue Their Utility Biller

Conservice, LLC is facing a class action lawsuit after a couple of San Diego tenants alleged the company isn’t being transparent about its utility charges. The Utah-based company markets itself as one of the nation’s “largest most trusted utility management and billing services.”

In one case, Conservice charged a Chula Vista Tenant $634 for an October 2021 electricity bill. But the company refused to provide a copy of the property owner’s San Diego Gas and Electric bill, citing confidentiality. Attorneys for Conservice, LLC didn’t respond to a request for comment.

Jimmie Davis Parker, the attorney representing San Diego tenants, said in a statement that Conservice’s non-disclosure policy prevents tenants concerned they’re overpaying their fair share of utilities from verifying what the landlord is actually paying.

Conservice argued in a response to the lawsuit that there’s no state law requiring them to reveal those bills and that the company gave tenants enough information, like the cost of electricity per kilowatt-hour, or how the company splits sewer and trash costs “equally by number of units.”

In a tentative ruling, Judge Keri Katz sided with part of the tenants’ argument that they didn’t have enough information to verify Conservice was billing them correctly.

“Much of the data is not provided but instead described in vague terms,” Katz wrote.

Katz wrote that the tenants allegations were enough to support the claim that they lost money in the form of upcharges or overbilling as a result of Conservice’s practices. Another hearing on the case is set for August.

Ratio Utility Billing Bans in Rent-Controlled Cities

Rent-controlled cities in California are increasingly putting restrictions around third-party utility billing. Santa Monica’s rent control board recommended banning ratio utility billing altogether back in 2017.

“It is susceptible to abuse as landlords – and the industry of billing companies that has sprung up to facilitate RUB billing – have no requirements to ensure the accuracy of their billing or limit the ‘administrative’ costs that they impose on tenants merely for the ­privilege of receiving a bill from their landlords or the landlord’s third-party billing vendor,” wrote the board’s general counsel, J. Stephen Lewis, in a letter to then Mayor Ted Winterer.

Instead of a ban, Santa Monica’s rent control board essentially counts utilities costs as part of rent. Landlords are required to register the amount they’re charging, including any shared utilities costs, and if the amount exceeds the city’s rent cap the landlords are liable to the tenant for excess rent.

“This is really kind of calling out for state regulation,” said Alison Regan, the rent board’s general counsel during an 2021 interview with Voice of San Diego.

California has a statewide rent cap that allows landlords to raise rent by no more than ten percent per year. But the law doesn’t define utilities, said Gilberto Vera, an attorney at the Legal Aid Society of San Diego. Vera said a trend among landlords is to increase rent to the cap while passing utilities onto the tenant.

“We’ve seen some landlords and property management companies try to get around that (cap) and squeeze as much money as they can from the property,” Vera said.

Vera said landlords are increasingly adding fees onto leases for things like parking or maintaining a month to month lease. That’s true in the case of Morse, whose landlord recently offered her a yearlong lease or a $250 per month fee to stay on her month-to-month.

“I think this is an area ripe for abuse because … the statewide rent cap is vague as to whether utility shifting and adding fees is a rent increase or not,” Vera said.

Vera said the stakes are high in California in that if a tenant misses a utility bill or fee payment it could be classified as missing rent, enough cause for a landlord to evict.

“Landlords are disproportionately in positions of power,” Vera said. “They’ll have eight or nine applicants who want a unit presented as a take it or leave it kind of thing … they’re not really negotiable from the perspective of a tenant.”