Thomas P. DiNapoli OFFICE OF THE COMPTROLLER NEW YORK 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 New York City 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 Report 2007-S-22 Page 2 of 12 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 Report 2007-S-22 Page 3 of 12 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