Electric power customers prepare for competition
An exclusive reader survey by Energy User News and Purchasing Magazine finds end users working hard to devise long-term electric power procurement strategies.
By Anne M Porter -- Purchasing, 3/25/1999
In response to the re-regulation that's taking place in the electric power industry, 50% of companies surveyed recently by Energy User News and Purchasing Magazine say they've taken at least some steps toward developing electric power procurement strategies. These preparations run the gambit from simply becoming informed, to advancing political agendas, to writing contracts with suppliers, and to altering capital equipment strategies. The most popular activities include--Getting smart
Most of the purchasing and energy management pros surveyed for this report, have--at the very least--become avid followers of deregulation news. Many have attended seminars, hired consultants, or participated in retail pilot programs. The commodity manager for a Northeast bank says, "The bank has invested in education of key participants." Gerhard Pierce, maintenance and building manager for McLoone Metal Graphics in La Crosse, Wis., has "attended seminars."
A handful of companies--mostly large industrials with a great deal to gain--have set out to develop considerable market intelligence. For example, the energy expert for a large U.S. steel company has been "developing market knowledge on generation, pricing, and transmission issues," and "developing risk management policies for electricity procurement as the market develops."
Political activism
A substantial number of survey respondents report political activism on behalf of their companies and organizations. For example, the vice president of engineering for a small Missouri-based industrial firm has "joined a state alliance for deregulation." Thomas Wandler, purchasing manager for Philadelphia Tramrail Company in Philadelphia has, "joined a manufacturers' group." J. Michael Whitcomb, energy manager for Montgomery College, in Rockville, Md., has "joined an interagency committee to provide input to the state public service [commission]." Ralph Blevins, facilities engineering manager for Austin Quality Foods in Cary, N.C., has been "involved in different task forces and energy user groups." Floyd Weitzel, Jr., facilities manager for McDonald Steel Corporation in McDonald, Ohio, says, "I've been involved in the electrical deregulation push through our Chamber of Commerce." The energy program engineer for a major U.S. university says his organization has "intervened with others at the utility commission during [the] restructuring process."
Load profiling
Benchmarking and data gathering are also common activities for purchasing and energy management professionals, according to the survey. For example, the purchasing manager for a U.S. brewery has been developing, "usage history," and looking for possible "modifications to power usage." The project manager for a Birmingham, Ala., health-care concern has been, "getting together energy data management and load profiles for all facilities," and "benchmarking one facility to another." Ken Crowe, business affairs manager for the University of Georgia in Athens, has been "acquiring interval metering data."
Aggregating
The University of Georgia's Crowe, for one, will be "taking advantage of aggregation opportunities." Meantime, Gary Markowitz, energy manager for the Star Markets chain based in Cambridge, Mass., has "formed an aggregation" and is now "comparing bids" from suppliers. David Inger, energy manager for California's Ventura county reports "cooperating with other government entities for joint procurement." (See sidebar on page S8 for more on aggregation.)
Signing up
Where possible, survey respondents say they're jumping into newly competitive markets. Wandler of Philadelphia Tramrail reports having "enrolled in the Pennsylvania electric choice program." The purchasing professional for a small multi-site industrial in the Northeast has, "filed the necessary paperwork to take advantage of deregulation."
Qualifying suppliers
The purchasing pro for a small New York industrial interest says he has "initiated a study of very limited alternate prospects." Roger Lourie, president of Pneumatic Tools in College Point, N.Y., says his firm is "becoming more aware of the competitive market and evaluating various suppliers and comparative forms of energy." The energy program engineer for a major U.S. university says his team has "developed a two-step procurement process" consisting of a request for qualifications followed by a request for proposals.
Quoting suppliers
Quite a number of energy management and purchasing professionals say they have already begun to solicit supplier quotes and proposals. The director of procurement for a manufacturer in Michigan is currently "reviewing quotes and options." Michael Fisher, purchasing manager for FTX Systems in Stone Ridge, N.Y., has "...obtained rate quotes, near and long term."
