[Federal Register Volume 61, Number 41 (Thursday, February 29, 1996)]
[Rules and Regulations]
[Pages 7966-7973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4679]



      

[[Page 7965]]

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Part IX





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Community Planning and 
Development



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24 CFR Part 965



Streamlining Public Housing Maintenance and Operation Rules; Final Rule

  Federal Register / Vol. 61, No. 41 / Thursday, February 29, 1996 / 
Rules and Regulations   

[[Page 7966]]


DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Public and Indian Housing

24 CFR Part 965

[Docket No. FR-3928-F-02]
RIN 2577-AB55


Streamlining Public Housing Maintenance and Operation Rules

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule amends HUD's regulations in 24 CFR part 965 on 
public housing maintenance and operations to streamline and simplify 
necessary requirements and to eliminate unnecessary requirements. This 
final rule takes into consideration comments received on the September 
25, 1995 proposed rule.

EFFECTIVE DATE: April 29, 1996.

FOR FURTHER INFORMATION CONTACT: William C. Thorson, Director, 
Administration and Maintenance Division, Office of Public Housing 
Management, Room 4214, U.S. Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410. Telephone 
(202) 708-4703; Hearing- or speech-impaired persons may use the 
Telecommunications Devices for the Deaf (TDD) by contacting the Federal 
Information Relay Service on 1-800-877-TDDY (1-800-877-8339) or (202) 
708-9300. (Other than the ``800'' TDD number, the telephone numbers are 
not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

    In accordance with President Clinton's regulatory reinvention 
efforts and Executive Order 12866 (Regulatory Planning and Review) 
issued by President Clinton on September 30, 1993, HUD commenced a 
comprehensive review of all of its regulations to determine which 
regulations could be eliminated and streamlined. One such review was 
with respect to 24 CFR 965, PHA-Owned or Leased Projects-Maintenance 
and Operation.
    HUD published a proposed rule on September 25, 1995 (60 FR 49480) 
announcing its intention to (1) eliminate one subpart F--Modernization 
of Oil Fired Heating Plants, (2) simplify and revise subpart C--Energy 
Audits and Energy Conservation Measures, subpart D--Individual Metering 
of Utilities for Existing PHA-Owned Projects, and subpart E--Tenant 
Allowances for Utilities, (3) consolidate two subparts, subpart A--
Preemption of State Prevailing Wage Requirements With Respect to 
Maintenance and Operation and subpart H--Lead- Based Paint Poisoning 
Prevention, applicable to other housing programs in a new ``general'' 
part that will be applicable to all programs, (4) revise subpart I--
Fire Safety at a later date to reflect new statutory requirements and 
(5) make only a minor technical change to subpart B--Required Insurance 
Coverage.

II. Differences Between This Final Rule and September 25, 1995 Proposed 
Rule

    Intervening events have changed the need for some of these changes. 
Subpart F was removed by another rulemaking that eliminated obsolete 
provisions, 61 FR 47263. Subpart A is being amended by a pending 
rulemaking that focuses primarily on streamlining public and Indian 
housing modernization regulations. Therefore, this final rule focuses 
on making the changes to simplify subparts C, D, and E.
    Four changes were made at this final rule stage to the revisions 
proposed in the rule published on September 25, 1995.
    1. The Department has revised Sec. 965.407 to require that PHAs 
with mastermeter systems must reevaluate these systems by making a 
cost-benefit analysis at least every 5 years. The final rule changes 
the period from 36 months to 5 years to be consistent with the energy 
audit and the Comprehensive Grant Program five year plan.
    2. The Department has revised Sec. 965.503 to streamline the 
paragraph by eliminating the unnecessary language in the last sentence 
which goes beyond the basic requirement.
    3. The Department has revised Sec. 965.504(b) to streamline the 
paragraph by eliminating unnecessary descriptive language beyond the 
basic requirement.
    4. The Department has revised Sec. 965.507(b) to clarify that 
increases in utility allowances due to rate changes are not subject to 
the 60-day notice requirement in Sec. 965.502(c).

III. Discussion of Public Comments on Proposed Rule

    The Department received public comments from ten organizations 
(seven public housing agencies (PHAs), one PHA trade organization and 
two labor organizations) in response to the September 25, 1995 proposed 
rule. One PHA commended HUD's efforts in simplifying part 965, 
recommending no revisions. The following discussion summarizes the 
remaining comments and provides HUD's responses to those comments.

Subpart A--Preemption of State Prevailing Wage Requirements With 
Respect to Maintenance and Operation of Projects

    Comment: While two PHAs concurred with the decision to retain this 
subpart, two labor organizations strongly objected. Both organizations 
cited their opposition to the rule when it was originally issued in 
1988. They contended that lower rates do not equate to lower project 
costs and that the capacity of the U.S. Department of Labor to produce 
timely and accurate wage reports is questionable because of budget 
cuts. One organization also suggested that the rule creates an unfunded 
mandate upon the States.
    Response: The Department appreciates the positions of the two labor 
organizations. However, the Department points out that this issue was 
the subject of considerable debate at the time the proposed and final 
rules were issued in 1987/1988. It was also, as one of the 
organizations correctly pointed out, challenged in the courts. The 
court found in favor of the Department. The Department continues to 
believe that the rule is in the best interest of the program and 
declines to eliminate this subpart.

