Co-ops & Condos Prepare for the Repeal of a $75 Million Energy Tax Break

Despite the change, many co-op and condo boards, management companies, ESCOs and energy brokers are aren't panicking. "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."

Amalgamated Warbasse Houses, one of his customers, is on an energy program that sets a price ceiling but uses a variety of pricing measures to get better deals. Thomas Auletti, the co-op's assistant property manager, says, "We knew the budget going forward would have to be adjusted, but only slightly." ESCOs generally offer three choices of pricing plans — fixed, which offers certainty over fluctuating utility rates; indexed, which changes with the market daily or monthly; and hybrids that combine both types.

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 traditional utility companies such as Con Edison.

$75 Million Added Tax Revenue

The city expects 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 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 Manhattan 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 Property Management started using ESCOs six years ago to serve about 100 of the 250 buildings it manages. 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 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 says, they are still determining how much more they will have to budget to cover the taxes. Overall, he says, the ESCO is still a better deal. "We're certainly not paying more than the Con Ed rate.". 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.

Merchant Function, What's Your Junction?

Vitelli reports that all customers with ESCOs are given a small break over Con Edison in the form of something called the Merchant Function Charge. This 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 the Garden City, Queens-based Reliable Power Alternatives, 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."

Adapted from Habitat March 2010. For the complete article and more, join our Archive >>