September 7, 2006 By David Raths
In the case of Montgomery County, its officials saw deregulation coming several years ago and were determined to act, Nash said. "In 2000 they convened a meeting of county agencies such as schools, the community college, the sewer agency and others, and said, 'Let's create an 800-pound gorilla to leverage our size and negotiate better electricity deals.'"
Led by six county agencies, the jurisdiction created a 16-member aggregation group to procure electricity. Joining the group were several local cities and towns, such as Gaithersburg, Rockville and Takoma Park.
Serving as the group's lead procurement agency, Montgomery County structured a process that allowed electricity contracts to be bid and awarded within days. From October 2000 through June 2004, members of the aggregation group saw savings of $5.6 million below Maryland's Standard Offer Service (SOS) rate, which sets a regulated price for consumers who choose not to select an electricity supplier.
But both the governmental entities and the utilities had a lot to learn about the process. "We were new in the aggregation business and so were the utilities," said Nash. County officials found they had to keep going back to their chief administrative officer for exemptions from procurement rules. "They kept bumping into regulations that ran counter to quickly resolving the bidding process, such as a requirement to post requests for bids for 10 days," he added.
The utilities had to go through their own learning curve about things like terms and conditions. There were issues around indemnification and penalties for nondelivery. Also, some utilities balked at contract language stating that the contracts were dependent on continuing resolutions of municipalities, and subject to appropriations every year.
In the Hot Seat
Nash was handed responsibility for the aggregation board in summer 2003, just as the current set of contracts were set to expire in summer 2004. "I was the guy thrown into the hot seat to get a new contract in place," he recalled. By then, the aggregation group had grown to 18 members, including neighboring Prince George's County, and a contract for renewable "green energy" was included.
For what Nash called this "second iteration" of bidding, new regulations were created to eliminate the impediments they'd run into the first time. "We capped damages in disputes and made sure the suppliers agreed up front about terms and conditions before they were qualified to bid -- something that had led to problems earlier," he said. In prequalifying bidders, they also rated them on experience, financial stability and other measures.
One effect of Maryland's statewide deregulation, which took effect in July 2004, was to force the bidding processes to speed up. Wholesale prices were changing much faster, so negotiation and awarding of contracts had to move from several days to a process that could be completed in a single day.
"We realized that to receive bids on 2,630 accounts and assess whether they beat the default Standard Offer Service, we had to get a computer involved," Nash said.
That led to the 2004 software glitch. And although that second iteration of bidding was successful in saving the group $2 million on 526 awarded accounts, it also led Nash to realize the process might require a level of expertise the county didn't have. "You can't just take all these accounts and stick them together, and think you've got leverage," he explained. "It's more complicated than that. Suppliers wanted to bid on the larger accounts, but not on the smaller ones." When the group made it a requirement to bid on both large and small accounts, the suppliers offered bids for the smaller accounts that were more expensive than the SOS. "
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