Subpart C--Energy Audits and Energy Conservation Measures

    Comment: One PHA and a PHA trade organization suggested that HUD 
should not require all PHAs, regardless of size or performance, to 
conduct energy audits and undertake energy conservation measures. The 
commenter suggested that standard and high performing PHAs and PHAs 
with fewer than 250 units should be exempt unless there is evidence 
that intervention by HUD is required on energy conservation issues. 
Alternatively, it was recommended that if HUD requires all PHAs to 
conduct the described activities, it should guarantee funding. Another 
PHA raised similar concerns about funding of audits.
    Response: First, it should be noted that HUD pays operating 
subsidies through the Performance Funding System (PFS) (24 CFR part 
990) for HAs that are not able to cover all operating costs, including 
utilities, through rents charged to residents. Currently, the utility 
component of the operating subsidy now exceeds $1 billion annually. The 
appropriation for operating subsidy for Fiscal Years 1994 and 1995 was 
only sufficient to fund 

[[Page 7967]]
PHAs at 95 and 96 percent, respectively, of their eligibility level. It 
is not guaranteed that future appropriations will result in a higher 
percentage funding. Hence, the Department must ensure that PHAs conduct 
audits as one means of holding down operating costs, including the cost 
of utilities, and ensuring that the limited funds available for 
operations are used as efficiently as possible.
    It is erroneous to assume that a designation as a standard or high 
performer under the Public Housing Management Assessment Program 
automatically equates to having a good energy management program. HUD's 
Office of Inspector General (OIG) recently completed an Audit Report 
entitled ``Review of Opportunities To Reduce Utility Costs At Public 
Housing Authorities.'' The OIG report was based on visits to 
approximately 63 PHAs, which manage 41 percent of the 1.3 million 
public housing units nationally. The OIG indicated that despite past 
efforts:

    Opportunities for reducing utility costs continue to exist and 
are cost effective in many instances due to ongoing improvements in 
technology. Housing authority managers need to be aware of, 
evaluate, and give maximum consideration to these ongoing and new 
opportunities when managing their utility costs. Because of 
improvements in technology, managing utilities is a continuous 
process that requires an ongoing energy management program.

    The purpose of an energy audit is to identify the types and costs 
of energy use in order to understand how energy is being used and to 
identify and analyze alternatives that could substantially reduce 
costs. PHAs that are effectively managing their utility consumption are 
going through a dynamic process--evaluating current usage, implementing 
recommendations for energy cost savings, and monitoring the results. A 
good energy audit process can provide a PHA with many benefits and 
insights and does not have to be very complex. In fact, some utility 
companies do energy audits for free.
    The Department views a regularly scheduled audit to be an essential 
tool in reducing operating costs for PHAs and the Federal government. 
Since the Federal government is paying the cost of operations, 
including the utility costs, and the technology is constantly evolving, 
it is reasonable and cost effective to require periodic energy audits 
by all PHAs, regardless of size or performance. The Department 
considers five year intervals to be the maximum time between regularly 
scheduled audits, given the continuous changes that are occurring in 
the energy industry.
    It should be further noted that the requirement to perform an audit 
is not new. It has been in the existing regulation for more than a 
decade. The existing regulation required an audit within 36 months from 
the effective date of the regulation (which was published in 1980) and 
prior to a PHA's application for Comprehensive Modernization. The 
proposed rule simply updates the existing requirement for the audit to 
establish regular intervals when audits must be done.
    HUD has eliminated most of the process-oriented requirements (e.g., 
most of the requirements in the current Secs. 965.303 and 965.304) in 
favor of a results-oriented requirement (e.g., an audit performed in 
accordance with State requirements). HUD also has eliminated the 
provision in Sec. 965.302 of the proposed rule involving HUD approval 
of energy audit standards.
    A PHA can, as one commenter recommended, do the energy audit in 
conjunction with its five-year action plan which is required for the 
Comprehensive Grant Program. The modernization regulations are being 
amended to require the incorporation of the energy conservation 
measures resulting from an audit performed under this subpart.
    With regard to the funding of energy audits, the Department 
believes that a sound energy management program is fundamental to good 
property management and that energy audits are a cost of doing business 
that should be included as a part of an agency's operating budget. For 
that reason, the final rule, in keeping with the existing rule, 
provides that the audit is to be paid out of operating funds to the 
extent feasible, and, where operating funds are insufficient, the cost 
of the audit is an eligible cost for inclusion in a modernization 
program. The Department disagrees that this existing requirement 
represents an unfunded mandate.
    The Department recommends that PHAs give serious consideration to 
Secs. 965.305(b) and 965.308 of this rule. These sections, and the 
applicable sections of part 990, provide incentives for PHAs to 
undertake energy improvements through energy performance contracts 
using non-HUD financing. Under this arrangement, a PHA may contract 
with an energy service company to do an audit of its properties and 
submit a proposal for the installation of energy conservation measures 
using non-HUD financing. If the proposal is approved by HUD, HUD will 
freeze the three year rolling base in the utility component of the PFS 
for the utilities involved. The PHA must use at least 50 percent of the 
consumption savings to pay debt service on the non-HUD financing, 
retaining any balance.
    The PHA benefits three ways from such an arrangement: (1) It 
generates additional income from the savings not used for debt service 
payments; (2) energy improvements are shifted from the PHA's 
modernization program to non-HUD financing, thus, enabling the PHA to 
do more work with its limited modernization funds; and (3) the PHA is 
able to provide a better environment for its residents. As pointed out 
in the OIG report, ``energy efficiency can become a competitive 
advantage for housing authorities who want to attract residents through 
increased resident comfort and decreased operating costs.'' Effective 
energy use becomes a more critical issue as the public housing 
community faces drastic changes in the nature of how they are funded 
and operate. More information regarding energy performance contracting 
and incentives to reduce utility costs is contained in HUD Notice PIH 
95-26, issued April 28, 1995.
    Comment: The PHA trade organization suggested that if HUD continues 
to require energy audits of all PHAs, it should not require that HUD 
review and pre-approve all energy performance contracts, especially for 
standard and high-performing PHAs. Instead, the organization suggests 
that the review of such contracts should be part of the independent 
public accountant (IPA) process, as the Department proposes for the 
calculation of resident utility allowances.
    Response: Energy performance contracting is relatively new in the 
public housing community and involves a more sophisticated two-step 
procurement process that most PHAs have not used and are not familiar 
with. Further, HUD must agree that the proposed savings will 
materialize and be sufficient to amortize the debt service in order to 
commit the Department to freezing the utility component of the PFS for 
periods of up to 12 years. This represents a significant financial 
investment on the part of the government. For these reasons, the 
Department is retaining the pre-approval of energy performance 
contracts.
    Comment: One PHA recommended that HUD should develop criteria to 
determine which housing authorities are in need of an energy audit. HUD 
should evaluate a housing authority's energy performance by comparing 
consumption and cost to a standard. This evaluation would determine 
which housing 

