Thomas P. DiNapoli OFFICE OF THE COMPTROLLER STATE COMPTROLLER

DIVISION OF STATE GOVERNMENT ACCOUNTABILITY

Audit Objectives ...... 2

Audit Results - Summary...... 2 STATE UNIVERSITY OF Background...... 3

Audit Findings and NEW YORK Recommendations...... 4

Wholesale and Other Low-Cost Purchases of Electricity ...... 4 Recommendations...... 7 Allocation of Electricity Costs PROCUREMENT OF Among Campuses in the Energy Buying Group ...... 7 ELECTRICITY Recommendations...... 8

Audit Scope and Methodology...... 8

Authority...... 9 Report 2007-S-22 Reporting Requirements...... 9

Contributors to the Report ...... 9

Exhibit A ...... 10

Appendix A - Auditee Response.. 11

AUDIT OBJECTIVES they would have paid if they purchased the electricity from their local utilities). The One of our objectives was to determine Energy Office also encourages non- whether the State University of New York participating campuses to become members of (SUNY) is maximizing the opportunity to the Group. reduce its systemwide electricity costs through wholesale purchases of electricity. We examined whether SUNY is maximizing Another objective was to determine whether its opportunity to make wholesale purchases the cost of the electricity purchased in bulk on of electricity. We found that SUNY has made the wholesale market by a group of SUNY significant progress in this area. Most campuses is allocated accurately among the campuses either belong to the Energy Buying campuses. Group, are not able to join the Group (e.g., campuses located in and Long AUDIT RESULTS - SUMMARY Island cannot join because of constraints in the electricity transmission network in that SUNY consists of 64 autonomous campuses region), or are obtaining low-cost power (including 29 State-operated campuses, 5 through other means (such as self-generation). statutory colleges affiliated with private We commend SUNY and campus officials for universities, and 30 community colleges) their efforts in this area. located throughout the State and a central administrative office located in Albany We also recommend certain actions that could (System Administration). Each campus is be taken by the SUNY Energy Office to responsible for its own electricity purchases. increase campus membership in the Energy SUNY spends about $127 million a year for Buying Group. For example, two campuses electricity (excluding costs for the community left the Group because of large fluctuations in colleges). SUNY procures more electricity their monthly electricity bills (since the Group than any other State agency. In December purchases power at market prices, prices can 2002, many SUNY-affiliated campuses joined fluctuate significantly in response to market together to form the SUNY Energy Buying conditions). We recommend the Energy Group (Group). The purpose of the Group is Office evaluate the feasibility of adopting a to reduce the cost of electricity for its risk management program to smooth out the members by purchasing electrical power in effects of volatile market prices on individual bulk directly on the State’s wholesale participating campuses. electricity market. In this market, which was created in 1996 when the State’s utility The SUNY Energy Office pays a single industry was deregulated, electricity is bought invoice each month for the electricity and sold in a competitive bidding process not purchased in bulk on the wholesale market for unlike a stock exchange. the Energy Buying Group. The Energy Office then charges each participating campus The Energy Buying Group is administered by for its share of the bill. The Energy Office the SUNY Energy Office. The Energy Office uses a cost allocation process (including estimates each campus’ savings from its actual cost data provided by a consultant) to participation in the Group. According to determine each campus’ share. We examined these estimates, the participating campuses this process and found that it was fair and save a total of about $1.7 million a year on accurate. We also identified certain their electricity bills (compared to the prices opportunities for improvement in the Energy

