Image via Wikipediaby David C. Wyld Southeastern Louisiana University - June 11, 2010
In a Nutshell:
The pioneering reverse auction firm, FreeMarkets, rose a decade ago from Pittsburgh. Now, the City of Pittsburgh is leading an effort to combine agencies’ purchasing power to produce powerful savings on electrical and natural gas procurements through reverse auctions.
The Pittsburgh-area has been a hotbed of reverse auction activity over the years. A decade ago, FreeMarkets grew fast to become the market leader in bringing reverse auctions into prominence in business-to-business and business-to-government procurements. Today, we are seeing the results of an exciting partnership between governments across the Pittsburgh region – working with a private-sector reverse auction provider, Co-exprise (http://www.co-exprise.com/), based in nearby Wexford, Pennsylvania.
The Western Pennsylvania Energy Aggregation Program has already produced multi-million dollar savings for taxpayers through the use of reverse auctions for utility procurements for governmental agencies in the area – with promises for much more in the future. This innovative effort, initiated in 2007, first began with an effort to aggregate electricity purchases for governments in the Pittsburgh area in the wake of deregulation in Pennsylvania’s electricity market statewide. With the structure of the partnership, there was very little risk for the governments involved, as the fees for the program are borne not by the public agencies, but rather they are paid for by the successful suppliers. In 2008, the initial bulk-purchase of electricity capacity – conducted using an electronic reverse auction where competitors anonymously bid down the price at which they would supply the kilowatt hours needed by the various agencies – produced a savings of $1.4 million dollars over the expected price level, based on current market conditions and historical buys. Co-exprise Chief Executive Officer Bill Blair commented that the result of the initial energy auction “was a powerful display of strategic sourcing processes coupled with next generation technology deployed to assist public and private entities in achieving best market price for their electricity contracts.”
Just last month (May 2010), the second procurement auction for aggregated governmental electrical needs was conducted. This event produced – for a combined 30 million kilowatt hours of electricity – shaved more than a full penny (6.54 cents per kilowatt hour versus 7.75 cents) that the winning bidder, Duquesne Light Energy, normally charged its municipal customers. For the City of Pittsburgh alone, this means the municipal government saved residents over $1 million dollars over the next three years through this single acquisition! And for even the smallest of participating governmental agencies, the savings can be of critical importance. Take for instance the Borough of Wilkinsburg, PA. It will save $7,600 a year under the reverse auction negotiated energy contract. As Borough Manager Marla Marcinko recently commented, while not Pittsburgh-level savings, for her community, these thousands of dollars a year are critical, as she observed: “I wish we could do this every day. Every little bit helps.” And dollar savings are not the only benefits to be gained by the participating communities and their residents. As part of this agreement for cooperative electrical procurement, the cooperating agencies specified that they would buy – and suppliers who bid would agree to provide – at least ten percent of the total kilowatt hours from renewable energy sources. This has brought-on the support of the Pittsburgh Climate Initiative (http://www.pittsburghclimate.org/) for this cross-agency, public-private cooperative effort that produces both cheaper and cleaner energy use by governmental agencies across much of Western Pennsylvania.
Now, based on the success of the bulk electric power acquisitions, the Western Pennsylvania Energy Aggregation Program recently announced that it would work with Co-exprise again to procure natural gas for a number of Pittsburgh-area governmental agencies, including:
· City of Pittsburgh
· Allegheny County
· Pittsburgh Zoo & PPG Aquarium
· Pittsburgh Water & Sewer Authority
· Pittsburgh Public Schools
· Allegheny County Airport Authority.
According to Co-exprise’s Blair, in the natural gas program to be carried out this fall (preceding the need for wintertime peak utilization): “Co-exprise will reach out to multiple natural gas suppliers…, and only the most competitive and qualified suppliers will participate on bid day. The result will be best market price and terms for the county, city, school district and airport authority, and most importantly, their constituents.” Thus, this cooperation between governmental agencies and their innovative private sector partner in Co-exprise serves to produce an unquestionable “win-win” for the taxpayers of the area. Indeed, Pittsburgh Mayor Luke Ravenstahl recently commented on the success of the reverse auction energy acquisition program, stating: “The Western Pennsylvania Energy Aggregation Program is a great example of best-in-class purchasing practices that are enabled by 21st Century technology. The joint efforts are helping us to make the best use of taxpayer dollars.”
