Tax Break No More

When the utility market was deregulated a decade ago, lawmakers offered incentives to customers to switch to energy service companies (ESCOs) for their power needs instead of the traditional utility company. One of the big carrots was supposedly a break on New York City sales taxes on the delivery side of your utility bill. That tax break is gone.

As of August 1, 2009, customers of both ESCOs and Con Edison will have to pay the 4.5 percent sales tax on the delivery side, a portion of your bill that accounts for about 35 to 40 percent of the total cost. That’s on top of the current 4.5 percent city sales tax on the supply side.

Despite the change, many boards, management companies, ESCOs, and energy brokers are not too worried about it. “Sales tax breaks were never part of our biggest sales pitch,” says Matt Lanfear, CEO of Great Eastern Energy, which serves about 30 condos and co-ops. “It was always a bonus.”

Despite losing the sales tax benefit, Great Eastern Energy, like other ESCOs and energy brokers, says it will be able to lure customers. ESCOs generally offer three choices:

• Fixed prices, which give the promise of price certainty over fluctuating utility rates

• Indexed prices, which change with the market daily or monthly and can often give rates lower than utility providers

• Hybrid plans that combine both measures

Using an ESCO is the same thing as switching from MCI to AT&T for your phone service. Like a mortgage broker, an energy broker shops around with different ESCOs to find the best deals. Amalgamated Warbasse Houses in Brooklyn, a five-building, 2,585-unit co-op went with an ESCO in 2007. The additional taxes are estimated to cost an extra $320,000 a year.

“But the way we manage their program, they are still 18 percent under their budget for 2010 and 22 percent under budget for 2011,” says Lanfear.
The co-op is on an energy program that sets a price ceiling but uses a variety of pricing measures to get better deals.

Thomas Auletti, assistant property manager at the co-op, says he remains loyal to his ESCO despite the change. “We knew the budget going forward would have to be adjusted but only slightly,” Auletti says. The co-op had picked an ESCO for budget certainty. “It’s great to walk into a meeting of shareholders and know what our numbers are.”

Lanfear says he wasn’t surprised by the tax change. His company and others did lobby against the changes, but “the fiscal problems trumped anything we had to say. The maturation of the market of deregulation combined with budgetary issues was enough of a combination,” he says. “The idea was that they could take this back and people would not necessarily switch back to the utilities.”

The city is expected to reap $75 million through the sales tax in the 2010 fiscal year and $84 million in fiscal year 2011, according to Owen Stone, spokesman for the city’s department of finance.
“The exemption was initially intended to bolster ESCOs competitively, but a decade later the industry should not need a tax subsidy to survive,” says Stone, explaining the reason for reinstating the tax.

Michael Lockhart, president of American Utility Consultants, a firm that does utility audits, agrees that many customers will still stand to benefit without the tax break. But it could become harder to beat Con Ed’s rates without the tax advantage.

Douglas Elliman started using ESCOs to serve about 100 of the 250 buildings it manages about six years ago. From August 2009 to August 2010, its clients will lose, in total, about $600,000 in tax savings, according to Larry Vitelli, a senior vice president at the firm.

Most of the buildings that are using ESCOs are larger complexes, he says, a fact that reduces the impact. “With a building that has a budget of $20 million, you’re not talking about a tremendous expense,” he observes, noting that his clients had a deal with the ESCOs that locked in a floating rate. That provided a certain amount of savings over Con Ed rates, a deal that saw the buildings holding on to about $350,000. That contract began in May 2009 and expires in May 2010. Now, he said they are still figuring out how much more they will have to budget to cover the taxes, but said overall the ESCO is still a better deal.
“We’re certainly not paying more than the Con Ed rate,” he says. And, at least early on, energy rates were better in 2009 than they were in 2008, which gave some savings to offset the additional taxes.

Vitelli reports that all customers with ESCOs are given a small break over Con Edison called the Merchant Function Charge. (The Merchant Function Charge applies to the electric side of utilities and means that ESCO customers save money over Con Ed customers. For the 100 Douglas Elliman properties on ESCOs the Merchant Function savings can come to about $167,000 for a one-year contract.)

“Of course, going into 2010 we’re not really sure where rates are going to go,” Vitelli says. “When our contract expires, we’ll have to look at it to see if we should stay with an ESCO.”

Stuart Belloff, executive vice president of Reliable Power Alternative, an energy consultant, counts himself in the “not worried,” category. “I think a good consultant never sold it only on tax savings,” he says. “It was always an add-on.”

He argues that losing the tax break might even be good for the industry. “I think you’ll see a lot of the illegitimate ESCOs leave the New York market because their whole pitch was the tax savings,” he says. “There will be a shakeout between the good consultants and the ones who were not so good. A consultant is only as good as when the customer looks back and sees the performance over the year.”