Is This the NEW Business of Management?

In February 2011, the Carlton Regency, a 210-unit co-op in the Murray Hill section of Manhattan, signed a fixed-rate, one-year contract with Hess Corporation for electricity. It didn’t have to negotiate with Hess, nor did it have to shop the market to get this rate. What it did have to do, however, is join a bulk-buying group and pay $.002 per kilowatt hour for the privilege.

Hess, acting as an energy supply company (or ESCO), agreed to provide the co-op with electricity at a fixed rate of 8.85 cents per kilowatt hour. In addition, Hess agreed to pay a fee of $.002 per kilowatt hour directly to FS Energy, a wholly owned subsidiary of the Carlton Regency’s management company, Cooper Square Realty.

The Deal

Dan Wurtzel, president of Cooper Square, says that about two years ago the company began shopping for the best deals from ESCOs, energy suppliers that came into being after the industry was deregulated in 1998. It wasn’t until the relatively recent rise in electricity costs, however, that Cooper Square started using its large portfolio as a lever for negotiating cheaper bulk rates.

“About a year ago,” Wurtzel says, “instead of purchasing energy for each individual building, FS Energy began aggregating buildings into pools.”

Wurtzel says Cooper Square now has two aggregate pools. One contains about 250 buildings; the other about 150. Armed with the leverage of buying electricity in bulk, employees of FS Energy go out to about 10 ESCOs in search of the best rates.

“Like an insurance broker, they work the deal,” Wurtzel says. “They present it to the co-op. As part of the deal, which is fully disclosed, the broker gets a fee, which is paid by the ESCO. We’re the only residential management company with a subsidiary energy company in-house.” Cooper Square’s clients usually save from 5 to 16 percent on gas and electric bills – and sometimes more – according to Wurtzel.

Adds Cooper Square vice president Tom Padilla: “Even though that fee is paid by an ESCO to FS Energy, the cost to the co-op is still less than they would be paying to Con Ed or an ESCO. There’s nothing here to hide. We’re saving our clients tons of money through our aggregation program.”

The Potential Problems

Boards that are offered such deals should, of course, be diligent to be sure they are getting a fair deal. It’s easy to get an idea of the rates various ESCOs charge for electricity and gas. Visit the websites of the New York State Public Service Commission (www.dps.ny.gov) or Con Ed (www.poweryourway.com), and do some comparison shopping. Remember that rates fluctuate constantly, which will come into play when you decide whether to lock into a fixed rate or gamble on a floating rate. As of press time, rates for electricity range from about 7 cents to 8.2 cents per kilowatt hour.

Some professionals warn of potential conflicts. “Management companies are not in the business of collecting commissions from oil companies – even if it was a good deal when you signed the contract,” says Pam Delorme, president of Delkap Management. “The misconception could be that the management company selected that energy company only because they’re making money. As a management company, why put yourself in a position of being accused of steering contracts in favor of your commission – even though it’s disclosed? It’s not a question of legal or illegal. Is it ethical? I say no.”

James Samson, a partner at the law firm of Samson Fink & Dubow, agrees. “It’s a conflict,” Samson says. “If the managing agent thinks he’s entitled to a fee, then he should bill the co-op. Why is the managing agent getting paid by a vendor? That’s a classic definition of a kickback.”

Richard Booth, president of retail operations for Kiwi Energy, another ESCO, says his company does not pay fees to management companies. “We haven’t done it yet, but it’s not completely unheard of,” Booth says. Normally there should be a benefit to the consumer.”

Arthur Weinstein, a real estate lawyer and vice president of the Council of New York Cooperatives & Condominiums, agrees with Delorme and Samson – up to a point. “A board should be knowledgeable about every fee, every dime a managing agent gets from a source other than the co-op or condo board’s management fee,” Weinstein says. “Any fee that’s not disclosed and known to the board is, in effect, a kickback.”

However, he adds, if the fee is known to the board and it pays for a service that benefits the building – at no cost to the shareholders or unit-owners – then a case could be made for such a fee. “Is the management company assembling a pool of buildings and using that to get a lower cost? Is it fully disclosed? If so, it could be justified.”

That, as it turns out, approximates the situation at the Carlton Regency. The potential savings spoke to the directors. “The board decided it was better than we could do on our own,” says David May, the president. “Cooper Square has a way of doing business that has a large umbrella. We knew about [the fee]. It was in our agreement. It’s not a cops-and-robbers thing.”