[[Page 7968]]
authorities need to conduct an energy audit. The PHA contends that PHAs 
send in so many reports and information to HUD that the energy 
performance of a housing authority could be determined by HUD.
    Response: As noted above, energy audits are an essential part of an 
ongoing energy management system. Technology is constantly changing, 
and it is necessary to have properties reevaluated on a regular basis. 
The recommendation is to rely on HUD to make a determination after the 
PHA has been determined to be energy inefficient. The Department does 
not believe that this is an effective management approach, particularly 
given dwindling resources for PHAs and HUD.
    Further, the Department does receive consumption information for 
PHAs in conjunction with the PFS. The information reflects gross 
consumption and is not broken down by individual projects or buildings, 
both of which can vary significantly. HUD also requests utility 
information in conjunction with its routine monitoring. Such monitoring 
is done only on a limited basis. As noted above, the Department does 
not believe that it is a good management practice for PHAs to wait for 
HUD to determine energy efficiency. Given the cost to the Department 
for operations, including utilities, it will retain the audit 
requirement which has been in effect since 1980.

Subpart D--Individual Metering of Utilities for Existing PHA-Owned 
Projects

    Comment: One PHA indicated that residents should be required to pay 
for utilities and that the PHA should charge a modest rent based on the 
number of bedrooms in the unit.
    Response: The Department agrees that individual metering is an 
important component of a complete energy management system for property 
managers. However, conversions should only be mandatory if they are 
cost effective, and this subpart is written accordingly. The payment of 
rent by public housing residents is, by law, based on income and is not 
addressed by this rule.
    Comment: One PHA indicated that it agrees that individual metering 
is advisable, but that PHAs are capable of implementing these steps 
independent of HUD regulation. The PHA questions the change in the 
requirement in the existing rule which advises the PHA to consult with 
residents, whereas the proposed rule makes such consultation mandatory.
    Response: The Department agrees that many PHAs are capable of 
implementing the provisions contained in the rule. However, it is also 
true that many PHAs are reluctant to do so to avoid confrontational 
situations with the residents and the possibility of litigation which 
has accompanied such conversions in the past. Also, HUD pays the 
utility costs in these cases and needs to ensure that the conversions 
are accomplished where it is cost effective to do so. Because of the 
cost to the Federal government, the Department is retaining this 
requirement. With regard to consultation, residents are both the PHA's 
and the Department's ultimate customer. The Department believes the 
conversion to individual metering, while a good management practice, 
will nevertheless significantly impact the residents and, therefore, 
they must be consulted.
    Comment: One PHA noted the requirement in Sec. 965.407 for PHAs 
with mastermeter systems to reevaluate these systems by making a cost-
benefit analysis at least every 36 months. The PHA recommends a five-
year cycle to be consistent with the energy audit and the Comprehensive 
Grant Program five year plan.
    Response: The Department agrees with this recommendation and has 
made the revision in the final rule.

