In July 2000, the state of Maryland opened its electric utility industry for competition, giving “customers” the chance to shop for their electric power generation services. The state’s action was preceded by legislative activity that had been closely monitored by Montgomery County, Maryland, whose electric power generation, transmission, and distribution functions previously had been purchased as a single unit. The deregulation of the electric utility industry unbundles, or separates, the different pieces of the electricity product from each other and gives customers the opportunity to shop for their electric power generation.

Electricity deregulation in Maryland was implemented with some price protection in place for consumers. Electric companies must provide service at capped rates for the first few years after deregulation’s taking effect. This service is called "standard-offer service” and is supplied by an electric company to those customers who do not shop for electric generation. The price of standard-offer service (SOS) is the benchmark or price to compare for competitive procurement.

The existence of SOS provided the county with a fall-back option if it had chosen not to select a new provider. SOS caps also served as the benchmarks, or prices to beat, when the county was shopping for power. If the county was able to purchase power at a level below the price of standard-offer service, it would realize immediate savings.

The duration of price caps for SOS varies with the utility service area. Montgomery County lies within three utility service territories: most of it is served by the Potomac Electric Power Company; the northwestern portion of the county falls within the Allegheny Power region; and a small section in the east lies within the Baltimore Gas and Electric Company (BGE) service territory. This division by providers presents some interesting complications: for some large accounts in the BGE territory, for example, SOS will expire at the end of May 2002, whereas accounts for facilities in the rest of the county will enjoy capped rates through December 2004.

To its advantage, Montgomery County possesses an institutionalized system of cooperation and information sharing among its agencies. The Interagency Committee on Energy and Utility Management (ICEUM) has been in place for more than a decade. ICEUM members are the energy managers of each county agency, including county facilities, the school system, the water and sewer utility, the community college, and a bicounty planning commission. ICEUM is chaired by the Montgomery County Department of Environmental Protection—a fact that reflects the county’s commitment to using energy resources in a manner that best preserves the environment.

The amount of electricity used by all agencies was large enough so that if they all combined their electricity needs into a single purchase, the market power would be great enough to buy at a more competitive rate.

Implementation
The chief administrative officer’s (CAO) staff took on the task of coordinating the county’s strategy for electricity deregulation. In addition to planning for electricity procurement, the county has developed an award-winning program to furnish consumer education to residents and businesses. It also has participated in public service commission working groups to develop orders and regulations to implement deregulation and has intervened in a settlement agreement involving the primary electric utility.

In June 1997, the Montgomery County Task Force on Electric Deregulation was established. Members include the Montgomery County government, the Montgomery County Public Schools, the Washington Suburban Sanitary Commission, the Maryland-National Capital Park and Planning Commission, Montgomery College, and the Housing Opportunities Commission.

The task force also includes the county’s Department of Environmental Protection, Office of the County Attorney, and Procurement Office. Deborah Snead, the county’s assistant CAO, chairs the task force, which ensures that all agencies with a policy and/or fiscal interest in electric service and price are involved in discussions and in the decision-making process. The task force also writes recommendations on public policies and strategic actions that have been or will be taken by the agencies before, during, and after deregulation.

For two years, the task force gathered information on deregulation. Representatives of the county interviewed electricity suppliers to find out how they intended to market electricity to large customers when the competitive marketplace opened. Task-force members took a field trip to visit the headquarters of an independent-system operator for the electricity grid, or power pool, in the region.

Members met with the General Services Administration (GSA) to learn how the federal government had conducted electricity procurements. Local governments in deregulated states also were invited to share what they had learned. Outreach was made to other county municipalities possibly interested in adding their electricity loads to the county procurement. As members became more educated about the electricity market, strategies began to develop.

In order to gain the needed expertise in energy deregulation and to obtain aid in compiling a massive amount of data on the amount of electricity used and the times of day when it was used, along with seasonal changes, the task force hired a consultant in June 1998.

Timeline for the IFB Process

IFB advertised	9/15
Written comments due from bidders	9/22
Pre-bid conference	9/27
IFB opening	10/11
Bid tabulation and evaluation	10/12
Validate pricing comparisons	10/12–10/15
Recommendation of lowest bidder	10/16
Approval by all local jurisdictions	10/18
All contracts executed	10/20

Decision to Conduct a Joint Procurement
Because the task force realized that the only effective way to conduct a large electricity joint purchase was as a committed and cohesive group, a memorandum of understanding (MOU) was signed by each county agency on September 1, 1998. It committed the agencies to a cooperative procurement approach and ensured that all agencies would work together to develop a procurement methodology.

Further, to formalize the aggregation of electricity loads, the task force amended the MOU in November 1999, committing all county agencies to undertake an aggregated, cooperative, and competitive procurement of electric supply. It also designated Montgomery County as the lead procurement agency on behalf of all parties.

At the same time, the county’s energy policy was amended to provide legislative authority for the procurement and now includes this language: “Seek creative ways that the public sector can take advantage of cost-savings opportunities presented by utility restructuring, including undertaking an aggregated, cooperative, competitive procurement of electricity supply at the earliest opportunity practicable.”

