Tactics For Securing The Best
Power Prices - Before They Change Again!
(Tip of the Month for May 2001)
When most retail power customers think of price volatility, it's the
wholesale spot market that comes to mind. Such variability "trickles
down" to the retail level as summer approaches, and locking in a good price
can become a challenge - especially for first-time buyers. At such times, most
vendors won't guarantee their quotes for more than a few days, and maybe not
more than 24 hours. That makes casual shopping among vendors nearly worthless:
today's quote from Vendor A might be lower than tomorrow's quote from Vendor B,
but Vendor B might still offer the better deal because A's price may have risen
in the interim.
Large commercial/industrial customers often use the Request For Proposal
(RFP) process to get simultaneous quotes from several vendors and then choose
the one with the lowest price and best conditions. The general idea is that,
even if the contract is signed several days later, the differences among
vendors' pricing should remain about the same, so the winning vendor on Day One
remains the best choice for the immediate future. The tricky part is holding
onto a good price once it's been quoted, or getting a better price if the market
drops significantly during the contract negotiating process. That process can
take a week or two, especially the first time one goes through it, depending on
the size and complexity of the deal being sought.
To manage that process, here are a few ideas that have helped others avoid
unforeseen delays in nailing down a good price.
- Start shopping early so
there's plenty of time available to handle the details. "Early"
means months before you want to start receiving that power, and preferably
during the least volatile season (typically late winter just as temperatures
are starting to rise).
- Consult with vendors from whom you are likely to request
pricing in the future, and get copies of their
standard contracts for review by your attorneys.
Iron out any sticky issues before you start shopping for prices.
- Determine your firm's internal chain of command when
it comes to accepting such a contract. Define how (and from which boss) the
final signature will be secured. Due to travel and vacation schedules, try
to set up a backup signatory, just in case.
- Have all your electrical account data readily available
in accurate and accessible form (e.g., Excel spreadsheet). If your utility
does not offer access to your usage data through a web site, have copies of
your last two years of monthly bills available for distribution, along with
a synopsis in spreadsheet format. If you have interval meters that measure
power use by quarter hours, have your last year's worth available in Excel
format should the vendor wish to examine it.
- To give yourself some breathing room during lengthy
negotiations, secure internal permission in advance to offer a letter of
intent accompanied by a "kill fee." The letter of intent
outlines the agreed-upon goals and general contract provisions that remain
to be finalized, while the kill fee acts as security in case the
negotiations fail. In exchange for these two items, the vendor agrees to
hold his price constant during a defined negotiating period (e.g., two
weeks), knowing that he will be compensated if the deal does not go through.
- If a letter of intent is not appropriate, consider
offering a simple price binder. Through a short (i.e., one-page) letter
agreement, the parties agree to hold a defined price for a set period during
which they negotiate the deal. No money changes hands unless negotiations
fail, at which point the customer would repay the vendor for the cost of the
option on power that the vendor bought from his power supplier (assuming the
vendor does not own his own generation).
The value of either the kill fee or price binder is set by the cost of that
option (typically less than 5% of the value of one year's power). If the
deal goes through, that option gets exercised and its cost is built into the
vendor's quoted price. By agreeing to cover the cost for the option if
negotiations fail, a customer removes from the vendor any risk for holding
the price steady.
On a large contract, the value of such an option may be a substantial amount
of money, so it also acts as a strong deterrent against dawdling by in-house
attorneys or purchasing agents. On two million dollars' worth of power, 5%
is $100,000, or nearly the annual salary of such a person. No one wants to
be responsible for losing the company as much as they earn: such an action
would not look good during the next salary review.
- Set up a "strike price" arrangement. If
negotiations falter and prices rise, all is not lost. If contract terms and
conditions are eventually worked out, the parties may then agree to wait
until the price once again approaches an acceptable level before proceeding.
An agreement may be created that allows for expedited conclusion of a
contract when a defined strike price becomes available. Under this plan, a
previously signed copy of the contract (with the price section left blank)
would be kept ready at the customer's office. When that price is reached, an
addendum containing it is prepared by the vendor and attached to the signed
contract, and the deal is quickly consummated. Similar arrangements may be
made with multiple vendors to maximize chances that one will come through
with a better price when the market improves.
Each of these tactics has worked at one time or another, but all depend on
planning in advance. Once a customer's purchasing agents and attorneys become
comfortable with buying power through contracts, future purchases become more
informal, with prior contracts being re-used with only minor changes.
As we move from the take-it-or-leave-it pricing of yesterday's regulated
tariffs to the rough-and-tumble world of open competition, power customers need
to start planning their games several moves ahead if they expect to eventually
win.
Energywiz, Inc.
Adding New Dimensions to Energy Services
SM
|