Subpart E--Resident Allowances for Utilities

    Comment: One PHA noted that a HUD Field Office did a Utility Review 
and made a finding because it was not surcharging residents for water 
for a washing machine. The PHA indicates that it felt that it had a 
right to determine what appliances required surcharges but notes that 
the regulation does not specifically mention washing machines. The PHA 
also recommended that we specifically exempt elderly high rises in the 
South from the requirement to charge residents for the energy to use a 
PHA-furnished air conditioner. In the instant case, the individual 
units had heat pumps for each unit which provide heat and air 
conditioning. The PHA did not think it was possible to establish fair 
surcharges because some run the air conditioning all the time while 
others only run the air conditioning occasionally.
    Response: The Department agrees that if laundromats are not 
available, washing machines in units are reasonable, but not without 
limitation. As has been described above, the amount of operating 
subsidies is limited. It is, therefore, essential that PHAs undertake 
measures to conserve energy. One such way is to establish an allowance 
``which reflects a reasonable consumption of utilities by an energy-
conservative household of modest circumstances * * *.'' If the utility 
is paid by the PHA and the resident exceeds the allowance, the resident 
must be surcharged for the excess consumption. The regulation provides 
PHAs with considerable latitude in the development of allowances, 
within the basic framework described above. The Department plans to 
issue a guidebook in the near future to assist PHAs in developing 
utility allowances.
    There is considerable debate as to the extent to which air 
conditioning should be considered an essential component. As noted 
earlier, the cost of utilities is in excess of $1 billion annually. 
Appropriations for the last two years have been, and for the 
foreseeable future, will be, insufficient to fund PHAs at 100 percent 
of their eligibility under the PFS. Including air conditioning in 
utility allowances beyond what is already specifically authorized would 
seriously and adversely impact the level of funding for other critical 
services such as maintenance. This will affect all PHAs around the 
nation, since it will reduce the overall amount of operating subsidy 
which is fixed. The Department's approach to this difficult issue is to 
allow the capital costs to be an eligible expense while requiring the 
resident to pay the costs of the energy associated with its use. The 
Department is retaining the language in Sec. 965.505(e) as described in 
the proposed rule.
    Comment: Two PHAs indicate that HUD's criteria for establishing 
utility allowances as required in Sec. 965.505(d)(1) through (9) should 
be simplified. One PHA indicated that the nine factors that must be 
taken into account have intimidated many PHAs into commissioning 
expensive engineering studies in an effort to comply. The PHA suggests 
that the language be simplified to allow for the use of previous 
consumption histories. Another PHA suggested that the factors be 
advisory.
    Response: As noted in Sec. 965.505(c), the Department leaves the 
complexity and elaborateness of the methods for establishing utility 
allowances to the discretion of the PHA. HUD believes that the choice 
in methodology is best handled at the local level where the PHA can use 
a procedure suitable to available data and local experience. As such, 
the rule does not intend to require only the use of the engineering 
method to establish allowances. While the Department believes that the 
engineering method will more closely approximate the objective stated 
in 

[[Page 7969]]
Sec. 965.505(a), the consumption method is acceptable and may be 
appropriate for some PHAs. The Department believes that the ``factors'' 
cited, which have been in effect for more than a decade, are reasonable 
and necessary to be ``considered'' regardless of the methodology used 
in order to meet the objective in Sec. 965.505(a).
    Comment: One PHA indicated that Sec. 965.507 states that utility 
allowances must be revised if the rate changes more than 10 percent 
between annual reviews. Utility rates can be volatile, particularly if 
a housing authority purchases a utility, such as natural gas, directly 
from the well-head. This could necessitate changing utility allowances 
several times during a twelve month period. The PHA recommends revision 
only on an annual basis. This PHA, along with others, indicated that if 
HUD wants PHAs to be competitive in the housing market, air 
conditioning must be considered a legitimate cost and should be 
included in the utility allowances.
    Response: To the extent that the market is volatile, any savings/
cost should be passed along to the resident. The Department previously 
discussed the financial impact of including air conditioning in utility 
allowances. No changes are being made to this section.
    Comment: One PHA noted an apparent inconsistency. Specifically, 
Sec. 965.502(c) requires residents to receive a 60-day notice of any 
change to the utility allowances. Section 965.507(b), on the other 
hand, requires that in cases of increases in utility allowances due to 
rate changes, adjustments shall be effective the first day of the month 
following the month in which the last rate change taken into account in 
such revision became effective. The PHA suggested that it appears that 
increases due to rate changes are not subject to the 60-day notice 
requirement contained in Sec. 965.502(c).
    Response: The PHA is correct that revisions due to rate changes 
pursuant to Sec. 965.507(b) are not subject to the 60 day notice 
requirement. The Department has added clarifying language.

Other Matters

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule was made at the proposed rule stage in accordance with 
HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of 
the National Environmental Policy Act of 1969. The Finding of No 
Significant Impact remains applicable to this final rule and is 
available for public inspection between 7:30 a.m. and 5:30 p.m. 
weekdays in the Office of the Rules Docket Clerk, Office of the General 
Counsel, Department of Housing and Urban Development, Room 10276, 451 
Seventh Street, SW., Washington, DC 20410.

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule would not have a significant 
economic impact on a substantial number of small entities because the 
rule reduces and streamlines existing requirements. PHAs will have 
fewer mandatory requirements. No new additional requirements are being 
imposed by this rule.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this rule 
does not have ``federalism implications'' because it does not have 
substantial direct effect on the States (including their political 
subdivisions), or on the distribution of power and responsibilities 
among the various levels of government.