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Office’s administration of the Group’s universities, and 30 community colleges) activities. located throughout the State and a central administrative office located in Albany In their response to our draft audit report, (System Administration). Each campus is SUNY officials agreed with our responsible for its own electricity purchases, recommendations and indicated that they have and accordingly, may purchase electricity taken or will be taking actions to implement from its local utility, from an ESCO, or them. directly on the wholesale market. SUNY spends about $127 million a year for This report, dated September 27, 2007, is electricity (excluding the community available on our website at: colleges), more than any other State agency. http://www.osc.state.ny.us Add or update your mailing list address by In December 2002, several SUNY campuses contacting us at: (518) 474-3271 or joined together with SUNY System Office of the State Comptroller Administration to form the SUNY Energy Division of State Government Accountability Buying Group (Group). The purpose of the 110 State Street, 11th Floor Group is to reduce the cost of electricity for Albany, NY 12236 its members by purchasing their power in bulk directly on the wholesale market. BACKGROUND Wholesale market prices tend to be lower on average than the prices charged by local In New York State’s wholesale electricity investor-owned utilities, because the utilities market, electricity is bought and sold in a have various overhead costs to cover and competitive bidding process not unlike a must earn a reasonable rate of return for their stock exchange. Local utilities purchase their investors. power on this market, and then sell the power to consumers in their respective areas. The Energy Buying Group’s purchases are Energy Service Companies (known as facilitated by a contractor (Lynx ESCOs) also purchase power on this market, Technologies, Inc. or Lynx). Lynx regularly and then sell the power to consumers in places electricity orders for the Group on the various zones throughout the State. Certain wholesale market and provides the detailed large users may even purchase power directly accounting services needed to distribute the on the wholesale market. costs to members and determine any cost savings (or losses) accurately. Lynx is paid a The wholesale electricity market was created fee (prescribed contractually) for each in 1996 when the State’s utility industry was kilowatt-hour of power purchased plus a deregulated. The market is administered by percentage of the price savings (derived the New York Independent System Operator through a special program for buying (NYISO), a not-for-profit corporation electricity on the real time market) that are regulated by the Federal Energy Regulatory realized by Group members. For the period Commission. January 2004 through February 2007, Lynx was paid a total of about $284,000 under the The State University of New York (SUNY) contract. consists of 64 autonomous campuses (including 29 State-operated campuses, 5 The Energy Buying Group receives statutory colleges affiliated with private administrative support from SUNY System

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Administration’s Energy Office (SUNY Buying Group (and some do), but in some Budget Office). The SUNY Energy Office instances local arrangements may preclude manages the contract with Lynx, pays the their participation. Group’s monthly bulk power bill, determines how much each participating campus should The New York State Office of General be charged for its share of the bill, and Services (OGS) also has an account with the estimates each campus’s savings from its NYISO to procure electricity for other (but participation in the Energy Buying Group. not all other) state agencies, and OGS has an According to these estimates, the participating agreement with the SUNY Energy Office for campuses save a total of about $1.7 million a assistance with the administration of its year on their electricity purchases (compared electricity procurement effort. OGS provides to the prices they would have paid if they various support services to State agencies, purchased the electricity from their local public authorities, and local governments. utilities). The SUNY Energy Office also For example, OGS owns several State office encourages eligible non-participating buildings and leases space in other buildings campuses to become members of the Energy for government agencies. OGS is responsible Buying Group. for obtaining electricity for some of these buildings. However, OGS’s role in electricity SUNY campuses can elect to join or leave the procurement was not addressed by our audit. Energy Buying Group annually, with sufficient formal notice. As of May 31, 2007, AUDIT FINDINGS AND a total of 24 campuses belonged to the Group, RECOMMENDATIONS as did SUNY System Administration. Campuses located in New York City and Wholesale and Other Low-Cost Purchases Long Island cannot join the Group, because of of Electricity regulatory restrictions caused by constraints in the electrical transmission network in that SUNY campuses can reduce their electricity area. In addition, some campuses obtain low- costs if they join the Energy Buying Group, cost electricity independently of the Group. and 24 campuses have elected to do so (16

State-operated campuses, seven community It should be noted that only 29 of SUNY’s 64 colleges and one statutory college). campuses are operated directly by the State. According to savings estimates developed by The other 35 campuses (30 community the SUNY Energy Office, between July 2004 colleges and five statutory colleges) have and February 2007, the participating different governing structures and are only campuses (including three campuses no partly funded by the State. The community longer with the Group) paid about $4.4 colleges, which are associated with particular million less for electricity than they would counties, are governed by those counties and have paid if they purchased the electricity funded in part by those counties. The from their local utilities. These estimated statutory colleges, which are located on the savings ranged from about $3,538 at Cayuga campuses of two private universities (Cornell Community College to more than $694,616 at and Alfred), are governed jointly by SUNY Upstate Medical Center. (One campus - New and the private universities, and are supported Paltz College - paid slightly more for in part by private funding. Both the electricity as a member of the Group). community colleges and the statutory colleges are welcome to participate in the Energy

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The remaining 40 campuses do not belong to College) obtain low-cost electricity from the Energy Buying Group (see Exhibit A for municipal sources. the status of each campus). Some of these campuses cannot join the Group, others obtain • One campus (Empire State College) is low-cost electricity independently of the considered too small to bring into the Group, and others have elected to purchase Energy Buying Group, as it only has two their electricity separately from the Group at small buildings. Since Empire State prices that may or may not be lower than College specializes in distance learning, those obtained by the Group, as follows: most of its “campus” is virtual.

