The English philosopher Sir Francis Bacon once said that “knowledge is power.” New energy reporting requirements in California may soon give different credence to this quote by requiring that knowledge about power, specifically energy consumption in commercial buildings, becomes an inescapable part of the knowledge necessary to own, lease and finance a non-residential building in California.
California Assembly Bills 1103 and 531 were enacted on October 12, 2007, and October 11, 2009,1 respectively, and require non-residential building owners and operators to record and disclose energy consumption data to prospective purchasers, tenants and lenders for the 12-month period preceding the disclosure. The benchmarking and disclosure requirements of these bills were originally scheduled to take effect on January 1, 2009, but, after a series of delays, they currently are scheduled to commence on July 1, 2013.2
This article explores the potential pitfalls of AB 1103 and 531 and provides recommendations for commercial building owners and recipients of the energy consumption data.
General Requirements of AB 1103 and 531
The basic framework for the legislation is in California Public Resources Code Section 25402.10. The statute provides in part as follows:
- On and after January 1, 2009,3 electric and gas utilities shall maintain records of the energy consumption data of all nonresidential buildings to which they provide service. This data shall be maintained, in a format compatible for uploading to the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager, for at least the most recent 12 months.
- On and after January 1, 2009,4 upon the written authorization or secure electronic authorization of a nonresidential building owner or operator, an electric or gas utility shall upload all of the energy consumption data for the account specified for a building to the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager in a manner that preserves the confidentiality of the customer.
- In carrying out this section, an electric or gas utility may use any method for providing the specified data in order to maximize efficiency and minimize overall program cost, and is encouraged to work with the United States Environmental Protection Agency and customers in developing reasonable reporting options.
- (1) Based on a schedule developed by the commission pursuant to paragraph (2), an owner or operator of a nonresidential building shall disclose the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager benchmarking data and ratings for the most recent 12-month period to a prospective buyer, lessee of the entire building, or lender that would finance the entire building. If the data is delivered to a prospective buyer, lessee, or lender, a property owner, operator, or his or her agent is not required to provide additional information, and the information shall be deemed to be adequate to inform the prospective buyer, lessee, or lender regarding the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager benchmarking data and ratings for the most recent 12-month period for the building that is being sold, leased, financed, or refinanced.
The Proposed Regulations dated March 2012 (the “Regulations”) of the California Energy Commission (the “Commission”), set forth the schedule and procedure for implementing AB 1103 and 531. Under the current Regulations, the commencement dates for implementation are based on square footage, as follows: (i) January 1, 2013, for a building of more than 50,000 square feet; (ii) July 1, 2013, for a building of more than 10,000 square feet up to 50,000 square feet; and (iii) January 1, 2014, for a building between 5,000 and 10,000 square feet. (There are currently no express benchmarking or disclosure requirements for a non-residential building of less than 5,000 square feet.) According to the Commission’s website as of November 14, 2012, however, the initial compliance date will be postponed to July 1, 2013, under new proposed regulations containing an updated schedule of implementation to be made available by November 27, 2012. The Commission’s website currently indicates there will be no substantive changes from the March 2012 Regulations.
Monitoring the implementation dates for the bills is important, because under Section 1685(a) of the Regulations, once implemented, a building owner must do the following at least 30 days before a disclosure is required: open an account at the EPA’s Energy Star Program Portfolio Manager website; provide the owner name, building name, address and other identifying information; identify all sources of energy use data for the entire building for at least the most recent 12 months; and request that all utility and energy providers serving the building release energy use data for the entire building from the most recent 12 months to the owner’s Portfolio Manager Account or manually enter all data to such account. Under Sections 1685(b) and (c) of the Regulations, a utility company is required to upload the data within 15 days of an owner’s request, and the owner or operator has 30 days thereafter to access the data for disclosure purposes.
Building Owners and Operators
Notably, the benchmarking and disclosure requirements and the Regulations apply only to transactions between non-residential building owners and operators, and prospective buyers, tenants and lenders. The statute does not define the term “building operator,” so it is unclear which entities, apart from property owners, would fall under this definition. AB 1103 does not expressly apply to transactions between sublandlords and subtenants, but if a sublandlord is leasing the entirety of the building under a triple-net lease, it could constitute an “operator” that must disclose the energy usage data to potential subtenants of the entire building.