Executive Order 12606, The Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that the rule will not have a 
significant impact on family formation, maintenance, and well being, 
and, therefore, is not subject to review under the order. No 
significant changes in existing HUD policies or programs will result 
from promulgation of this rule as those policies and programs relate to 
family concerns.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Program number assigned 
to this program is 14.850.

List of Subjects in 24 CFR Part 965

    Energy conservation, Government procurement, Grant programs--
housing and community development, Lead poisoning, Loan programs--
housing and community development, Public housing, Reporting and 
recordkeeping requirements, Utilities.

    Accordingly, 24 CFR part 965 is amended as follows:

PART 965--PHA-OWNED OR LEASED PROJECTS--MAINTENANCE AND OPERATION

    1. The authority citation for part 965 continues to read as 
follows:

    Authority: 42 U.S.C. 1437, 1437a, 1437d, 1437g, and 3535(d). 
Subpart H is also issued under 42 U.S.C. 4821-4846.


Sec. 965.205  [Amended]

    2. In subpart B, in Sec. 965.205, paragraph (a) is amended by 
removing the parenthetical phrase ``(in section 305 of the ACC)'' from 
the first sentence that immediately follows the paragraph heading.
    3. Subpart C is revised to read as follows:

Subpart C--Energy Audits and Energy Conservation Measures

Sec.
965.301  Purpose and applicability.
965.302  Requirements for energy audits.
965.303  [Reserved].
965.304  Order of funding.
965.305  Funding.
965.306  Energy conservation equipment and practices.
965.307  Compliance schedule.
965.308  Energy performance contracts.

Subpart C--Energy Audits and Energy Conservation Measures


Sec. 965.301  Purpose and applicability.

    (a) Purpose. The purpose of this subpart C is to implement HUD 
policies in support of national energy conservation goals by requiring 
PHAs to conduct energy audits and undertake certain cost-effective 
energy conservation measures.
    (b) Applicability. The provisions of this subpart apply to all PHAs 
with PHA-owned housing, but they do not apply to Indian Housing 
Authorities. (For similar provisions applicable to Indian housing, see 
part 950 of this chapter.) No PHA-leased project or Section 8 Housing 
Assistance Payments Program project, including a PHA-owned Section 8 
project, is covered by this subpart.


Sec. 965.302  Requirements for energy audits.

    All PHAs shall complete an energy audit for each PHA-owned project 
under management, not less than once every five years. Standards for 
energy audits shall be equivalent to State standards for energy audits. 
Energy audits shall analyze all of the energy conservation measures, 
and the payback period for these measures, that are pertinent to the 
type of buildings and equipment operated by the PHA. 

[[Page 7970]]



Sec. 965.303  [Reserved]


Sec. 965.304  Order of funding.

    Within the funds available to a PHA, energy conservation measures 
should be accomplished with the shortest pay-back periods funded first. 
A PHA may make adjustments to this funding order because of 
insufficient funds to accomplish high-cost energy conservation measures 
(ECM) or where an ECM with a longer pay-back period can be more 
efficiently installed in conjunction with other planned modernization. 
A PHA may not install individual utility meters that measure the energy 
or fuel used for space heating in dwelling units that need substantial 
weatherization, when installation of meters would result in economic 
hardship for residents. In these cases, the ECMs related to 
weatherization shall be accomplished before the installation of 
individual utility meters.


Sec. 965.305  Funding.

    (a) The cost of accomplishing cost-effective energy conservation 
measures, including the cost of performing energy audits, shall be 
funded from operating funds of the PHA to the extent feasible. When 
sufficient operating funds are not available for this purpose, such 
costs are eligible for inclusion in a modernization program, for 
funding from any available development funds in the case of projects 
still in development, or for other available funds that HUD may 
designate to be used for energy conservation.
    (b) If a PHA finances energy conservation measures from sources 
other than modernization or operating reserves, such as a loan from a 
utility entity or a guaranteed savings agreement with a private energy 
service company, HUD may agree to provide adjustments in its 
calculation of the PHA's operating subsidy eligibility under the PFS 
for the project and utility involved based on a determination that 
payments can be funded from the reasonably anticipated energy cost 
savings (See Sec. 990.107(g) of this chapter).


Sec. 965.306  Energy conservation equipment and practices.

    In purchasing original or, when needed, replacement equipment, PHAs 
shall acquire only equipment that meets or exceeds the minimum 
efficiency requirements established by the U.S. Department of Energy. 
In the operation of their facilities, PHAs shall follow operating 
practices directed to maximum energy conservation.


Sec. 965.307  Compliance schedule.

    All energy conservation measures determined by energy audits to be 
cost effective shall be accomplished as funds are available.


Sec. 965.308  Energy performance contracts.