Noteworthy is that many of those who have quoted suppliers say that, to date, new market entrants have rarely beat the incumbent utilities. For example, the representative for one state government says he, "went out to purchase electricity from a third party, but the standard offer was less expensive." Likewise, Jeffrey Tannatt, director of physical plant for the Williston Northampton School in Easthampton, Mass., says "We've priced using a separate generation supplier, but there are no significant savings at this point."
Creating contracts
Robert Richardson, manager of fuels and related chemicals for basf in Mount Olive, N.J., has been "discussing contracts with consultants and energy marketers." Meantime, the vice president of global procurement for a large commercial interest based in Pennsylvania has been undertaking, "electricity contract preparation for California and Pennsylvania."
Pressing utilities
Some end users are negotiating better terms with existing utilities. For example, Frank Dibling, purchasing manager for Florida Distillers in Lake Alfred, Fla., says he has "indexed load, entertained supply options, and negotiated a better rate due to the utility's fear of losing business to deregulation or co-generation." Likewise, the purchasing pro for a small Midwest industrial has been "somewhat successful" at putting "pressure on current suppliers to reduce costs." The director of engineering for a large multisite Northeast industrial has, "reduced rates with utilities," while investigating, "future power plant plans." The director of physical plant and facilities planning for a Southern college says, "We negotiated a 20% rate reduction in exchange for a five-year contract."
Creating flexibility
Forty-one percent of the EUN/Purchasing readers surveyed say they have begun to research and to build capabilities for reacting to power market price signals.
The director of facility planning for a Southern college is now, "using real-time-price (RTP) rates" on its primary meter. "We have real-time metering on all meters at four facilities," says Lori Moen, utilities conservation specialist for the Kent School District, in Kent, Wash. David Twichell, equipment operations manager for Alton Manufacturing in Rochester, N.Y., has been installing sub-meters and conducting "on-site demand monitoring and energy-usage tracking."
The commodity manager for a large Northeast banking concern says, "More extensive metering of power consumption is being done and increased emphasis has been placed on demand-side management." Dibling of Florida Distillers says, "We currently have load meters and attempt to balance usage versus inventory storage."
The director of facilities for an industrial firm in Barrington, Ill., says, "We have separated hvac, and light and power as a first step." The energy manager for a major U.S. steel mill says, "Many of our existing supply contracts are market sensitive. [We] monitor and manage production accordingly." David Inger of Ventura County in California has put, "load management and load shifting plans into place." Bill Stein, energy coordinator and utility sales officer for the U.S. Army Intelligence Center in Fort Huachuca, Ariz., has been working to "improve load factor," and looking into, "fuel switching (natural gas cooling)" and "on-site generation."
Diversifying equipment
Thirty-percent of survey respondents say they've begun to evaluate and diversify their capital equipment strategies as a way to build leverage in a competitive market for electric power. Most are emphasizing efficiency, switching capability, and distributed generation (particularly for emergency backup applications).
Lourie of Pneumatic Tools says his firm is "reviewing changes that may be required in our equipment procedures." Christian Guntert, purchasing director for Guntert Steel in Ripon, Calif., says his firm is "going to more energy-efficient transformers and motors." Kent School District's Moen says, "We've been installing the most efficient systems available on new construction."
The purchasing manager for a U.S. brewery says he's been pursuing "conservation and energy-efficient new capital purchases." Dibling of Florida Distillers is "currently studying the potential for cogeneration by using steam from distillery boilers." Whitcomb of Montgomery College says, "We have the capability to switch from electrical cooling to natural gas, and have solar electrical generation." Stein of U.S. Army Intelligence Center in Fort Huachuca, Ariz., says he has "conducted numerous studies on co-generation and peak shaving." He says the organization also has [acquired] a 200KW fuel cell, one two-stage direct fired natural gas absorption chiller, and two team fired (from natural gas) absorption chillers."