• Ten campuses (seven State-operated • Seventeen community colleges have schools and three community colleges) elected not to join the Energy Buying cannot join the Energy Buying Group Group. According to SUNY officials, at either because of their location (New least nine of these community colleges are York City or Long Island) and/or because participating in county energy buying they have long-term contracts to purchase groups, and thus are obtaining low-cost electricity from the New York Power electricity from the wholesale market. Authority, a public authority that provides The other eight community colleges have low-cost power to several government not provided the SUNY Energy Office agencies in the New York City with information about their electricity metropolitan area and certain other procurement practices, and are under no locations. obligation to do so, since the counties are responsible for these costs. • Four of the statutory colleges, all associated with , cannot • One campus (Geneseo College) purchases join the Energy Buying Group because of its power from an ESCO. Such certain long-term financial arrangements companies generally offer consumers with Cornell. According to SUNY electricity at a fixed price for a fixed officials, essentially, the colleges’ utility period. The price may or may not be bills are paid by Cornell (however, a lower than the price charged by the remote location associated with one of the consumer’s local utility, depending on four statutory colleges is able to obtain its market fluctuations in the price of power through the Group, and does so). electricity during the period.

• Four campuses obtain low-cost electricity • Three campuses used to belong to the from other sources. One campus (Hudson Energy Buying Group, but left the Group. Valley Community College) generates all Two of these campuses (Binghamton its own power. Another campus (the University and Fulton-Montgomery University at Buffalo), the largest Community College) now purchase their consumer of electricity in the SUNY power from Energy Service Companies. system, purchases electricity directly from The third campus (New Paltz College) the wholesale market on its own, purchases its power from its local utility, separately from the Energy Buying which offers New Paltz rates below Group. Two campuses (Plattsburgh market costs. College and Jamestown Community

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It is thus apparent that SUNY has made a rejoining the Group if it adopted a risk significant effort, both collectively and on an management program to stabilize the effect of individual campus-by-campus basis, to reduce potentially volatile market prices. its electricity costs through wholesale and other low-cost purchases of electricity. We We recommend SUNY investigate the conclude that significant progress has been possibility of adopting such a risk made in this effort, and we commend SUNY management program for the prices charged and campus officials for this progress. to each Group member. As is described later However, certain concerns were expressed by in this report, the prices charged each month two of the campuses which left the Energy to the participating campuses for their share Buying Group, and these concerns may need of the power purchased in bulk on the to be addressed by SUNY. wholesale market are based on estimates that are adjusted in subsequent months when more We contacted officials at the three campuses accurate data about electricity usage becomes that left the Energy Buying Group. At one of available. This ongoing process of price the campuses (New Paltz College), an official estimation and price adjustment, which is said they left the Group because lower prices managed by the SUNY Energy Office, could were available from their local utility. be further modified to smooth out the effects However, at the other two campuses of volatile market prices. (Binghamton University and Fulton- Montgomery Community College), officials We note that SUNY’s Strategic Energy told us they left the Group because of the Planning Task Force, in its March 2007 large fluctuations in their monthly electricity report, recommended that SUNY “procure bills. Since the Group purchases power at energy and fuels at the lowest cost, while market prices, the prices can fluctuate managing price risk in accordance with a significantly in response to market conditions. prudent, clearly defined and documented The officials at the two schools said that these University Risk Management Policy.” SUNY fluctuations made it difficult for them to Energy Office officials indicated that they had budget their electricity costs. They said they taken initial, informal steps to consider the preferred the security of fixed pricing, which feasibility of adopting such a risk was why they decided to contract with management program for the Energy Buying ESCOs. Group. We recommend the Energy Office formally evaluate the feasibility of such a Both campuses reduced their electricity costs program. when they were in the Energy Buying Group. For example, according to the savings We also note that, while the SUNY Energy estimates developed by the SUNY Budget Office encourages non-participating campuses Office, Binghamton University saved about to join the Energy Buying Group, it does not $211,000 a year (on average) when it was a compare their electricity prices to the prices member of the Group. The official from they would pay if they were in the Group. Binghamton indicated they were aware that Such comparisons could persuade campuses they could be paying more for electricity that have never been members (such as since they left the Group, but they were Geneseo College) to become members, and willing to accept somewhat higher prices if could persuade former members (such as they were predictable. The official also Binghamton University, Fulton-Montgomery indicated that they would be interested in Community College, and New Paltz College)