    (a) Method of procurement. Energy performance contracting shall be 
conducted using one of the following methods of procurement:
    (1) Competitive proposals (see 24 CFR 85.36(d)(3)). In identifying 
the evaluation factors and their relative importance, as required by 
Sec. 85.36(d)(3)(i) of this title, the solicitation shall state that 
technical factors are significantly more important than price (of the 
energy audit); or
    (2) If the services are available only from a single source, 
noncompetitive proposals (see 24 CFR 85.36(d)(4)(i)(A)).
    (b) HUD Review. Solicitations for energy performance contracting 
shall be submitted to the HUD Field Office for review and approval 
prior to issuance. Energy performance contracts shall be submitted to 
the HUD Field Office for review and approval before award.
    4. Subpart D is revised to read as follows:

Subpart D--Individual Metering of Utilities for Existing PHA-Owned 
Projects

Sec.
965.401  Individually metered utilities.
965.402  Benefit/cost analysis.
965.403  Funding.
965.404  Order of conversion.
965.405  Actions affecting residents.
965.406  Benefit/cost analysis for similar projects.
965.407  Reevaluations of mastermeter systems.

Subpart D--Individual Metering of Utilities for Existing PHA-Owned 
Projects


Sec. 965.401  Individually metered utilities.

    (a) All utility service shall be individually metered to residents, 
either through provision of retail service to the residents by the 
utility supplier or through the use of checkmeters, unless:
    (1) Individual metering is impractical, such as in the case of a 
central heating system in an apartment building;
    (2) Change from a mastermetering system to individual meters would 
not be financially justified based upon a benefit/cost analysis; or
    (3) Checkmetering is not permissible under State or local law, or 
under the policies of the particular utility supplier or public service 
commission.
    (b) If checkmetering is not permissible, retail service shall be 
considered. Where checkmetering is permissible, the type of individual 
metering offering the most savings to the PHA shall be selected.


Sec. 965.402  Benefit/cost analysis.

    (a) A benefit/cost analysis shall be made to determine whether a 
change from a mastermetering system to individual meters will be cost 
effective, except as otherwise provided in Sec. 965.405.
    (b) Proposed installation of checkmeters shall be justified on the 
basis that the cost of debt service (interest and amortization) of the 
estimated installation costs plus the operating costs of the 
checkmeters will be more than offset by reduction in future utilities 
expenditures to the PHA under the mastermeter system.
    (c) Proposed conversion to retail service shall be justified on the 
basis of net savings to the PHA. This determination involves making a 
comparison between the reduction in utility expense obtained through 
eliminating the expense to the PHA for PHA-supplied utilities and the 
resultant allowance for resident-supplied utilities, based on the cost 
of utility service to the residents after conversion.


Sec. 965.403  Funding.

    The cost to change mastermeter systems to individual metering of 
resident consumption, including the costs of benefit/cost analysis and 
complete installation of checkmeters, shall be funded from operating 
funds of the PHA to the extent feasible. When sufficient operating 
funds are not available for this purpose, such costs are eligible for 
inclusion in a modernization project or for funding from any available 
development funds.


Sec. 965.404  Order of conversion.

    Conversions to individually metered utility service shall be 
accomplished in the following order when a PHA has projects of two or 
more of the designated categories, unless the PHA has a justifiable 
reason to do otherwise, which shall be documented in its files.
    (a) In projects for which retail service is provided by the utility 
supplier and the PHA is paying all the individual utility bills, no 
benefit/cost analysis is necessary, and residents shall be billed 
directly after the PHA adopts revised payment schedules providing 
appropriate allowances for resident-supplied utilities.
    (b) In projects for which checkmeters have been installed but are 
not being utilized as the basis for determining utility charges to the 
residents, no benefit/cost analysis is necessary. The checkmeters shall 
be used as the basis for utility charges, and residents shall be 
surcharged for excess utility use.
    (c) Projects for which meter loops have been installed for 
utilization of 

[[Page 7971]]
checkmeters shall be analyzed both for the installation of checkmeters 
and for conversion to retail service.
    (d) Low- or medium-rise family units with a mastermeter system 
should be analyzed for both checkmetering and conversion to retail 
service, because of their large potential for energy savings.
    (e) Low- or medium-rise housing for the elderly should next be 
analyzed for both checkmetering and conversion to retail service, since 
the potential for energy saving is less than for family units.
    (f) Electric service under mastermeters for high-rise buildings, 
including projects for the elderly, should be analyzed for both use of 
retail service and of checkmeters.


Sec. 965.405  Actions affecting residents.

    (a) Before making any conversion to retail service, the PHA shall 
adopt revised payment schedules, providing appropriate allowances for 
the resident-supplied utilities resulting from the conversion.
    (b) Before implementing any modifications to utility services 
arrangements with the residents or charges with respect thereto, the 
PHA shall make the requisite changes in resident dwelling leases in 
accordance with 24 CFR part 966.
    (c) PHAs must work closely with resident organizations, to the 
extent practicable, in making plans for conversion of utility service 
to individual metering, explaining the national policy objectives of 
energy conservation, the changes in charges and rent structure that 
will result, and the goals of achieving an equitable structure that 
will be advantageous to residents who conserve energy.
    (d) A transition period of at least six months shall be provided in 
the case of initiation of checkmeters, during which residents will be 
advised of the charges but during which no surcharge will be made based 
on the readings. This trial period will afford residents ample notice 
of the effects the checkmetering system will have on their individual 
utility charges and also afford a test period for the adequacy of the 
utility allowances established.
    (e) During and after the transition period, PHAs shall advise and 
assist residents with high utility consumption on methods for reducing 
their usage. This advice and assistance may include counseling, 
installation of new energy conserving equipment or appliances, and 
corrective maintenance.


