Going for Brokers

No one thinks twice about comparing prices for an internet provider or phone company. So why not shop around for your gas or electric service? Since the deregulation of the utility market in 1999, the state has offered incentives to customers to go to energy service companies (ESCOs) for their power needs instead of using traditional utilities like Con Edison or KeySpan. If you use an ESCO, you save money right away because you only have to pay sales tax on the supply side, not the delivery portion, which is about a third of your total bill. Those delivery-side tax savings can range from four to eight percent, depending on your tax status.

Sure, you can research ESCOs yourself. (Go to www.powertochooseny.com and type in your zip code, and get a list of ESCOs that serve you.) However, many co-ops and condos in the city are now using the services of energy brokers or consultants. “We find [for our clients] the better arrangement and oftentimes a cheaper arrangement,” says Alan Kurzer, president of Tradition Energy, one of the city’s brokers, which has been in the energy business for 20 years. “It’s just as though you switched from AT&T to MCI,” he notes, adding that energy brokers are very similar to mortgage brokers. “You go to a mortgage broker for the best advice and the best deal.” Just as brokers go to mortgage firms, “we go to the ESCOs and find the best arrangement.”

Jay Raphaelson, president of EnergyWatch, is a broker who serves about 80 co-ops and condo developments in the city and has been in business for six years. He says buildings with good credit ratings are more likely to get better deals from ESCOs. Properties with fewer than 100 units often won’t see savings beyond the initial sales tax savings; it is usually easier to get good deals for master-metered structures because they provide bigger loads. In addition, ESCOs are always looking for energy efficiency, so properties will also get good prices if they employ time-of-use meters. Those help the ESCO balance out daytime energy-using office buildings with nighttime energy-using co-ops and condos.

Raphaelson admits that boards can research ESCOs on their own, but that the process is complicated and time-consuming. “All the info we have you can get – that is, if the board wants to put the time and effort into it, but most of these people have full-time jobs,” he says.

A broker has an advantage over a board or manager researching ESCOs because the broker has the technical expertise, says Stuart Belloff, executive vice president of Reliable Power Alternative. (He adds that he actually prefers the term “consultant.”) Companies like his can connect co-ops and condos to ESCOs, but they can also help them manage energy efficiency. “You don’t want someone who is just going to get you a price, and you’ll only see them a year later when it’s time to renew,” he says.

A good broker will be able to look at your building and tell you exactly where and how you can save. Maybe it’s better to have a fixed rate on your common areas and an index on your units. If you’re in a complex, it might make sense to only include three of the buildings because the fourth has a bad load profile and would drag down your savings. “It’s very important to do that kind of analytical work,” says Belloff, whose company has been in business since 2000 and represents about 100 co-ops and condos.

The process works like this: the broker first evaluates the building to determine its unique energy needs and financial requirements. There are generally three choices:

(1) Fixed price – a price per kilowatt-hour for electricity or per decaderm for natural gas that will remain the same over the life of a contract;

(2) Indexed price, which changes with the market either daily or monthly; or

(3) A hybrid of fixed and indexed.

Some buildings need the financial certainty of a fixed price. Belloff says that savings on such an arrangement come when a broker can gauge the marketplace and find the right time to make a deal. With a fixed price, you’ll see savings over the course of a year, such as when prices rise during the peak seasons of summer and winter, and if the market rises because of unforeseen factors, such as foul weather. Indexed pricing, which is really best for large buildings and complexes, can bring savings of up to five percent compared to what you would pay under Con Ed, Belloff notes. Many buildings benefit most by having some services on a fixed contract and others on an indexed rate.

The brokers say they go to a rotating group of about eight to ten ESCOs to get proposals and then return to the board, managing agent, or lawyer with, say, the top three or four bids. Because of the way the market works, that decision must be made within one day, so that many boards or agents will haggle over the terms they want with an ESCO but may give one person the power to pull the trigger when a decision has to be made. The broker’s pay comes from the chosen ESCO – either a rate that ranges from about .001 to .003 cents per kilowatt-hour or a flat fee that ranges from $5,000 to $7,500.

Currently, no state agency oversees energy brokers, and there is no way to tell how many are operating in the city. How should you pick a good broker?

(1) Make sure the terms of the contract with the ESCO and the broker’s fee are clearly stated.

(2) Ask whether the broker is going to a large pool of ESCOs or if the firm only relies on one or two.

(3) Ask about the company’s history and get references.

(4) Ask the broker what qualities the company looks for in the ESCOs with which it deals: do the ESCOs have good credit, deep pockets, and easy-to-read contracts?

Tradition Energy represents about 31 co-op and condo buildings in the city, including such large complexes as Amalgamated Warbasse Houses in Brooklyn. Warbasse signed up with Tradition because the co-op needed budget certainty. The five-building, 2,585-unit affordable-housing complex has its own power plant to supply electricity but was getting hammered on gas prices, says Thomas Auletti, assistant property manager. Three surcharges – one at 9.98 percent and two at 2.95 percent – had been levied since 2005 to plug the gap. In December 2006, Auletti says Warbasse inked a 15-month deal with Tradition where an ESCO will provide the gas service for the complex’s high-pressure boilers at a rate of $10.56 a decaderm. “There were times where we were paying $14 a decaderm – it was going up and down,” says Auletti.

Michael Silverman, the co-op’s board president, says the decision was made to go with an ESCO and a broker to avoid getting those bills that “knocked our socks off. We needed to figure out a way to have cost certainty,” says Silverman, who has lived in the complex for decades and served on the board for 15 years. “We can’t keep going to our cooperators.” With the Tradition Energy deal, Silverman notes: “I could face the people and say, ‘No, there is not going to be another increase this year,’ which is delightful.”

But with a fixed-rate price, brokers like Kurzer cautioned boards and managers that they need to know what they’re getting into. “The good news is that you’ll never pay more if the cost for energy spikes,” he says. “They also have to recognize that if they lock in for a year-and-a-half and suddenly the price craters, we want them to understand that when you hedge, you also give up the chance to save money if things turn around.”

About four years ago, Douglas Elliman Property Management started using an energy broker to serve about 100 of the 250 buildings it manages in the five boroughs. Larry Vitelli, a senior vice president at the firm, declined to detail the exact deal the firm currently has, other than to say that it chose an indexed rate, over fixed. He did say that in 2006, the arrangement saved clients about $700,000 in electric bills – most of it through tax savings and about $100,000 in rate savings. In 2005, the rate savings were about $200,000, thanks to favorable market conditions.

“The reason why we do it at an index price rather than a fixed [one] is because no one can criticize the decision if the prices drop,” Vitelli says. He recalled the case of how one property went with a fixed rate and did great initially but then “got killed” when fuel prices dropped.

The buildings in this group represented by this broker range in size from about 100 units to 2,000. Vitelli says the agency started using ESCOs about a decade ago and went to a broker because “we thought they could use their expertise to make sure we got the best price.”

Belloff advises boards and agents to be wary of brokers or ESCOs promising huge savings. “No one can predict where the future energy savings are. We have customers who have saved 20 percent on their electric bills but again, it has to do with the type of product, when you lock in – what the market conditions are,” he adds.