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to rejoin the Group. We recommend the The SUNY Energy Office pays the bill, SUNY Energy Office periodically perform estimates each campus’s share of the bill, and such comparisons and share the results with charges each campus for its share. the non-participating campuses. The monthly bill from NYISO is not itemized As part of our audit, we also contacted for each campus because complete electricity officials at three participating campuses usage data is not yet available for each (Buffalo State College, Oneonta College, and campus. Generally, it takes several months Cayuga Community College). We asked for this data to become available, due to such these officials, as well as officials at the three factors as power outages and the need to campuses that left the Energy Buying Group, perform complex calculations to account for about the adequacy of the services provided the operations of campus-owned transformers. by the SUNY Energy Office to the members of the Group. Officials at all six campuses To estimate each campus’s share of the stated that the communication was good and monthly bill from NYISO, the SUNY Energy the Energy Office was immediately Office reviews each campus’s actual responsive to their questions. electricity usage for that month in the prior year and allocates the bill among the Recommendations campuses on a pro rata basis. The allocations are based on the current zonal rates for a 1. Formally evaluate the feasibility of campus and the prior year’s percentage of adopting a risk management program actual electricity consumption by that to smooth out the effects of volatile campus. The Budget Office then adjusts market prices on individual these estimates at four and twelve-month participating campuses. intervals to account for the additional electricity usage data that becomes available 2. Periodically compare the electricity for each campus. This data includes actual prices paid by eligible non- campus meter readings and reports from participating campuses to the prices electricity generators and transmission line they would have paid if they were in owners. Each campus is charged accordingly the Group, and provide the results of for these adjustments. To keep the campuses the comparisons to the eligible non- fully informed about the ongoing adjustment participating campuses. process, the Energy Office sends them monthly emails containing a link on SUNY’s Allocation of Electricity Costs Among website to the adjustment information. Campuses in the Energy Buying Group To determine whether the Energy Buying

Group’s electricity costs were accurately Each month, the SUNY Energy Office allocated among the participating campuses, receives a bill from NYISO for the power that we tested the accuracy of the allocation was purchased for the Energy Buying Group process for one campus for one month in during the previous month. The amount 2007. We found that the process was accurate billed represents the total cost of all the power and adequately supported by source that was purchased for the Group that month documentation. plus adjustments from prior periods. The bill is not itemized for each individual campus. However, we also found that the SUNY

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Energy Office does not have formal Office relies on certain price and usage data verification procedures to ensure that the cost that is provided by Lynx. allocations are routinely reviewed for To determine whether the data provided by accuracy prior to submission for payment. Lynx is accurate, we compared the Lynx data Once this allocation process is completed and to actual meter readings and certain pricing before it is submitted to the Audit Services data on utility websites for selected campuses Unit within SUNY for certification of during selected months. We found that the accuracy and processing of the payment, this accuracy of the data provided by Lynx could information is not formally reviewed by not be fully verified, mainly because of the someone other than the preparer of the cost complexity of some of the data. However, the allocation data. As a result, errors are less variances we identified were not significant. likely to be detected. We therefore conclude that the data provided by Lynx appears to be accurate. We learned of one such error from one of the six campuses we contacted (Cayuga The SUNY Energy Office does not attempt to Community College), as we were told that verify the accuracy of the price and usage one of the monthly electricity bills from the data provided by Lynx. Because of the SUNY Energy Office contained an error that importance of this data, we recommend that resulted in a significant overcharge to the the Energy Office periodically attempt to College (the bill was more than double the perform such verifications to ensure that any normal monthly amount). The error was variances between the Lynx data and subsequently corrected, prior to our audit. independent price and usage data are minimal.

SUNY officials stated they randomly check Recommendations the cost allocation worksheets to look for large variances that could be indicative of 3. Develop formal procedures for errors. However, these verification reviews verifying that the Energy Buying were not documented. We recommend that Group’s electricity costs have been the verification process be formalized and the accurately allocated among the verification reviews be documented. SUNY participating campuses and document officials agreed that improvements could be the verification process. made in the cost allocation verification process. 4. Periodically attempt to verify the accuracy of the price and usage data The SUNY Energy Office is also expected to provided by Lynx to ensure that any estimate each campus’s savings from its variances between the Lynx data and participation in the Energy Buying Group. independent price and usage data are This expectation is formalized in the bylaws minimal. of the Energy Buying Group. To fulfill this responsibility, the Energy Office compares AUDIT SCOPE AND METHODOLOGY the electricity prices paid by each campus while in the Group to the prices they would We conducted our performance audit in have paid if they had purchased the same accordance with generally accepted amount of electricity from their local utility. government auditing standards. We audited In making these comparisons, the Energy SUNY’s procurement of electricity for the period April 1, 2005 through May 31, 2007.

