Apartment building owners have filed a lawsuit in Denver District Court to stop Colorado’s mandate to reduce energy consumption for large buildings.

The owners, along with a trade organization representing more than 3,600 members who own and manage more than 350,000 apartments, argue that the Colorado Air Pollution Control Division delayed release of the proposed “Building Benchmarking and Performance Standards” rule by two years — and then rushed to pass the regulation beginning in February 2023.

In doing so, the state denied the public and building owners meaningful opportunity to participate in the

rulemaking process, the lawsuit said.

The regulation requires owners of all buildings larger than 50,000 square feet in floor area to make changes or improvements to those buildings to achieve a 7% reduction in energy use by 2026 and a 20% reduction by 2030 from a 2021 benchmark for a specific building. The regulation doesn’t specify how building owners must achieve those goals.

“An individual building owner has the option of electrification, which is the best way to avoid being vulnerable to costly spikes in natural gas, either by itself or as part of a portfolio of measures, but no owner is required to electrify,” Conor Cahill, a spokesperson for Gov. Jared Polis, said in a previous statement. “Building owners will also be able to apply for adjustments, in case they cannot meet their set target or need more time to replace equipment.”

“There is no mandatory electrification requirement,” Cahill said earlier. “The proposed Building Performance Standards (BPS) rules provide flexibility, offering multiple pathways for building owners to select from, including energy efficiency, electrification, renewables, or a combination.”

Polis administration officials declined to comment on the lawsuit.

Building owners and management companies said what the rule amounts to is a mandatory electrification requirement, given the difficulties in adding things, such as insulation or high-performance windows, or other energy savings that building owners may have already done. Older buildings, they said, face other problems, such as asbestos, that would require tenants to move out during renovations.

Critics also said renovations that meet the initial 7% reduction by 2026 — just 26 months away — may be impossible to achieve due to planning, permitting, and supply-chain issues.

How owners might comply is not the core of the lawsuit. Instead, the challenge focuses on the process involved in drafting and enacting the energy rule.

The plaintiffs, the Colorado Apartment Association and Apartment Association of Metro Denver, alleged the state violated the law by, among other things, shortening the rulemaking process and repeatedly revising the rule without adequate notice to affected building owners.

“The regulation was rushed and poorly thought through, resulting in a disjointed mess that has enormously adverse practical and legal consequences for owners of the 8,000 buildings now subject to this state mandate,” said environmental and natural resources lawyer Paul Seby, who is one of the lawyers representing the plaintiffs.

The delay — and alleged rush to pass the regulation — invalidates it because of numerous “arbitrary and capricious” violations of the state Administrative Procedures Act and other statutes, according to the complaint. The lawsuit asked that the entire regulation be thrown out.

The lawsuit cited six reasons why the regulation is “legally flawed”:

• The division’s economic impact, cost benefit and regulatory analyses failed to comply with state statutes.

• All three of the analyses “failed to show that the building performance standards in the adopted Regulation 28 are technologically feasible, economically feasible, or in the public interest, resulting in an arbitrary and capricious rule in violation of the Colorado APA and Colorado APPCA.”

• The commission adopted the regulation without requiring that the CAPCD demonstrate that the standards will meet the greenhouse gas reduction goals in the statute.

• The division’s regulatory analysis was given to the parties one day too late, only four days before the rulemaking hearing, “resulting in the RA being per se invalid.”

• The regulation violates both the state and federal constitutions by impairing existing contracts.

• The regulation violates “principles of fair notice by being impermissibly vague.”

The state General Assembly passed House Bill 21-1286, which required the regulation. Gov. Jared Polis signed it into law on June 24, 2021.

The Colorado Administrative Procedures Act contains specific rules and deadlines for state actions in order to make the process of rulemaking fair and transparent to those affected by the proposed rules.

Seby said he’s never seen a rule being pushed through the process this quickly.

The commission faced a Sept. 1, 2023 legislative deadline to enact regulations to achieve the General Assembly’s mandate for large building energy use reductions. The mandate, which went into effect on Oct. 15, requires owners of buildings larger than 50,000 square feet to meet energy use reduction goals.

Despite the bill’s enactment in 2021 and the state agencies knowing the deadlines, the Colorado Department of Health and Environment, through the Air Pollution Control Division, did not produce a final draft of the regulation for review by the public and affected building owners until March 10, 2023, according to Seby, the lawyer.

In an April 2023 pre-hearing statement to the commission, the plaintiffs said the first draft was filled with “to be determined” criteria as to precisely what energy reductions are required for more than 86 different types of buildings and uses listed in the regulation.

“Proposing a rule in which the compliance obligations are ‘ TBD’ makes a mockery of due process,” the plaintiffs said in a prehearing statement.

This ambiguity, the lawsuit alleged, fails to give building owners notice of the standards they are expected to meet — something required by the Administrative Procedures Act and enabling statute.

From April 2023 until the final hearing in August 2023, when the regulation was passed, the lawsuit said the draft of the regulation changed “multiple times” and that adequate notice was not provided to the public so they and affected building owners could analyze and respond properly to the changes.

The lawsuit also said the rule violates the Colorado and U.S. Constitutions by interfering with private contracts.

“Regulation 28 mandates that CAA’s and AAMD’s members modify existing Covered Buildings, forcing them to remove equipment and infrastructure with remaining useful life, thus impairing existing contracts for gas and electricity, contracts with existing appliance suppliers, and financing contracts which often have 30-year contractual periods,” the complaint said.

The lawsuit also argued the costs of compliance “will have drastic pass down effects” on renters they may not be able to afford.

The Air Pollution Control Division admitted as much in its documents, saying, “Landlords might pass on some or all of the cost of implementing this

rule to their tenants, which will lead to higher rents.”

“However, the energy efficiency measures implemented will lead to lower power bills for the tenants. The net cost to the public, which is the difference between the higher rent and the lower power bill, will depend on such considerations as how much of the cost the landlords pass on to the tenants, if the power bill was already built into the rent, and the share of the cost that is covered by applicable state programs, among others,” the agency said. “These details are not yet known.”

A state economic analysis said the energy savings and greenhouse gas reduction benefits that would accrue from implementing the rule will result in a total benefit worth “$10,843,398,013.”

The total cost associated with this rule, which would accrue to the state and building owners or operators, is expected to total $3 billion, which puts the benefit-to-cost ratio at 3.48, the analysis said, suggesting that, for each $1 in cost, the benefit is $3.48.

The complaint also said that the air quality and pollution control offices did not analyze the physical and economic impossibility of complying with the rule that some building owners face.

Seby told the Denver Gazette that he has received 30 or so phone calls from affected building owners who knew nothing about this rule until recently.

There are more than 8,000 buildings subject to the rule in the state database. Seby estimated that half of those owners still don’t know about it.

The air pollution division, in its second prehearing statement said that, to date, around 60% of the 8,000 covered buildings have submitted benchmarking reports to the Colorado Energy Office.

Those reports were due beginning in 2021.

Asked for a statement, both Polis’ office and health department said, “We do not comment on ongoing litigation.”