These actions ensured the cohesiveness of the task force as a group and set the stage for the successful navigation of a field of complex issues. Some of the questions that needed to be resolved were the term of the contract to be obtained, the pricing methodology, the timing of the procurement with relation to the market, environmental considerations, and the type of contract document to use. To complicate matters further, the differences in procurement regulations among the agencies made development of a single contract document a cumbersome process. Even so, the group held together and found creative ways to address these concerns.

Outreach efforts were successful, and 10 municipalities in the county decided to become part of the joint procurement. These were Chevy Chase Village, Chevy Chase Village–Section 5, Rockville, Rockville Housing Enterprises, Gaithersburg, Takoma Park, Glen Echo, Laytonsville, Kensington, and Somerset. These jurisdictions added approximately 40,000 kilowatt hours (kWh) to the total load. While this amount was fairly small in relation to the total procurement of 894 million kWh, these cities and towns would benefit by obtaining the same competitive prices offered to county agencies.

Procurement by REOI
Recognizing the procurement consisted of 16 participants, 2,200 accounts, and 894 million kWh, task force members agreed that procurement questions could best be answered by actually testing the market. The group decided to do some formal information gathering by issuing a request for the expression of interest (REOI), which would then be followed by an invitation for bids (IFB), if results showed that real cost savings were available.

The REOI was structured to determine how the market would react and how prices would be affected by differing procurement criteria. Responses to the REOI told the task force how best to structure the IFB. This decision solidified a procurement strategy and set in place a series of objectives that led to an optimal method for obtaining the best possible price while conducting a fair and equitable procurement process.
 

Environmental Requirements in the REOI
Montgomery County’s commitment to maintaining environmental integrity requires that consideration be given to the environmental characteristics of electricity generation. Because the county’s purchasing power is great enough to influence the market, it has a responsibility to encourage the development of clean and renewable energy resources within the regional or local electricity marketplace.

For these reasons, the department of environmental protection explored the environmental standards then existing within the region, opportunities for the development of clean and renewable power sources, and the average characteristics of power generation within the power pool of one of the distributors.

At the time, the state of Maryland was in the process of developing regulations for disclosure of the environmental characteristics of electric power generation. State information showed that the amount of renewable energy, broadly defined, was approximately 2.8 percent of overall power sources within the region selected. In addition, the new technology of combined-cycle gas turbines was just coming online and produced low environmental emissions.

The task force agreed that, at a minimum, any procurement of electricity must require that 3 percent of the power provided (on a kilowatt-hour, or kWh, basis) come from clean or renewable sources. It defined these kinds of sources as the following: solar, tidal, wind, small-head hydroelectric, geothermal, biomass (waste-to-energy and landfill gas), combined-cycle natural gas technology, digester gas, fuel cells, manufacturing or commercial waste-to-energy systems, and waste heat recovery. This 3 percent minimum would ensure that cost savings would not be the result of purchasing dirtier power than the county currently uses but rather of buying a product that is somewhat environmentally preferable to the regional average.

In developing the REOI, the task force included this 3 percent requirement for clean-or-green power as the minimum necessary for a responsive proposal. The REOI evaluation criteria in fact gave preference to offerors capable of exceeding the 3 percent minimum. It also requested that offerors give information on the percentage level at which the clean-and-green requirement would result in a price premium. In this way, the task force hoped to determine the highest level of clean-and-green power that could be bought without causing a burdensome increase in overall price.

Term and Timing as Specified in the REOI
In preparing the REOI, Montgomery County monitored the electricity market closely to determine the optimal time to issue the IFB. Also considered were the time frame for the expiration of SOS and the requirements to be placed on customers who returned to SOS after shopping for power. If the county chose to return to SOS after the end of the contract term, it would need to remain on SOS for at least a year to avoid any price penalties.

The task force decided to structure the REOI to include price proposals for three possible contract terms: one, two, or three years. This inclusion would provide general (nonbinding) price information that could be used to help determine the best term for the final contract. The information would let the task force know if a competitive procurement would likely beat the capped price under SOS.

Pricing Methodology and Billing Issues
The central item of discovery in the REOI process was the question of how to structure the pricing in such a way as to maximize cost savings. The task force needed to know how to group accounts so as to draw potential bidders. For this reason, the consultant developed customized pricing proposal forms for the REOI. These forms included pricing proposals for the generation component of supply service on the basis of demand, as well as energy billing determinants that mirrored the pricing structure for the generation component of SOS.

Prospective offerors were required to cite pricing on a levelized (cents-per- kWh) basis. Offerors would be evaluated on the comprehensiveness of the pricing they provided, meaning their ability to determine pricing for all rate classes.

Of course, members of the task force had, and still have, diverse billing and reporting requirements. Some require split billing, in which the contractor submits a bill for electricity supply separately from the electric distribution company (EDC). Others prefer contractor-consolidated billing, in which all charges are included on one bill, submitted by the contractor, while yet others prefer EDC consolidated billing, in which the local distribution company submits the consolidated bill.

Participants also had different data requirements. Some maintained central databases using such commercial software systems as FASER. These participants required electronic reporting in formats that facilitated data import into such systems and the payment of bills.