Buyers, Tenants and Lenders
Section 1684 of the Regulations requires owners to disclose the data to the prospective buyer, tenant or lender “as soon as practicable” before execution of the purchase and sale agreement or lease, or submittal of the loan application, as applicable. Section 1684 also clarifies that the disclosure is required only to a buyer, tenant or lender financing the entire building. Accordingly, any prospective tenant looking to occupy less than the entire building would legally not be entitled to obtain the data. It also is unclear whether a construction lender that is financing improvements for only a portion of the building would be entitled to the energy consumption data, even if the loan is secured by a deed of trust that encumbers the entire building and property.
No Updates Required
Neither the statute nor the Regulations require the owner to update the data after the initial disclosure. The Legislative Counsel’s Digest for AB 1103 provides:
After the benchmarking data and ratings are disclosed, the property owner, operator, or his or her agent would not be required to provide additional information regarding the benchmarking data and ratings. The information disclosed would be considered adequate to inform the prospective buyer, lessee of the entire building, or lender that would finance the entire building of the benchmarking data and ratings for the building.
The absence of an obligation to update the data could present a problem for a prospective tenant, buyer or lender where the closing is scheduled to occur several months after the initial disclosure. For this reason, a recipient of the data would be well served to require the owner to update the disclosure in a purchase agreement, lease or loan agreement, as applicable, on a quarterly or semi-annual basis. In addition, a lender or buyer may wish to consider including an express negative covenant against the energy rating falling below the initial rating in its agreement with the building owner if the energy rating is a material attribute of the building’s value.
Risk of Misuse
One of the reasons for the delayed implementation of AB 1103 and 531 is the concern over the privacy of a tenant’s energy usage data. Under Section 1685(b) of the Regulations, if more than one account exists in a building, such as a multi-tenant building with separately metered utilities, a utility company must aggregate or “use other means to reasonably protect” the account holder’s data from uses other than compliance with Public Resources Code Section 25402.10. However, it is unclear from the Regulations to what extent an owner could use the data, and the Regulations do not set out penalties for any owner’s misuse of an account holder’s information. For instance, it is unclear whether a building owner’s use of the data to enforce “green” lease provisions against a tenant, such as to establish a violation of excessive energy consumption requirements, would violate the Regulations. If the Regulations are construed narrowly, such use would not be in compliance. In addition, protection of a tenant’s data and identity is difficult, if not impossible, in multi-tenant buildings occupied by few tenants.5 For example, in a multi-tenant building with three or fewer tenants, a landlord could ascertain a new tenant’s increased energy usage by comparing it to usage data for periods before such tenant’s occupancy, and, in single-tenant buildings, there is no means of protecting the identity of the tenant from the building owner or operator.6
Obstacles to Obtaining Tenants’ Data
There also are difficulties with obtaining the required disclosure data where a tenant is unwilling to provide a written release to the utility company. A landlord may require that a tenant consent to disclosure by the utility company in future leases, but for existing tenants (or tenants that occupied the building within the last 12 months, but no longer occupy the building) that have not previously consented to disclosure of energy usage records, it may be difficult for an owner to obtain the data. Under the California Public Utilities Code, a utility company may not disclose a customer’s electrical or gas consumption data without the consent of the customer, unless all information regarding the individual identity of a customer has been removed or where required or permitted under state or federal law or by order of the Public Utilities Commission.7 As noted above, removal of all identifying information is not possible where there is a single-tenant building or where there are few tenants and aggregation may not conceal the identity of the tenant. Although the statute requires the building owner to comply with the reporting requirements, it does not require the tenant to consent to disclosure of its account.8 In order to resolve this problem, building owners should include provisions in future leases, amendments or lease termination agreements that expressly require tenants to provide written consent to disclosure of energy usage records in the form required by the applicable utility company.
Until the Commission issues additional regulations that clarify the ambiguities and other issues identified in this article, building owners and operators should err on the side of strict compliance. Parties entitled to receive the energy usage data should be mindful of the shortcomings of the existing reporting requirements and insist on including provisions that require updates to the data or covenants relating to energy ratings in the underlying agreements with the owner. It remains to be seen if knowledge about power consumption equates to knowledge that gives power, but California non-residential building owners, lenders and tenants are on notice that they need to devote some energy to ascertaining an answer.