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Why a Corporation is best Served by a Centralized Approach to Electricity and Natural Gas Spend

By Tim Krajenke
Director, Seven - Utility Management Consultants

This paper discusses how most medium and large corporations transformed their purchasing functions from solely decentralized entities to main centralized teams in the 70's and 80's. Where each location once had a purchasing team, there is now a single purchasing person at each company location to handle the management of the individual locations needs not handled on a corporate level. The majority of major negotiation happens on a corporate level from the home office. In this common corporate structure, products that are used at multiple locations are leveraged and negotiated on a national level to both minimize the cost per unit while expanding the savings edge versus the competition who may not have the same purchasing power.

Within the creation of this structure, certain items were originally left to the individual locations to manage. This list includes such items as office products, telephone/IT networks, electricity, and natural gas. Over time, most companies have learned that office products, although not the same for each location, can still be discounted if all purchased from a single company, so most companies are now handling this negotiated discount on a national level. Regarding telephone/IT networks and the deregulation of the industry in the late 1980's, this too changed. A centralized approach yielded significant spend minimization opportunities by working on a regional or national level.

With regards to electricity and natural gas, the answer is not as simple as decentralized or centralized approach. The markets for electricity and natural gas are not the same on a regional or national level. Every state is either regulated by the government or in one of the various phases called 'deregulation' for electricity and/or natural gas. Since the first state deregulation in the late 1990's, there are 39 states that are deregulated for electricity, natural gas, or both. This number will most likely grow by the time this paper comes to print. Nearly all state governments observe how other states have progressed and constantly modify their own states legislatures. The statewide control is in place mainly to protect the consumers, but also to insure that the statewide suppliers have a voice.

As much as the simplicity of the above statements may lead one to believe that a local (decentralized) approach would offer the most benefit, the reality is that electricity and natural gas markets, as ever-changing as they are on a state level, are best handled on a centralized level, whether it be statewide, regionally, or nationally. The paper touches on the many reasons why a centralized approach to the electricity and natural gas may be a paradigm shift from traditional thinking. The paper demonstrates how companies can leverage their locations as best as possible to minimize their spending on a corporate level.

To accomplish a centralized electricity and natural gas approach, companies need to develop a team whose sole function is the management of the electricity and natural gas supplier development with the ultimate objective being the minimization of company spend for electricity and natural gas. The team will need to stay abreast of the various states legislation so as to take advantage of newly deregulated markets as soon as they are available. When not negotiating new contracts, the team should be monitoring existing contract rates versus market conditions, constantly looking for opportunities to renegotiate further rate savings. Additionally, change also happens within a company (through either divestiture/acquisition or through internal location growth) and it is best that all locations are being leveraged to the maximum allowed at that particular point in time. The corporate wide goal should be to have all locations (if in a decentralized state) on a contract of some sort so as to not be negatively affected by rising rates or by supplier greed. For example, those not under contract in one particular state pay about $.16/ kwh of energy versus negotiated rates of $.08/kwh or less for those that truly shop the market place. This can mean hundreds or thousands, or even millions in savings for those that put a focused team together.

Seven - Utility Management Consultants is available for those companies wishing to outsource their electricity and natural gas management to a team of energy professionals. Seven's full services are paid by the energy providers so it will not cost you any fees to utilize the services of Tim and the Seven - Utility Management team. Tim can be reached at mailto:TKrajenke@sevenutility.com.

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