Purchasing Energy for Municipal Accounts

"How do I make a comparison to all my alternatives?"

By
Fred Fastiggi, CEM
Senior Vice President – Energy
Birdsall Services Group

As an energy consultant with a substantial portion of our practice involved in Energy Procurement Advisory Services, we are often asked by our clients “how does the price you secured for me, compare to this alternative I just heard about?” 

We are constantly getting these inquiries, and the most difficult thing is trying to answer them with facts so that our clients can make a true “apples to apples” comparison.  While we always have the facts from our end (they come right off the supplier’s contract), inquiries spurred by competitor pitches usually contain no detail other than a claim that “we can save you more money”.   

Perhaps they can, but in order to answer the question, we need to delve a little deeper into what, when and why a user is buying energy from a non-utility supplier.  We also need to understand exactly what the buying alternative being promoted actually represents. 

One Client’s Question - We recently had a client tell us that they could get a rate of $0.0784 per KWH from a competitor, while we were under contract at $0.085 per KWH.  Naturally they were curious as to why the contract we procured for them was so much higher than the competitor’s offer.  We too were curious, but to answer that question we needed to understand a few more things:    

What tariff are we talking about when you quote the $0.0784 rate? - We were buying electricity for this client for two very distinct types of accounts.    The first is for what are called “fixed price accounts,” and these are the accounts typically found at town hall, the police station, the fire house, the library and other buildings where the town pays the electric bill.  Usually for these types of buildings and accounts, in PSE&G’s territory, a town is on either a GLP or LPL-S tariff.  The smaller accounts are on GLP, the larger ones, who have a demand of at least 150KW in any month during the year, go to LPL-S (Large Power and Light-Secondary Service).  LPL-S service is generally going to be less costly than GLP whether you take it from PSE&G as your default supplier, or from a Third Party Supplier because LPL-S accounts usually have higher volume and less volatility in usage patterns.  Both characteristics are very desirable for a supplier due to economies of scale and because the risk of buying too much, or too little to service the accounts, is greatly reduced for a supplier. 

The town in question has 18 separate “fixed price” accounts, all on PSE&G’s GLP tariff.  Collectively they consume 509,564 KWH per year.  Our contract rate for these accounts is $0.085 per KWH and is a flat rate for the entire 12 months of the contract running from June 1, 2012 to May 31, 2013.  Our price will not change from month to month over the term of the contract, as many competitive offers do. 

What is included in the quoted price? – Our price is totally comparable to PSE&G’s price-to-compare (also known as Basic Generation Service or BGS) and includes NJ Sales and Use Tax, as well as charges for generation and transmission capacity , line losses, PJM ancillary service charges and all of the items in PSE&G’s BGS component of their default tariff.    

It is very important when evaluating competitive offers to understand not only what tariffs the quote is applicable to, but also to understand what is included in the price being quoted.   Many times vendors do not include Sales and Use tax in their quotes. 

There may also be other charges in the price which you may, or may not, want to pay for.  For example, our price also includes a small fraction of a cent, to pay for the operating costs, legal fees, audit fees, automated auction fee and our firm’s fee as the energy consultant for the buying group that this town is a member of.   A buyer needs to decide if these are services they want to pay for in their electric cost.

The members of our buying group get many benefits, including:

·         The administrative expertise of an Executive Director who manages the buying group, schedules and runs meetings, promotes new membership, and makes sure the group adheres to public contract law;

·         An attorney who provides legal services in the drafting of contracts that are favorable to the membership; 

·         An Energy Consultant who provides advice on contract structure, reviews supplier qualifications, writes the RFP, answers member questions, analyzes and monitors energy markets, forecasts a guaranteed target pricing level for the members prior to asking them to commit to a contract, and conducts either a traditional paper bid or automated auction for suppliers to bid, and;

·         Board Members who make decisions on behalf of the buying group, who themselves are Municipal Business Administrators making decisions, sharing their efforts with their fellow Business Administrators.         

It gets more complicated - This particular client also has their Street Lighting accounts in our program.  These accounts use approximately 302,800 KWH per year, and our rate for them is much lower, at $0.04632 per KWH.  Again, this rate is fixed for the 12 month contract period and includes Sales and Use Tax and all components of PSE&G’s BGS for their street lighting tariff.

