Syracuse University is involved in a $50 million lawsuit with the company that supplies its steam for heating buildings. Project Orange Associates, the steam company, filed a suit last month against the university, claiming SU has been cheating it out of at least $50 million since 1990.

The lawsuit, filed Oct. 15 in a state Supreme Court in New York City, claims SU misrepresented its cost of steam production and illegally resold steam to nearby institutions at inflated prices.SU countersued the next day, claiming the university did not violate any clause of the contract. The suit also stated SU is seeking the right to terminate the contract.

The action stems from three interconnected agreements entered into by SU and POA in February 1990, according to court documents. The first agreement is the steam contract between POA and SU. The second agreement is a leasing contract in which POA rents land from SU. The third agreement allows POA to operate two boilers that belong to SU.

‘SU actions have not only damaged POA, but they have also hurt the New York state taxpayers because of the university’s systematic overcharging of steam,’ POA President Adam Victor said.

But in an e-mail sent to The Daily Orange Tuesday, SU spokesman Kevin Morrow said the accusations made by POA in its complaint are not true.

‘The University is confident thatwe will prevail in that lawsuit and in the lawsuitwe commenced against POA in which we seek to hold POA to its legal obligations under our contractual agreements,’ Morrow said in the e-mail.

The university’s complaint asks the court to declare that theagreements are valid and binding on POA as written, and that the university has the right to cancel the agreements because of POA’ s inability to perform them, Morrow said.

POA operates an energy plant on property leased from the university at 520 E. Taylor St. It agreed to provide, at 75 percent of the university’s projected costs, the steam required to meet the needs of SU and certain other not-for-profit institutional users located near the university who ‘shared steam costs’ with SU.

These customers include several nearby hospitals, including Crouse Hospital, the VA Medical Center, the State University of New York Upstate Medical University, and educational institutions such as the State University of New York College of Environmental Science and Forestry, according to court documents.

According to the steam contract, those customers are to acquire steam from SU on a ‘cost-sharing’ basis without any profits to the university.

The steam contract specifically prohibits any contact between POA and SU’s customers, which prevents them from buying the steam directly from POA, Victor said.

In the lawsuit, POA charges that SU has been improperly obtaining steam in violation of the contract by reselling POA steam at a profit, rather than ‘cost sharing’ with local non-profits as required in the agreement.

POA has also sought an injunction prohibiting SU from demanding or taking steam from POA, according to court documents.

In New York state, in order for a non-utility to sell steam, its case must be presented to the New York State Public Service Commission and the New York State Legislature. POA contends in its complaint that the parties agreed, and SU told the commission, that SU would pay POA for steam from its own steam plant.

POA’s complaint states the steam contract between POA and SU set a ‘base year price’ for steam at ‘$4.27 per thousand pounds of steam,’ which SU represented to be 75 percent of its steam production costs as of Feb. 27, 1990.

POA has recently learned, and SU has recently acknowledged, that the university’s production costs were in reality ‘substantially higher than that which SU represented in fixing the ‘Base Year Price’ of steam for the steam contract,’ according to POA’s complaint.

As a result of the misleading information provided by SU in fixing the ‘base year price’ for steam, POA alleges the university has underpaid POA by at least $1.67 per thousand pounds of steam for all steam purchased under the contract. In other words, Victor said, SU underpaid POA for steam ‘by at least $50 million’ and then overcharged its customers.

This is not the first time SU is being sued for allegedly making profit from the sale of steam to its customers. Public records show that in 1960, in the court case Syracuse University v. Murphy, SU was sued by the State Tax Commission for the State of New York for taxes SU allegedly owed on profits it derived from the sale of steam to its customers.

‘In successfully defending the tax claim, SU represented to the New York Courts that the cost of steam production was charged to the Ancillary Customers pro rata in accordance with the quantity used, and that SU realized no profit from the ‘cost-sharing’ with the not-for-profit Ancillary Customers,’ according to the POA complaint.

The Syracuse Housing Authority was one of SU’s most important customers, purchasing 14 percent of the university’s annual steam output, SHA director Fred Murphy said. That was up until the late 1980s, when Murphy pulled the organization out of SU steam system purchase and established its own heating system.

‘It was a monopoly,’ said Murphy, who retired in 2006 after 36 years at the head of the Syracuse Housing Authority. ‘The university had a monopolistic position on steam.

‘(SU) was the sole supplier,’ Murphy said. ‘There was no competition for that product. And because of that, we felt that we were never in a position to bargain or negotiate prices.’

A high-ranking official at ESF confirmed ESF was buying steam from SU at $17 per thousand pounds of steam, when SU was only buying it for $7 per thousand pounds.

In the lawsuit, POA is represented by high-profile prosecutor and criminal defense lawyer Thomas Puccio. SU is represented by Bond, Schoeneck & King.

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Published on November 11, 2008 at 12:00 pm