Ken Crowe at the University of Georgia is, "assessing opportunities for distributed generation." The manager of engineering services for a Midwest health-care concern is, "purchasing natural-gas cooling equipment." Tannatt of the Williston Northampton School in Easthampton, Mass., is "looking into natural gas or diesel generators or direct drive refrigeration equipment for our hockey rink."
What end users want
Asked to cite products or services they'd like to see offered in the electric power marketplace, respondents to the EUN/Purchasing survey appear somewhat reticent, suggesting that most are content to see what the market will offer. Beyond the obvious--cheap and reliable power--a handful of end users are hoping to see more of such services as consolidated billing, emergency generation, financing of demand management systems, testing and preventative maintenance services, rate-negotiating services, and "green" power.
The survey shows some concern about the potential unreliability of power marketers and brokers. As such, experience will be highly valued. For example, Whitcomb of Montgomery College says he'll be looking to deal with "reliable brokers [and] experienced energy service companies." The senior VP and director of technical services for a national property management interest says he's looking for "independent brokers and marketers that I can rely upon for good information."
Because electricity and gas marketing are both low-margin commodities, it's expected that large national marketing outfits will attempt to augment their bottom lines by offering energy-management services to end users. These services range from simple consulting to full-service energy management. For the short term, however, it appears that the consulting ends of these businesses will do better than the full-service offerings. To wit--
* Only 7% of the total survey pool say their company is most likely to "outsource the entire decision-making and electric power procurement process."
* Only 18% say their firm is most likely to "outsource day-to-day management while maintaining strategy, decision-making, and oversight functions in house."
* Forty-one percent say they'll "maintain all energy management in house with support from independent consultants."
* Twenty-two percent say their organizations are likely to "maintain all energy management functions in house with in-house experts" or personnel.
Power pricing strategies
Asked how their organization is likely to cope with exposure to market price risk, nearly half of the survey respondents (49%) say they're likely to obtain fixed prices from power marketers, effectively shifting price risk to the marketer. Only 13% say they're likely to obtain indexed pricing from suppliers, managing risk in-house. Just 7% say they'll obtain indexed pricing, managing risk with the assistance of outside advisers. Nearly one-third of survey respondents either don't know how their organization will handle price risk or offer no response to the question.
Asked if they're concerned about supply reliability in a deregulated power market, 58% of respondents reply in the affirmative compared to 37% who remain unconcerned. Many say they can not tolerate interruptions and, as such, will pursue only firm contracts. Christopher Ramsey, energy manager, Jasper Engine Exchange, in Jasper, Ind., says: "Management does not want any downtime in production if it costs us in sales." The energy manager for a national railroad says: "Most of our operations are critical with respect to energy supply, and quality of that supply is very important." As such, he says, "most of our energy agreements will be for 'firm' power."
Nonetheless, as scores of new--untested--companies jump into the electric power business, end users will be faced with the daunting task of qualifying suppliers that will be capable of delivering on their commitments. As the purchasing manager for a brewery puts it: "Great pricing is meaningless if it's not deliverable." The purchasing pro for a large multiregional industrial will "deal with financially sound companies." Others have more technical concerns. For example, the energy engineer for a major U.S. university expresses "concerns over transmission reliability once full wheeling emerges in all states."
Among the folks who are less concerned about reliability, there appears to be a stronger sense of faith in the power of free markets and the capabilities of regulatory bodies to create proper safeguards. "There will be sufficient capacity and the open market will work as proven in pilot programs," says basf's Richardson. Likewise, the energy expert working for a large U.S. steel mill says: "With proper ferc authority and naerc guides, reliability should not differ from today."
Other random concerns
Asked to cite important issues pertaining to the restructuring of electric power markets, most respondents to the EUN-Purchasing survey cite reliability and pricing (with roughly equal frequency). Other concerns: achieving true competition, ease of transition and management, and stranded costs.
