One of our clients saved over $1.2 million on its electricity contract and over $1.3 million dollars on its fossil fuel contract during a commodity procurement RFP powered by a web-based auction platform, which Luthin Associates helped to develop.
Our client uses more than 100 million kilowatt-hours each year and has fossil fuel requirements in excess of 8 million therms and 4 million gallons of oil. This energy is used in an urban environment that includes many different types of buildings. Luthin Associates worked with the client to determine their risk profile and picked energy pricing structures that reflected this profile. We reviewed fixed prices, indexes and block, and index structures. The client requested that renewable energy be included in the purchase as well. We recommended a fixed price structure that has more risk than a fixed price product because a portion of the customer load is allowed to float with day-ahead markets. We provided the Client with a back-cast, which takes their previous year’s hourly energy usage and applies it to historical real-time prices to show the client the best, worst, and probable case scenario. Based on this analysis, the client decided that the risk was in line with their threshold and the savings potential was commensurate with their tolerance for risk.
The client also had strict procurement requirements, which we believed would be best met by utilizing a web-based, reverse auction platform. The Client believed that standard email-based RFPs would not provide the level of documentation they needed to ensure a fair and competitive process. We were able to show the client that these requirements would be met by the auditable process of the auction platform. We also showed them that the additional costs to use the platform would be more than offset by the reduced risk premiums that energy providers will charge during real-time purchasing processes. The client requested that we use a platform that they had used previously to purchase non-energy goods such as janitorial supplies. Working with the platform provider, we assisted them in making sufficient modifications to their platform to enable it to conform to the requirements of the energy markets.
Luthin Associates developed a requirements document, which was sent to ESCOs who, we determined, were financially sound and able to deliver the services our client wanted. In total, 7 fossil fuel providers and 9 electricity providers decided to participate in the bid. Luthin Associates negotiated terms and conditions with all of the bidders prior to the auction commencement to ensure we would feel comfortable in executing contracts with the lowest bidder. We included in the contracts arbitrage clauses that would enable the Client to benefit during market spiking. We also used our proprietary, dynamic, real-time NYMEX model to evaluate which periods would be better served by oil versus gas purchases.
The reverse auctions lasted approximately an hour and a half and received nearly 200 bids form the competing companies. Because the bid documents were available online, bidders had easy access to the most current specifications that they needed to formulate a bid. And instead of submitting sealed bids via phone, fax, email, or paper, they simply registered with the platform and signed in to the secure site on the announced day and time of the auction to place their bids.
The result of the auction met the Client’s procurement procedures and enabled them to save $2.5 million compared to their previous year’s energy bills. As we do with all of our commodity clients, we did not end our services when the RFP ended. We reviewed every bill submitted by the suppliers and the utilities and verified their accuracy in our proprietary bill calculation system. This effort resulted in over $120,000 in recoveries from billing errors, which were recovered during the one-year term of our contract.