For these reasons, the pricing proposal forms requested bidders to propose a monthly, customer-type charge for billing and reporting services: a monthly debit or credit on an EDC-account basis.

Terms and Conditions Sought for the Contract
Considerable discussion was given to general electricity contract terms and conditions, which were different for each of the agencies participating in the procurement. There was concern that there might be items in some of the terms that suppliers would find prohibitive. It also was uncertain whether a single set of terms and conditions could be acceptable to all participants and potential offerors.

To help answer these questions, the REOI included the contractual terms and conditions for the county and for each participating agency. A prospective offeror was required either (1) to agree to all general terms and conditions of the participants or (2) to indicate in writing any noted exceptions to these terms and conditions.

The county attorney and the procurement office also worked with the consultant and participating agencies to develop a set of terms and conditions that would be more specific to an electricity procurement and could be included in contracts with all participants.

Procurement Process for The IFB
After briefing the county council, the REOI was issued in May 2000. In early June, at an optional pre-bid conference, bidders and county agencies exchanged information on what they hoped to achieve and answered specific questions on such items as pricing, billing, and power supply characteristics.

The result was that four suppliers submitted responsive bids. Using information gleaned during the REOI process and from the bids themselves, the task force developed an invitation for bid (IFB). The IFB approach allowed the task force to evaluate the final bids on price alone, after seeing to it that bidders were qualified and met certain requirements.

The IFB was structured around an 18-month contract term, thus maximizing the advantage of including two nonpeak seasons in the contract to secure a favorable price. The contract was timed to begin in December 2000 and end in May 2002, the end date coinciding with the expiration of SOS for some accounts and allowing other accounts the option of returning to SOS for one year.

Regarding pricing in the IFB, it was decided to split participant accounts into two groups: one group that included all utility rate classes except street and outdoor lighting, and another that encompassed only street and outdoor lighting accounts. Bidders were required to submit prices on an individual account basis for all 2,200 accounts included in the procurement, whose aggregate size was some 894 million kWh.

With feedback from bidders, a uniform set of terms and conditions was assembled that was to be used by all participants and streamlined to remove items not considered relevant to electricity procurement. The IFB contained a requirement that power supply be provided using a minimum of 3 percent clean and renewable energy sources. The winning bidder also was required to report annually on how this 3 percent was being achieved.

Bid evaluation was to be based on price for all responsive offers. The consultant developed customized price evaluation sheets for all participant accounts. The winning bidder would be the one offering the lowest overall cost for each of the bid groups. Verification of prices would be done on an account-by-account basis, and accounts not receiving prices below SOS caps would be excluded from the final award. These accounts would remain on SOS.

To minimize the risk to bidders and to obtain optimal pricing, the procurement process required bidders to hold price offers fixed for the minimum time possible. Again, extraordinary coordination and cooperation among participants were required. The schedule required that prices be held for only 10 days and that contracts be executed immediately upon the selection of a winning bidder. The accompanying figure summarizes the schedule.

In developing the timeline shown on the table, the task force considered the time it needed to evaluate the bids; the problems that could arise if bids were considered nonresponsive; potential obstacles like a need for one of the agencies to obtain approval from a board before contract execution; and potential difficulties in obtaining signatures over weekends or vacation periods. With careful coordination, however, the schedule was first set and then met.

Resources Consumed by The Process: Staff and Budget
Throughout this process, the agency that took primary responsibility for the technical requirements of the procurement and later for contract management was the division of facilities services (DFS) in the county’s department of public works and transportation. DFS staff had the technical expertise to review electricity consumption data and to oversee the work of the consultant.

Through DFS, the task force hired the consultant to perform the technical work of gathering data, preparing load profiles, developing procurement documents, aggregating rate classes based upon bid prices, and evaluating the technical portion of the bid documents. Once a supplier had been selected and the contract terms finalized, the consultant assisted in the administration and support of the contract.

The procurement office was the lead county agency responsible for developing contract documents; hosting pre-bid conferences; posting, opening, and reviewing bids; and ensuring that procurement regulations were met.

Remarkable Outcome
Montgomery County has saved more than $2.2 million, thanks to the competitive procurement of electric power. These savings came in addition to the price reductions that have resulted from electric industry deregulation in Maryland.

The county awarded an 18-month electricity supply contract to Washington Gas Energy Services, Inc., located in Herndon, Virginia. The contract culminated a two-year procurement effort in which six county agencies and 10 municipalities had cooperated to investigate, develop, and issue a solicitation for competitive electricity supply.

An additional lesson was the importance of responding as early as possible to changes in the marketplace or the external environment. Because Montgomery County began exploring the potential impacts of electric utility deregulation early in the process, it was able to position itself as an early entrant in the competitive marketplace. By conducting its procurement early in the deregulation process and before standard-offer service had expired, the county proved that it had the necessary experience and knowledge to be prepared for whatever market impacts would ensue when SOS ended.

Perhaps the most significant lesson learned has been the value of interagency coordination and cooperation. Within the framework of a multiagency task force, an extraordinary level of collaboration was achieved toward aggregating the needs of 16 agencies.