What was in the competitive offer?  - Upon further questioning, we found that the competitive price being quoted to our client was not a “firm” commitment and was only supposed to be “representative” of what they could secure.   The competitive offer was based on a neighboring town with a contract already in place, that on the surface appeared to be a town with very similar energy needs to our client.  In reality, the competitor’s price was a bundled price for all accounts in the neighboring town (fixed price accounts, street light accounts and even accounts having to do with their water treatment plant (which was a regional plant serving five towns!) Their rate was not comparable to our rate.  Accounts serving a water treatment plant in PSE&G’s territory are usually on yet another tariff.  In this case, the plant was on LPL-P (Large Power and Light – Primary Service).  This type of tariff is referred to as Commercial and Industrial Pricing (or CIEP) and is characterized by high volumes, higher voltages and usually still steadier usage.  Predictability of load is very important to a supplier bidding into a supply contract and, as you can imagine, a water treatment plant has a high volume and relatively steady demand for electricity.  Because of this, most of these plants are on CIEP tariffs like LPL-P.  CIEP loads are very attractive when compared to Fixed Price loads and, as such, they get much lower pricing.  

The real cost of each alternative - When calculating the weighted average (weighted by usage between our fixed price and street light accounts) for our client, our weighted average rate was $0.07058 which is less than the competitors quoted rate of $0.0784 per KWH (and their rate was a blended rate that included fixed price accounts, street lights and even a water treatment plant that served five towns).   

Timing?  - Timing also has a lot to do with electric pricing.  Competitive pricing differs significantly when you go out to bid at different times of the year, and the term of the contract can also affect pricing.  Sometimes a longer contract term is cheaper than a 12 month period and other times it is not. 

The month In which you secure your supply can also affect pricing.  The price of gas generally drives the price of electricity because most electric pricing is based on natural gas as a fuel for generation.   If we purchased a 12 month contract volume in March, for a term beginning on June 1^st, and the market for natural gas has since been in a decline, a contract put on at a later date, should have a lower price for electricity than one put on when the natural gas fuel price for electric generators was higher.

Additionally, electric prices are usually higher in a peak period, so if one contract has a term that includes many peak periods (e.g. summer months) in it, and another does not, you would expect the contract with more non-peak usage in it to be cheaper.  That is usually true but if the tariff you are buying against has a large portion of fixed cost components in it  (e.g. capacity charges), the opposite can be true because you are spreading that fixed cost over more KWH’s if you have a lot of peak usage.  Each situation needs to be analyzed individually to see what effect the seasonality, periodicity or hour-to-hour variation in usage does to the price of a particular account (or accounts) and given that, what price for electricity you can realize in the marketplace at that point in time.     

Terms  and Conditions? - Finally, the contract we have with our supplier is what is called a “full requirements” contract, which means the suppliers have to supply whatever the municipality needs at the agreed upon pricing.  If the municipality takes less than originally specified in the bid document, the supplier still needs to supply that deficiency at the contract price.  Same if the municipality takes more, the excess is priced at the contract price.  Many competitors who claim to offer lower pricing are not offering full requirements contracts and if usage should vary, you may find you are paying a different price of the variation from your originally anticipated volume.   

So, Let’s circle back - These are a few things you should initially ask a broker, consultant, supplier or aggregator when they approach you about buying energy:

·         What tariff(s) does the quoted rate cover?

·         What are the volumes included in that price?

·         Is the price flat for a specific period, or does it vary?

·         If it varies, what event or condition triggers a change in the price you quoted?

·         What period is covered? When does it start and stop?

·         What happens if my consumption patterns change during the term of your supply contract?

·         When did you go out for pricing?  What was the price of gas at that time and how does it compare to today’s price for gas?

·         Does the price include sales tax, and is the price fully comparable to the “Price to Compare” or the Basic Generation Service charge (they are one in the same) on my electric bill?

·         Who do I go to with questions on billing?

·         Can I see the contract under which you are buying this electric service?

·         Are you complying with Public Contract Laws?

·         Are you and your suppliers and subcontractors licensed and approved by the NJ Board of Public Utilities?    

Some of the intangibles you may want to ask about are:

·         How are the decisions made to enter into a competitive supply contract on my behalf? 

