Syracuse University has been reselling steam to public institutions for up to twice the price at which the university buys it, according to court documents and statements by engineers with knowledge of the steam production and prices.

Since January 2004, SU has sold steam to its customers at an average mark-up of 66 percent, supposedly for maintenance and operation costs, according to an SU affidavit. A number of steam regulation experts, though, have said those rates are unjustified.

Until last week, SU bought its steam from Project Orange Associates and resold some of it to Crouse Hospital, Syracuse VA Hospital, the State University of New York College of Environmental Science and Forestry and Upstate University Health System, formerly known as SUNY Upstate Medical University.

POA announced Oct. 19 that it will no longer operate the steam plants, leaving SU to produce its own steam.

‘The university has been blatantly overcharging its customers for years,’ said POA President Adam Victor. ‘It’s unconscionable.’

In court documents and in public, SU has consistently denied overcharging its steam customers. The resale price it sets ‘does not include any profit margin,’ according to an affidavit filed by Tim Sweet, SU Director of Energy and Computing Management.

The costs that SU reports for transporting the steam to its customers, though, are higher than those POA charged SU, even though POA had to transport the steam much farther, from its Taylor Street plants.

All the customers, like SU, are non-profit organizations. Upstate, ESF and Syracuse VA Hospital are public institutions.

BATTLE IN THE COURTS

Last November, POA and SU sued each other in the New York State Supreme Court over the terms of a 40-year agreement signed in 1990, according to which POA produces steam on SU property. On July 6, POA filed another suit, asking the state to condemn SU’s steam operation through eminent domain law.

The appellate division of the state Supreme Court will hear arguments on the condemnation Jan. 17.

POA has also said it plans to ask the state Public Service Commission to place SU’s resale of steam under regulatory control, a move the university – and its customers – have resisted.

BACKGROUND OF THE DEAL

POA ran SU’s Taylor Street steam operation and provided the university with discounted steam, part of which was for resale to ESF and the hospitals.

SU, as a non-profit institution, was supposed to resell steam to its customers for the same price it paid POA, adjusting only for the cost of transporting it. This cost, though, has fluctuated wildly and without any apparent justification in the period for which SU has provided data.

Sweet’s affidavit shows that from January 2004 to June 2009, SU bought steam for an average of $8.12 per thousand pounds, then sold it to its customers for an average of $12.93 per thousand pounds – a markup of $4.81 per thousand pounds.

During those five years, the university’s customers purchased 1.53 billion pounds of steam, according to Sweet’s affidavit.

In June 2009, SU bought steam for $4.35 per thousand pounds and sold it for $9.43, a markup of 116 percent.

The distribution costs that Sweet gives, however, are not based on actual costs incurred and are simply calculated as net revenue divided by volume sold. The university has not provided an itemized account of its distribution costs.

In July 2008, for instance, POA’s rates rose unexpectedly due to automatic market-based adjustments, but SU failed to adjust its customer rates in turn.

As a result, SU actually lost $3.82 per thousand pounds of steam sold that month. According to Sweet’s affidavit, the university was able to distribute steam for that same amount – negative $3.82 per thousand pounds.

EXPERTS WEIGH IN

In the absence of reliable numbers from the university, both POA and SU have brought in experts to debate SU’s distribution rates to its customers.

Frank Radigan, who helped set steam rates for the Public Service Commission for 16 years, compared SU’s purported operation and maintenance costs to those reported by Con Edison, a steam supplier in New York City.

Despite the higher costs of labor and the much larger pipe system, Radigan, who was commissioned by POA to analyze Con Edison’s operation and maintenance costs, said that the reported numbers were nine times lower than SU’s.

He suggested that a reasonable price for distribution to the university’s customers would be 50 cents per thousand pounds of steam.

Another POA expert, the European municipal heating consultant Ramboll, filed an affidavit comparing SU’s costs to those in Copenhagen. It estimated that a reasonable cost for operation and maintenance in Syracuse would be $350,000 a year.

SU’s current reported operation and maintenance cost is between $3 and $4 million a year. Copenhagen, which has 80 miles of steam lines compared to seven miles in Syracuse, spends $3 million on operation and maintenance every year.

Philip Peterson, an engineer hired by SU, compared SU’s reported costs with the rates of several companies across the country and said that they were comparable, if not favorable.

POA argued that this was an ‘apples-to-oranges’ comparison, matching rates against costs.

AN INSIDE OPINION

Sheldon Steiner, an engineer hired by Upstate to help draft a campus-wide master plan in 2006, recommended that it should expand its own steam operation because of overcharging by SU.

‘If you’re making your own steam, it’s fuel and buildings and labor plus minor losses in steam,’ Steiner said. ‘If you’re buying steam (from SU), you’re paying their price, which is a very high price, especially compared to POA.’

In 2006, when he was reviewing Upstate’s records, they were paying ‘at least $20 a month’ per thousand pounds of steam, Steiner said.

Sweet’s affidavit, on the other hand, shows a peak price of $15.33 per thousand pounds in 2006.

Steiner has done consulting for POA in the past, but is not currently working with either Upstate or POA, he said.

THE CUSTOMERS’ STANCE

Despite POA’s assertion that SU is overcharging its customers, all four of the customers support the university in its litigation with POA. They all submitted letters protesting POA’s eminent domain request, as did Syracuse Mayor Matt Driscoll.

Cornelius Murphy, president of ESF, said he didn’t ‘see any pressing need to have (steam sales) regulated.’

‘We definitely would like to have as much price stability as we possibly can,’ he said, ‘but the cost of natural gas has been spiking up and down, and that always presents a problem.’

Upstate President David Smith objected to the eminent domain motion in court, but Gary Kittell, Upstate director of physical plant, said that the hospital is doing a feasibility study of expanding its own plant as an alternative to purchasing steam from SU.

Crouse Hospital and Syracuse VA Hospital declined to comment for this story. In 1994, though, the director of the VA medical center wrote a letter to SU, saying, ‘We do not agree with SU that the method of computation for the cost of maintenance and operation of the distribution system is equitable.’

Victor, president of POA, accused SU’s customers of ‘going along like little lambs.’

‘It’s not their money, they don’t care,’ he said. ‘They’re more concerned with their own institutions.’

If POA succeeds in convincing the Public Service Commission to regulate SU’s steam sales to its customers, those rates would be fixed by the state, at cost.

SU argued in Sweet’s affidavit that such regulation would cause prices to rise due to increased taxes and administrative costs. Radigan and Steiner both said the taxes are negligible and that prices would actually decrease because regulation would eliminate SU’s exorbitant purported distribution costs.

jdmurp05@syr.edu

Published on October 27, 2009 at 12:00 pm