This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
PUBLIC CONTRACTS -- Energy Performance Contracts (maximum term) -- Term (maximum term for energy performance contracts)
WORDS AND PHRASES -- "Expected Useful Life" (for purpose of the maximum term of energy performance contracts)
BONDS AND NOTES -- Periods of Probable Usefulness (as distinguished from "expected useful life")
ENERGY LAW, §9-103; LOCAL FINANCE LAW, §11.00(a): The "expected useful life" of energy facilities or equipment subject to an energy performance contract, for purposes of Energy Law, §9-103, is the estimated period over which the facilities or equipment are reasonably expected to be useful and is not necessarily equated to the period of probable usefulness prescribed in Local Finance Law, §11.00(a) for obligations issued for such facilities or equipment. The estimate should be determined pursuant to generally accepted industry standards and should be based on evidence that will provide reasonable accuracy.
You ask whether the maximum term of an energy performance contract to be entered into by a municipality is governed by the periods of probable usefulness set forth in Local Finance Law, §11.00.
Article 9 of the Energy Law (§9-101 et seq.) contains provisions relative to energy performance contracts in connection with public buildings and facilities. For this purpose, an energy performance contract is defined as follows in Energy Law, §9-102(4):
... an agreement for the provision of energy services, including but not limited to electricity, heating, ventilation, cooling, steam or hot water, in which a person agrees to install, maintain or manage energy systems or equipment to improve the energy efficiency of, or produce energy in connection with, a building or facility in exchange for a portion of the energy savings or revenues.
Section 9-103 authorizes State departments, agencies, boards, commissions, offices or divisions, public benefit corporations and municipalities, including towns, villages, cities, counties, school districts, fire districts, BOCES, district corporations and special improvement districts, to enter into energy performance contracts (Energy Law, §§9-102-; 9-103). Section 9-103 provides that, notwithstanding any other provision of law, an energy performance contract may be entered into for a term of "up to thirty-five years duration, provided, that the duration of any such contract shall not exceed the reasonably expected useful life of the energy facilities or equipment subject to such contract" (emphasis added).1
The term "expected useful life" is not defined in article 9. In general, however, the phrase connotes the estimated period over which a particular asset is reasonably expected to be useful (see Cohn v U.S., 259 F2d 371; "Government Fixed Asset Inventory Systems: Establishing, Maintaining and Accounting", Glick, Government Finance Officers Association, Chicago, 1987, p 31). The estimate generally should be determined pursuant to generally accepted industry standards (see "Government Fixed Asset Inventory Systems", id., p 32; Memorandum to the Governor by the Office of the State Comptroller for L 1993, ch 261, July 14, 1993). Among factors commonly considered in making the determination are: the physical environment in which the asset is to be used; the prevailing characteristics of use; the existence of a maintenance policy; and the levels of employee experience in operating the asset ("Government Fixed Asset Inventory Systems", id., p 32).
Local Finance Law, §11.00(a) sets forth the "periods of probable usefulness" for the various objects or purposes for which a municipality, school district or district corporation may generally contract indebtedness. A municipality, school district, or district corporation may not contract indebtedness for a period longer than the applicable period of probable usefulness (Local Finance Law, §11.00[a]; NY Const, article VIII, §2). Periods of probable usefulness, therefore, represent determinations by the State Legislature as to the maximum period over which an object or purpose may be financed by the issuance of indebtedness.
The periods of probable usefulness prescribed in the Local Finance Law, however, do not necessarily have a close relationship to the actual expected useful life of any particular item of equipment or capital improvement (see Exley v Village of Endicott, 51 NY2d 426, 434 NYS2d 922; Cherey v City of Long Beach, 282 NY 382, 389, 390 at pps 386-8, discussing the history of article VIII, §2 of the State Constitution; 1979 Opns St Comp No. 79-646, p 124). Indeed, the courts have upheld periods of probable usefulness for objects or purposes in certain instances even though there is no physical asset, if the object or purpose "will be probably useful in the future" and does not have "purely transient usefulness" (Cherey, supra; Bugeja v City of New York, 24 AD2d 151, 266 NYS2d 80 affd 17 NY2d 606, 268 NYS2d 564; cf. Hurd v City of Buffalo, 34 NY2d 628, 355 NYS2d 369 affirming on the basis of opinion of Moule, J. at 41 AD2d 402, 343 NYS2d 950). Thus, the terms "period of probable usefulness" and "expected useful life" are not synonymous (cf. Local Finance Law, §11.00[a], which prescribes ten and fifteen year periods of probable usefulness for unspecified betterments or improvements if "the useful life" of the betterment or improvement has been determined to be at least ten or fifteen years by an appropriate engineering, architectural or other professional).
Accordingly, it is our opinion that the "expected useful life" of energy facilities or equipment subject to an energy performance contract, for purposes of Energy Law, §9-103, is the estimated period over which the facilities or equipment are reasonably expected to be useful and is not necessarily equated to the period of probable usefulness prescribed in Local Finance Law, §11.00(a) for obligations issued for such facilities or equipment.2 The estimate should be determined pursuant to generally accepted industry standards and should be based on evidence that will provide reasonable accuracy.3
November 16, 1999
Jeffrey S. Chase, Business Administrator
1 In the case of a BOCES or school district, an energy performance contract entered into on or after July 1, 1998 is generally subject to regulations promulgated by the Commissioner of Education (Energy Law, §9-103; 8 NYCRR §155.16). The BOCES or school district must obtain the approval of the Commissioner of Education to enter into an energy performance contract to which the regulations apply. The regulations of the Commissioner of Education provide that, in order to obtain the approval, the school district or BOCES must provide, among other things, a certification by the energy performance contractor that the contractor has guaranteed recovery of contract costs from energy savings realized "by the school district during the term of the energy performance contract, which shall not exceed 18 years, or the useful life of the equipment being installed, whichever is less" (8 NYCRR §155.16[d][ii]). Questions concerning the applicability or meaning and intent of these regulations should be directed to the Commissioner of Education.
2 Compare General Municipal Law, §109-b(2)(d), which provides that the term of an installment purchase contract, including all renewals thereof, may not exceed the period of probable usefulness prescribed by Local Finance Law, §11.00(a) for the equipment, machinery or apparatus being financed under the installment purchase contract.
3 Energy Law, §9-103(4) provides that agencies, municipalities and public authorities are encouraged to consult with and seek advice and assistance from the New York State Energy Research and Development Authority (see Public Authorities Law, §1850 et seq.) concerning energy performance contracts. Based on this provision, municipalities may wish to consult with the Authority with respect to making the determination of the expected useful life of any particular energy facilities or equipment that is the subject of an energy performance contract.