Here at the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), we’ll keep tabs on the progress of this Pittsburgh area initiative, and expect a follow-up post this fall after the reverse auction is conducted. I would expect that we’ll again see the Western Pennsylvania Energy Aggregation Program and Co-exprise once again produce seven-figure savings for the participating agencies in the region, generating real savings for taxpayers and positive press for government executives in the participating agencies.
Analysis
What lesson is there in the Pittsburgh-area success story? Well, it is simple really. If you are a governmental executive, with public sector budgets universally facing shortfalls and budgets bleeding red ink, now is the not the time to worry about if a great idea is born in your own head – or comes from your staff. Do not worry about the “NIH” syndrome (Not Invented Here). Rather, just as the best private sector organizations do, benchmark best practices and do what is proven to work. Follow these Pittsburgh-area agencies’ innovative actions and ask yourself (and your underlings) why you are not pursuing similar programs in your own procurement.
Over the past decade, the evidence is quite clear – reverse auctions can produce savings on everything you buy – from paper clips and computers to yes, bulk purchases of utility power. They have become a proven tool for Fortune 500 companies and large governmental buyers, and now, with the advent of web-based, user-friendly interfaces, in many cases, an online e-marketplace can be the easiest – and fastest – way to reach new potential suppliers and ensure that you are maximizing the effectiveness of its procurement dollars for organizations of all sizes around the country and around the world. And, for public sector agencies, there are a number of private sector partners to choose from, such as Co-exprise (http://www.co-exprise.com/), FedBid (http://www.fedbid.com/), and Procurex (http://www.procurexinc.com/) which are experienced in partnering with governmental agencies to produce 10-20% savings – perhaps more – and in some cases, much more – on your acquisition dollars.
If you haven’t looked into reverse auctions, there is indeed no time better than right now to do so. While it’s on your computer screen and fresh in your mind, circulate this Pittsburgh case study to your key people and get moving towards saving big money – and becoming a champion of spending taxpayer dollars more wisely – today! At the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), we’re here to help your agency learn how you to can use proven “best in class” procurement methods to streamline your acquisition process and save all-important taxpayer dollars to make you a hero to your constituents.
Sources
Allegheny County, Pennsylvania Government. Press Release: Onorato, Ravenstahl Announce Savings from Initial Joint Energy Purchase, February 7, 2008. Available at http://www.alleghenycounty.us/news/2008/280207a.asp.
Brandolph, Adam. “Energy auction cuts $1 million off electric bills,” The Pittsburgh Tribune-Review, May 27, 2010. Available at http://dailyme.com/story/2010052700001178/energy-auction-cuts-1-million-electric.html.
“Co-exprise Partners with City of Pittsburgh to Power Natural Gas Aggregation Initiative – Cooperative Purchase and Reverse Auction Provide Relief for Region’s Taxpayers,” Computersor, May 2010. Available at http://Computersor.com/space/lion77248c381o/uso9108549006.
Levine, Marty. “PA Companies Tap into Electricity Deregulation,” Keystone Edge, December 12, 2008. Available at http://www.keystoneedge.com/features/electricitydereg1218.aspx.
About the Author
David C. Wyld (dwyld.kwu@gmail.com) is the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/). He currently serves as the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a noted expert on reverse auctions and e-procurement topics, being widely published on the topic and a recognized expert/consultant in the area. He has been named among the Rising Stars in Federal Information Technology by Federal Computer Week.
Read more at Pittsburgh Blazes The Way, Again, in Reverse Auctions: How Municipal Governments are Saving Millions of Taxpayer Dollars on Their Energy Purchases Through Introducing Reverse Auction-based Competition Among Power Suppliers | Socyberty
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