The energy adviser for a large integrated steelmaker frets about, "Market power exercised by combined generation/transmission owners." The engineer for a health-care outfit in Massachusetts feels apprehensive about "understanding contract terms." Similarly, John Potvin, vice president of Equity Management, a property management and investment property consulting firm in Hyattsville, Md., is concerned about "understanding all charges, understanding what is available, and how much is really true savings." Quite a number of survey respondents express fear that their costs will rise, rather than fall. "I suspect my costs will go up." says the energy manager for a Midwest military installation. The plant engineer for a large commercial interest in Kentucky worries about the "cost to the end user," and "subsidizing higher-cost markets (for example, Ohio and New Jersey)."
End users investigate aggregation
Asked for their views on power load aggregation--both within their organizations and among many corporate or institutional entities--the EUN-Purchasing survey finds general support for the former, considerable uncertainty on the latter.
Examples of remarks on aggregation of power load within a company or institution range from downright enthusiastic--"It's the right thing to do." "Must pursue vigorously." "A definite strategy." "Combine them now!"--to lukewarm--"If it's practical and economical." "Will want to see if it's successful."
On the idea of large multicompany buying aggregates, responses range from unequivocal rejection to "already doing it." Some examples:
* "Not considering consortium buying arrangements."
* "Not interested."
* "Will shift expense from large business to small business."
* "We're looking into it now."
* "[Have] not investigated yet."
* "Benefit in either situation should be from generating a better load profile, however, we still say pricing by rate schedule versus aggregate profile."
* "[Will] look for strategic opportunities for small plants."
* "If it is practical and economical."
* "Need to know specifics."
* "Unless substantial savings can be realized, I would not be willing to partner with my competition."
* "We're more than willing to investigate and go this route if the economics are right."
* "Currently aggregating."
Who should call the shots?
As energy procurement becomes less a matter of paying utility bills and more a matter of competitive procurement, quite a number of companies and institutional organizations are finding it beneficial to assemble multifunctional procurement teams. For the total survey pool, existing energy procurement teams are typically populated (in order of popularity) by personnel from: facilities management (cited by 66% of respondents), procurement (cited by 36%), finance/accounting (30%), operations (16%), plant or process engineering (16%), and/or a dedicated energy management function (11%).
However, dividing the survey results between readers of Purchasing and Energy User News yields quite different results, suggesting that many groups may be struggling with internal turf battles over who should be calling the shots on procurement of electric power and other forms of energy.
Among subscribers to Energy User News--typically energy or facilities managers--only 23% say purchasing is typically involved in procurement decisions regarding electric power. Among readers of Purchasing--purchasing managers, buyers, and other purchasing professionals--this figure rises to 53%. Similarly, only 48% of Purchasing readers say facilities managers are typically involved in the energy buy versus 78% of EUN readers.
Only 29% of the EUN subscribers surveyed think purchasing should be involved in the energy procurement process versus 73% of Purchasing readers. And 69% of Purchasing readers think facilities managers should participate on energy procurement teams versus 81% of EUN readers. As to other corporate functions, the numbers are relatively even between the two subscriber groups--
* Forty-five percent of Purchasing readers say finance/accounting should be represented on energy procurement teams compared with 49% of EUN readers.
* Thirty-two percent of procurement pros say operations personnel belong on energy procurement teams compared with 34% of EUN readers.
* Thirty-two percent of purchasing pros would put plant or process engineering people on their teams versus 30% of EUN readers.
Seventy percent of survey respondents report being personally involved in their company's energy procurement process (56% of Purchasing readers, 79% of EUN readers). As to the shape of their involvement in energy procurement processes, purchasing managers tend to be more involved on the supply side--evaluating suppliers, obtaining quotes, and negotiating contracts; a few say they have final say or approval over pending energy deals. Meanwhile, EUN readers tend to be more involved on the demand side--monitoring, load profiling and management, conservation, etc.
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