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The objectives of our audit were to determine AUTHORITY whether (1) SUNY is maximizing the opportunity to reduce its systemwide The audit was performed pursuant to the State electricity costs through wholesale purchases Comptroller’s authority as set forth in Article of electricity, and (2) the cost of the electricity V, Section 1 of the State Constitution and purchased in bulk on the wholesale market by Article II, Section 8 of the State Finance Law. Lynx for the Energy Buying Group is allocated accurately among the participating REPORTING REQUIREMENTS campuses. Draft copies of this report were provided to To accomplish our objectives, we researched SUNY System Administration officials for electricity procurement practices. We also their review and comment. We have met with SUNY System Administration considered SUNY’s comments in preparing officials and contacted officials at six this report and have included them as campuses. In addition, we reviewed records Appendix A. SUNY officials agreed with our maintained by the SUNY Energy Office; recommendations and indicated that they have electricity pricing and usage data provided to taken or will be taking actions to implement the Energy Office by Lynx; electricity meter them. readings for selected campuses for selected months; and certain electricity pricing data on Within 90 days of the final release of this certain utility websites. All our samples were report, as required by Section 170 of the judgmental. Executive Law, the Chancellor of the State University of New York shall report to the In addition to being the State Auditor, the Governor, the State Comptroller, and the Comptroller performs certain other leaders of the Legislature and fiscal constitutionally and statutorily mandated committees, advising what steps were taken to duties as the chief fiscal officer of New York implement the recommendations contained State. These include operating the State’s herein, and where recommendations were not accounting system; preparing the State’s implemented, the reasons therefor. financial statements; and approving State contracts, refunds, and other payments. In CONTRIBUTORS TO THE REPORT addition, the Comptroller appoints members to certain boards, commissions and public Major contributors to this report include Brian authorities, some of whom have minority Mason, Art Smith, William Clynes, Claudia voting rights. These duties may be Christodoulou, Anthony Calabrese, Rebecca considered management functions for Tuczynski, Constance Walker and Dana purposes of evaluating organizational Newhouse. independence under generally accepted government auditing standards. In our opinion, these functions do not affect our ability to conduct independent audits of program performance.

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Exhibit A

Electricity Procurement at SUNY’s 64 Campuses As of May 31, 2007

State-Operated Campuses Community Colleges and Statutory Colleges

Member of Other Method Energy Other Method Campus Energy Buying of Procurement Campus Buying of Procurement Group Group Albany Yes Adirondack CC Yes Binghamton No ESCO Broome CC No Buffalo No NYISO Cayuga CC Yes Stony Brook Not Eligible LIPA Clinton CC No Downstate Med Not Eligible NYPA Columbia Greene No County Group Optometry Not Eligible NYPA CC Upstate Med Yes Corning CC Yes Brockport Yes Dutchess CC No County Group Buffalo State Yes Erie CC No County Group Cortland Yes Fashion Inst Tech Not Eligible NYPA Empire State No (too small) Utility Finger Lakes CC No County Group Fredonia Yes Fulton-Montgomery No ESCO Geneseo No ESCO CC New Paltz No Utility Genesee CC No County Group Old Westbury Not Eligible LIPA Herkimer CC Yes Oneonta Yes Hudson Valley CC No Self-Generates Oswego Yes Jamestown CC No Municipal Plattsburgh No Municipal Jefferson CC Yes Potsdam Yes Mohawk Valley CC Yes Purchase Not Eligible NYPA Monroe CC No County Group Alfred State Yes Nassau CC Not Eligible County Group Canton Yes Niagara CC No County Group Cobleskill Yes North Country CC No Delhi Yes Onondaga CC No County Group Env Sci/Forest Yes Orange CC No Farmingdale Not Eligible LIPA Rockland No Maritime Not Eligible NYPA Schenectady CC No Morrisville Yes Suffolk CC Not Eligible LIPA SUNY IT Yes Sullivan CC Yes Tompkins CC No Ulster CC No ESCO – Energy Service Company Westchester CC Not Eligible NYPA NYISO – New York Independent System Operator Statutory Colleges LIPA – Long Island Power Authority Alfred Ceramics Yes NYPA – New York Power Authority Cornell Agricult No Cornell Cornell Ecology No Cornell Cornell Labor Rel No Cornell Cornell Veterinary No Cornell

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APPENDIX A - AUDITEE RESPONSE

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