Right Place, Right Time

y the mid-1990s, Pennsylvania had some of the highest energy rates in the country. To contain soaring electricity costs, lawmakers turned to deregulation, allowing consumers to shop around for the best energy rates by breaking up utility company monopolies. Like telephone and airline deregulation, energy deregulation is supposed to provide cheaper rates and better service to customers by encouraging consumer choice and competition among utility companies. Unlike California, where deregulation has sparked an energy crisis, Pennsylvania has had success with deregulation. Before deregulation took effect in 1996, electricity rates in Pennsylvania were 15 percent above the national average; rates now are about 4.4 percent below the national average. When it came to capitalizing on the benefits of deregulation, some entrepreneurial staffers at the General Services Administration's Mid-Atlantic office in Pennsylvania didn't want to leave anyone out in the cold. Deregulation provided GSA the perfect opportunity to save federal agencies a significant amount of money, according to Ken Shutika, an energy management specialist with the agency. In 1999, the office launched an acquisition strategy that so far has saved federal agencies and nonprofit organizations more than $14 million. Shutika and his staff approached 23 federal agencies and four federally funded nonprofits more than three years ago with an offer to negotiate on their behalf a cost-effective energy contract in the state's newly deregulated energy environment. The goal was to pool the electricity needs of several small customers into a large block of power and solicit the best energy rates from utility companies. It's a concept borrowed from the private sector. "We saw it happening with some other private organizations, like the Building Owners and Managers Association, and figured that if it could work for the private sector, it could work for the government," says Shutika. "For GSA, it was an ideal opportunity to get the federal community working together as an entity." Although the agency's mission is to procure goods and services for federal agencies, this was the first time GSA had marketed itself as a source for utility procurement. The idea was simple, but the acquisition strategy was innovative: convincing agencies including the U.S. Postal Service and organizations such as Philadelphia's chapter of the American Red Cross to sign onto the venture with no guarantee of discounts from utilities. "The uncertainty actually worked in our favor," recalls Shutika, who served as the Mid-Atlantic Region's contracting officer during GSA's first utility deal. "There was no federal agency doing this in the state at the time, so it was easier for us to convince other organizations to team up with us." Shutika says GSA made a huge effort to market itself to prospective partners. "We went out and met with everyone, allowing them to get comfortable with our capabilities and expertise." "Agencies responded to GSA's offer because everyone realized, objectively speaking, that if you pool together your resources, you can negotiate a better deal than you can get on your own," says Carol Covey, deputy director of procurement for cost, pricing, and finance at the Defense Department, and a judge for this year's Business Solutions in the Public Interest Awards. Covey praised GSA's Mid-Atlantic team for capitalizing on the environment created by energy deregulation. "This was a great initiative on the local level," says Covey. Fellow judge Robert Welch, vice president for government operations at Acquisition Solutions Inc., a procurement consulting firm in Chantilly, Va., was impressed with the enthusiasm and creativity GSA brought to the project. "The true entrepreneurial spirit of the people involved in the project struck me," he says. Eight energy companies bid for the multi-agency contract. GSA chose Exelon Energy and Allegheny Energy and negotiated a fixed price. The procurement saved participating agencies and nonprofit organizations in Pennsylvania more than $5 million in utility costs, lowering their electrical unit costs by 13 percent. It was so successful that GSA extended the program up the East Coast. A second energy procurement in New Jersey saved federally funded organizations more than $2 million, and a third contract saved more than $1 million for partners in Pennsylvania and Delaware. Similar deals have been struck in Maryland and Washington, saving groups such as the IRS and the John F. Kennedy Center for the Performing Arts not only money, but valuable time and effort. The terms of the contracts vary and last anywhere from one to two years. After their contracts expire, agencies can extend them, or go back to buying power directly from the utility company. Shutika says some organizations, such as the Federal Aviation Administration, have allowed contracts to expire at smaller facilities to save money. "For the smaller accounts, when you figure the transaction costs, the contract may not be cost-effective," he says. "We are advising other agencies to focus on their bigger accounts." The overall price of the contract isn't likely to change if one organization decides to drop out of the group, Shutika says. "One of the benefits of aggregating is that you negotiate a price for the entire group, so that if someone drops out, it is generally not enough to make a difference in the price for the others," he says. "In certain buys, if a major client were to drop out, it could impact the pricing, but even then, it would still be negotiable." That has not happened so far. A firm commitment to the collaboration on the part of each organization helped secure reasonable energy rates, according to Shutika. Approaching utility companies as a group of organizations committed to finding affordable electricity rates was key to getting a good deal, he says. Since the agencies were firmly committed to collaborating on finding the best energy rates, utility companies knew none were shopping around on their own. With everyone firmly on board, utility companies did not have to worry about someone bolting at the last minute before the deal was closed. Although GSA's venture into energy procurement has been largely successful, some unforeseen challenges have emerged, according to Shutika. "We had some difficulties, particularly with billing, but we tried to resolve those problems as they arose." Getting the billing process to run smoothly was one of the biggest challenges in the beginning for contract participants, he says. "There is a lot of data that has to flow between the new parties [in the contract], and we are dealing with several accounts." Clients who paid their utility bills late had a snowball effect on the overall billing process. For example, a customer's bill could be $100,000, with that amount split evenly between the utility and supplier. If a customer pays a bill late and it overlaps with next month's bill, the utility will take its normal cut for that month-$50,000 using the above example-plus another $50,000 to bring the previous balance up to date. In that scenario, there is nothing left over for the supplier, says Shutika. "We [GSA] have very little control over that part because we don't render the bill," he says. "We might not know until six months down the road when the supplier calls and says 'I haven't been paid yet.'" Billing errors that cropped up in the first contract mostly have been ironed out. "As problems became more clear, the utilities adopted new billing policies," Shutika says. GSA toyed with the idea of creating a two-bill system to alleviate the ripple effect of late payments, but for now the agency is sticking with the single-bill approach. In spite of the accounting problems, GSA's collaborators are pleased with the agency's efforts on their behalf. The Postal Service, for example, joined GSA in its first energy procurement contract in Pennsylvania and has continued its partnership with the agency. The Postal Service has saved more than $2 million in utility costs. "To say the Postal Service/GSA partnership was successful would be an understatement. Our prime goal was to save as much money as possible in the deregulated energy markets, and GSA certainly helped us reach this goal," Robert Montebello, a Postal Service contracting officer, wrote in an award nomination letter to judges. Overall, it was the hard work and cooperation of GSA officials and the encouragement from the agency that made the energy procurement plan work, says Shutika. Shutika is unsure whether GSA's approach to energy deregulation could improve the situation in California. "We think this approach could maybe work in the long run, but right now California has some real systemic problems with deregulation." Shutika calls the state "an aberration" with regard to its energy deregulation problems. "We have to follow the rules [of energy deregulation] in each geographic area, and the conditions needed for successful deregulation have not yet been put in place in California." Ultimately, Shutika attributes GSA's success with energy deregulation in Pennsylvania and elsewhere to being in the right place at the right time. "We play by the rules we've been given, and try to give the government the best value in the process," he says.