Our buying group has a team of Municipal Administrators, Lawyers, Energy Consultants and an Executive Director that plan for, and administer, the Electric and Gas cooperative purchasing programs for its members.   The buying group ultimately takes its direction on the timing, and contract length from its Board, which is made up exclusively of Municipal Administrators who deal with the same issues other   Municipal Administrators deal with on a day in and day out basis.  Getting competitive pricing is important to them, as is budgetary certainty.   For the case cited above, the Board’s direction was to secure an appropriately aggregated supply (with specific bid packages for similar groups of accounts that will allow for the optimization of their usage) with a competitive price, as well as a flat rate for budgetary certainty, over the twelve month contract period.    In other instances they may direct their professionals to secure a floating price, or a “block and index” price where part of the requirement is at a fixed price and another part floats.  For natural gas they may direct their professional to lock only the “basis” (a/k/a) the transmission costs from the gulf to the local utility’s City Gate, and to let the commodity portion float.  There are an almost infinite number of contract structure possibilities, but what should be specified to the bidders is what satisfies the pricing and functional needs of the users given their risk appetite.

One of our buying groups tells all their members ahead of time, and in writing, that the Board will not authorize a final supply contract unless the chosen bid is at, or below a targeted price which reflects the host utilities lowest, forecasted BGS electric price during the course of the contract term.  If members don’t like the price, they can opt out of the auction.  This is a unique feature of this program as are the features of having Municipal Administrators making decisions for their fellow Municipal Administrators, and having legal, energy and administrative professionals retained as part of the buying process.  All of these features bring more value to the procurement process than just supplying competitive, low-priced electricity (which, obviously, is also a needed objective of the buying group).

A few more questions still:  Who is your Consultant/Broker/Aggregator, and what is their role in the Electric Procurement process? - The state of New Jersey has very specific guidelines, requirements and safety measures in place which govern the purchase of energy by government entities.  These guidelines and directives should be listed on your supplier’s website or in their promotional material.  The suppliers of electricity need to be licensed and approved by the NJ BPU.  That is also true for aggregators or consultants serving this market.  Make sure that your consultant or broker has been screened to meet the licensing requirements of the state.  Those requirements are there to protect you.  

Regulations also require that public entities understand and adhere to Public Contracts Laws.   Non-utility energy supply must be procured under public bid, satisfying all the requirements of applicable law. 

You should ask any potential supplier what their specific role is in the acquisition of competitive supply.  Are they a supplier, broker, aggregator, consultant, etc., and how are they paid?  What specifically do they do to facilitate the supply transaction?  Do they work alone?  Do they work with a law firm to make sure the town’s interests are protected?   Are they splitting his fee with other parties, and if so, what do they do?  Also, are they, and any of the parties they work with, licensed by the NJ BPU?

Any energy supplier, broker, consultant or aggregator should also be willing to show you the contract they will be securing their quoted price under.   Having that contract helps immeasurably in understanding if you are comparing apples to apples and in the public sector, that contract is public information so they should have no reluctance to sharing it with you. 

If a supplier, broker, consultant or aggregator can’t produce a contract, that would suggest that they might just be fishing for a quick transaction and may not have your strategic interests at heart.  There have been a lot of efforts by network marketers to build their energy sales force in a similar manner to the way Amway developed a network marketing organization to sell soap and personal products.  They recruit hundreds of people as sub-distributors, provide minimal training, and turn them loose to chase customers.    You have to decide if this type of procurement effort is all you need, or if you are looking for a more organized and professional approach.

There are many alternatives and options for buying electricity and gas competitively in the state of New Jersey, however if you hope to make a realistic comparison to your current situation, there are many questions you and your associates should  wade through before jumping to conclusions about which price is better or worse than what you have now. 

 
About the Author -  Fred Fastiggi is Senior Vice President of Energy Services for the Birdsall Services Group.  He has worked in the energy industry for over twenty-five years both for regulated utilities and as a consultant to commercial, industrial and public clients.  Fred’s firm is currently the Energy Consultant to the New Jersey Sustainable Energy Joint Meeting (an organization of over one-hundred and ninety New Jersey municipalities and public authorities), the Mid-County Cooperative Pricing System (six NJ counties who have banded together to do cooperative energy purchasing)   and numerous individual counties, school districts, colleges, hospitals and other commercial or industrial entities.   He holds the designation of Certified Energy Manager and Distributed Generation Certified Professional from the Association of Energy Engineers.