September 7, 2006 By David Raths
Nash, chief of the engineering and management services section of the Division of Operations in Montgomery County, Md., worked long hours with a consultant to develop software to assess bids from competing electricity suppliers. But Nash and his operations team quickly realized they had a glitch.
"One Excel spreadsheet did not feed into another the way it was supposed to, so the figure we came up with was too good to be true," he said. "The bidder balked, and it was a good thing, because we would have been in big trouble if we [had] signed a contract with those figures."
Bidding was halted, the consultants fixed the software problem and the county successfully awarded contracts for some of its accounts. But the "meltdown," as Nash calls it, underscored the need for a more sophisticated approach to the energy procurement process when contracts came up for bid in 2006.
Montgomery County turned to the World Energy Exchange, an online reverse auction run by Worcester, Mass.-based World Energy Solutions Inc. Unlike a traditional auction where customers bid incrementally higher amounts, a reverse auction creates an environment in which suppliers bid their prices down to win a contract to supply a commodity. The Exchange provides customers documentation of the purchasing process, from pre-auction planning to real-time auction bid tracking, and contract and usage management after an auction is completed.
Over a two-day span in March 2006, Montgomery County -- located in the suburbs of Washington, D.C. -- held 68 auctions and received 292 bids. More than $125 million in contracts were awarded, with terms ranging from 12 to 36 months. The county estimated the cost avoidance for all the contract terms to be more than $24 million, and this time, there were no software glitches, Nash said. "We have been unbelievably pleased."
For local government agencies around the country, the deregulation of electricity has vastly complicated a procurement process they barely had to think about when prices were regulated. In states such as Maryland, deregulation has resulted in price hikes of more than 70 percent, making procurement officers' efforts to aggregate demand and squeeze savings out of a bidding process even more crucial.
"This has become another big task they have to do," said Jonathan Harvey, vice president of business development at World Energy. "The markets are much more complex, but the work force responsible for it hasn't changed, and the time they have to devote to it hasn't changed."
Montgomery County wasn't the first government entity in the Old Line State to try reverse auctions for energy purchases. In 2004, Maryland became the first government in the country to procure electricity through a reverse auction. Because they were pioneers, there was some trepidation, admitted Carl LaVerghetta, director of procurement for the Maryland Department of General Services in Baltimore. "But we found that with a pure commodity like electricity, a reverse auction works great," he said. "It's a perfect fit."
After interviewing several vendors, the state contracted with World Energy and its channel partner, San Diego-based SAIC. Between March 2004 and May 2005, they completed three procurements worth $114 million. The auctions involved seven suppliers, and LaVerghetta estimates the state avoided more than $13 million in costs over that time. "It's an interesting partnership," he added. "We now consider World Energy part of our procurement process."
Maryland has three more procurements scheduled for early 2007, combining state agencies and most of the University of Maryland system.
LaVerghetta said the biggest challenge his department faced was the organizational and educational effort to get state agencies ready for an auction. "We had 8,000 accounts in state agencies but we didn't even have a database of them. We had to go back and get our ducks in a row first,"
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