Sec. 965.406  Benefit/cost analysis for similar projects.

    PHAs with more than one project of similar design and utilities 
service may prepare a benefit/cost analysis for a representative 
project. A finding that a change in metering is not cost effective for 
the representative project is sufficient reason for the PHA not to 
perform a benefit/cost analysis on the remaining similar projects.


Sec. 965.407  Reevaluations of mastermeter systems.

    Because of changes in the cost of utility services and the periodic 
changes in utility regulations, PHAs with mastermeter systems are 
required to reevaluate mastermeter systems without checkmeters by 
making benefit/cost analyses at least every 5 years. These analyses may 
be omitted under the conditions specified in Sec. 965.406.
    5. Subpart E is revised to read as follows:

Subpart E--Resident Allowances for Utilities

Sec.
965.501  Applicability.
965.502  Establishment of utility allowances by PHAs.
965.503  Categories for establishment of allowances.
965.504  Period for which allowances aare established.
965.505  Standards for allowances for utilities.
965.506  Surcharges for excess consumption of PHA-furnished 
utilities.
965.507  Review and revision of allowances.
965.508  Individual relief.

Subpart E--Resident Allowances for Utilities


Sec. 965.501  Applicability.

    (a) This subpart E applies to public housing, including the Turnkey 
III Homeownership Opportunities program. This subpart E also applies to 
units assisted under sections 10(c) and 23 of the U. S. Housing Act of 
1937 (42 U.S.C. 1437 et seq.) as in effect before amendment by the 
Housing and Community Development Act of 1974 (12 U.S.C. 1706e) and to 
which 24 CFR part 900 is not applicable. This subpart E does not apply 
to Indian housing projects (see 24 CFR part 950).
    (b) In rental units for which utilities are furnished by the PHA 
but there are no checkmeters to measure the actual utilities 
consumption of the individual units, residents shall be subject to 
charges for consumption by resident-owned major appliances, or for 
optional functions of PHA-furnished equipment, in accordance with 
Sec. 965.502(e) and 965.506(b), but no utility allowance will be 
established.


Sec. 965.502  Establishment of utility allowances by PHAs.

    (a) PHAs shall establish allowances for PHA-furnished utilities for 
all checkmetered utilities and allowances for resident-purchased 
utilities for all utilities purchased directly by residents from the 
utilities suppliers.
    (b) The PHA shall maintain a record that documents the basis on 
which allowances and scheduled surcharges, and revisions thereof, are 
established and revised. Such record shall be available for inspection 
by residents.
    (c) The PHA shall give notice to all residents of proposed 
allowances, scheduled surcharges, and revisions thereof. Such notice 
shall be given, in the manner provided in the lease or homebuyer 
agreement, not less than 60 days before the proposed effective date of 
the allowances or scheduled surcharges or revisions; shall describe 
with reasonable particularity the basis for determination of the 
allowances, scheduled surcharges, or revisions, including a statement 
of the specific items of equipment and function whose utility 
consumption requirements were included in determining the amounts of 
the allowances or scheduled surcharges; shall notify residents of the 
place where the PHA's record maintained in accordance with paragraph 
(b) of this section is available for inspection; and shall provide all 
residents an opportunity to submit written comments during a period 
expiring not less than 30 days before the proposed effective date of 
the allowances or scheduled surcharges or revisions. Such written 
comments shall be retained by the PHA and shall be available for 
inspection by residents.
    (d) Schedules of allowances and scheduled surcharges shall not be 
subject to approval by HUD before becoming effective, but will be 
reviewed in the course of audits or reviews of PHA operations.
    (e) The PHA's determinations of allowances, scheduled surcharges, 
and revisions thereof shall be final and valid unless found to be 
arbitrary, capricious, an abuse of discretion, or otherwise not in 
accordance with the law.


Sec. 965.503  Categories for establishment of allowances.

    Separate allowances shall be established for each utility and for 
each category of dwelling units determined by the PHA to be reasonably 
comparable as to factors affecting utility usage.


Sec. 965.504  Period for which allowances are established.

    (a) PHA-furnished utilities. Allowances will normally be 
established on a quarterly basis; however, residents may be surcharged 
on a monthly basis. The allowances 

[[Page 7972]]
established may provide for seasonal variations.
    (b) Resident-purchased utilities. Monthly allowances shall be 
established. The allowances established may provide for seasonal 
variations.


Sec. 965.505  Standards for allowances for utilities.

