"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 1st, 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.
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. 
Birdsall
Services Group (BSG), a professional services firm and recognized leader in
engineering and consulting services, announces the opening of their new
location in New York City at One Penn Plaza in the Borough of Manhattan.
BSG’s Senior Vice President of Land and Marine Engineering, Andy Raichle, P.E., was on site for a groundbreaking July 31st on a $50 million 350,000-square-foot warehouse in the Ironbound section of Newark. Morris Companies, a Rutherford, N.J.-based developer, is building on the dormant brownfield site, the home of a former Sherwin Williams Co. paint facility at 60 Lister Avenue. BSG is providing a full range of consulting and engineering services for this project, including civil, marine, environmental, survey, construction administration, and grants and funding. The site will also qualify for the state of New Jersey’s Urban Transit Hub Tax Credit program, which offers incentives to companies to develop near major transportation centers. Vital to the economic health of existing cities and suburban centers, Newark has actively been transforming and redeveloping brownfield sites, such as this one. 
Dave Applegate, BSG's Vice President of Water Resources, was recently recognized
by Northern Ocean Habitat for Humanity (NOHFH), a local branch of the national
nonprofit housing organization that he is actively involved with and that BSG
frequently supports. NOHFH formally thanked Dave for all of his efforts with
their organization, most recently for serving as NOHFH Construction Committee
Chairman, and for organizing volunteers from the Toms River Kiwanis Daybreak, an
organization that sponsors and participates in many projects to support children
and the local community. Dave has been an active member of the Toms River
Kiwanis Daybreak since 2010, and involved on the NOHFH Construction Committee
for 2 years. His passion for both local charities is evident in his unwavering
commitment and hard work. Great work, Dave!