    (a) The objective of a PHA in designing methods of establishing 
utility allowances for each dwelling unit category and unit size shall 
be to approximate a reasonable consumption of utilities by an energy-
conservative household of modest circumstances consistent with the 
requirements of a safe, sanitary, and healthful living environment.
    (b) Allowances for both PHA-furnished and resident-purchased 
utilities shall be designed to include such reasonable consumption for 
major equipment or for utility functions furnished by the PHA for all 
residents (e.g., heating furnace, hot water heater), for essential 
equipment whether or not furnished by the PHA (e.g., range and 
refrigerator), and for minor items of equipment (such as toasters and 
radios) furnished by residents.
    (c) The complexity and elaborateness of the methods chosen by the 
PHA, in its discretion, to achieve the foregoing objective will depend 
upon the nature of the housing stock, data available to the PHA and the 
extent of the administrative resources reasonably available to the PHA 
to be devoted to the collection of such data, the formulation of 
methods of calculation, and actual calculation and monitoring of the 
allowances.
    (d) In establishing allowances, the PHA shall take into account 
relevant factors affecting consumption requirements, including:
    (1) The equipment and functions intended to be covered by the 
allowance for which the utility will be used. For instance, natural gas 
may be used for cooking, heating domestic water, or space heating, or 
any combination of the three;
    (2) The climatic location of the housing projects;
    (3) The size of the dwelling units and the number of occupants per 
dwelling unit;
    (4) Type of construction and design of the housing project;
    (5) The energy efficiency of PHA-supplied appliances and equipment;
    (6) The utility consumption requirements of appliances and 
equipment whose reasonable consumption is intended to be covered by the 
total resident payment;
    (7) The physical condition, including insulation and 
weatherization, of the housing project;
    (8) Temperature levels intended to be maintained in the unit during 
the day and at night, and in cold and warm weather; and
    (9) Temperature of domestic hot water.
    (e) If a PHA installs air conditioning, it shall provide, to the 
maximum extent economically feasible, systems that give residents the 
option of choosing to use air conditioning in their units. The design 
of systems that offer each resident the option to choose air 
conditioning shall include retail meters or checkmeters, and residents 
shall pay for the energy used in its operation. For systems that offer 
residents the option to choose air conditioning, the PHA shall not 
include air conditioning in the utility allowances. For systems that 
offer residents the option to choose air conditioning but cannot be 
checkmetered, residents are to be surcharged in accordance with 
Sec. 965.506. If an air conditioning system does not provide for 
resident option, residents are not to be charged, and these systems 
should be avoided whenever possible.


Sec. 965.506  Surcharges for excess consumption of PHA-furnished 
utilities.

    (a) For dwelling units subject to allowances for PHA-furnished 
utilities where checkmeters have been installed, the PHA shall 
establish surcharges for utility consumption in excess of the 
allowances. Surcharges may be computed on a straight per unit of 
purchase basis (e.g., cents per kilowatt hour of electricity) or for 
stated blocks of excess consumption, and shall be based on the PHA's 
average utility rate. The basis for calculating such surcharges shall 
be described in the PHA's schedule of allowances. Changes in the dollar 
amounts of surcharges based directly on changes in the PHA's average 
utility rate shall not be subject to the advance notice requirements of 
this section.
    (b) For dwelling units served by PHA-furnished utilities where 
checkmeters have not been installed, the PHA shall establish schedules 
of surcharges indicating additional dollar amounts residents will be 
required to pay by reason of estimated utility consumption attributable 
to resident-owned major appliances or to optional functions of PHA-
furnished equipment. Such surcharge schedules shall state the resident-
owned equipment (or functions of PHA-furnished equipment) for which 
surcharges shall be made and the amounts of such charges, which shall 
be based on the cost to the PHA of the utility consumption estimated to 
be attributable to reasonable usage of such equipment.


Sec. 965.507  Review and revision of allowances.

    (a) Annual review. The PHA shall review at least annually the basis 
on which utility allowances have been established and, if reasonably 
required in order to continue adherence to the standards stated in 
Sec. 965.505, shall establish revised allowances. The review shall 
include all changes in circumstances (including completion of 
modernization and/or other energy conservation measures implemented by 
the PHA) indicating probability of a significant change in reasonable 
consumption requirements and changes in utility rates.
    (b) Revision as a result of rate changes. The PHA may revise its 
allowances for resident-purchased utilities between annual reviews if 
there is a rate change (including fuel adjustments) and shall be 
required to do so if such change, by itself or together with prior rate 
changes not adjusted for, results in a change of 10 percent or more 
from the rates on which such allowances were based. Adjustments to 
resident payments as a result of such changes shall be retroactive to 
the first day of the month following the month in which the last rate 
change taken into account in such revision became effective. Such rate 
changes shall not be subject to the 60 day notice requirement of 
Sec. 965.502(c).


Sec. 965.508  Individual relief.

    Requests for relief from surcharges for excess consumption of PHA-
purchased utilities, or from payment of utility supplier billings in 
excess of the allowances for resident-purchased utilities, may be 
granted by the PHA on reasonable grounds, such as special needs of 
elderly, ill or disabled residents, or special factors affecting 
utility usage not within the control of the resident, as the PHA shall 
deem appropriate. The PHA's criteria for granting such relief, and 
procedures for requesting such relief, shall be adopted at the time the 
PHA adopts the methods and procedures for determining utility 
allowances. Notice of the availability of such procedures (including 
identification of the PHA representative with whom initial contact may 
be made by residents), and the PHA's criteria for granting such relief, 
shall be included in each notice to residents given in accordance with 
Sec. 965.502(c) and in the information given to new residents upon 
admission.


[[Page 7973]]

    Dated: February 22, 1996.
MaryAnn Russ,
Acting Assistant Secretary for Public and Indian Housing.
[FR Doc. 96-4679 Filed 2-28-96; 8:45 am]
BILLING CODE 4210-33-P