The Power of Team

In 2002, a few executive managers of similar-sized utility companies and the editor of Transmission & Distribution World developed an idea, and the Midsize

In 2002, a few executive managers of similar-sized utility companies and the editor of Transmission & Distribution World developed an idea, and the Midsize Utility Consortium (MSUC) was born. The initial premise of the consortium was to leverage buying power, share best practices, optimize business strategies, and achieve economies of scale across a variety of internal and external functions among member companies.

The original members of the consortium included Kansas City Power & Light (KCP&L), Long Island Power Authority (LIPA), Oklahoma Gas & Electric (OG&E), Public Service Company of New Mexico (PNM) and We Energies (WE). After several initial meetings, the consortium determined there was an immediate need to focus on a few attainable initiatives and goals to demonstrate the value of the consortium by year-end 2004. Each defined initiative must have measurable benefits that could be provided by year-end.

The scope of the consortium would be limited to pursue the following key initiatives. Three items were identified to help gain “virtual scale” in member-company buying power: line clearance/tree trimming, cable locating and streetlight maintenance. Line clearance/tree trimming became the consortium's pilot project and the initiative received immediate focus.

This gave rise to the Midsize Utility Consortium Joint Line Clearance Team. Although each of the consortium members were involved at one time or another, ultimately, KCP&L and PNM were the companies that moved forward with the joint procurement of line clearance activities. Our statement of purpose is as follows:

In an effort to leverage purchasing power among consortium members, KCP&L and PNM have decided to pursue a strategy of consolidated solicitation of bids for distribution line clearance. It has been determined that it is in the best interest of the parties to go to the market collectively.

Desired Outcomes

Our intention was to jointly solicit bids from a host of qualified vendors from across the industry to secure optimal value through volume purchasing. As a sideline, we also intended to improve the contractual terms and specifications for both companies. Some of our desired outcomes included:

  • Obtain better value through consolidated volume. Flat equipment rates should be considered. Efforts to offset increased contractor overhead costs should be pursued, as opposed to the common practice of the utility absorbing 100% of contractors' wage and benefit increases.

  • Take into account the need to develop capabilities of regional or emergent vendors, facilitating their market penetration to inject additional competition into the market. This long-term strategy may result in short-term increases in expenses. An essential component will be the aggressive evaluation of vendor performance on an ongoing basis.

  • Share best vegetation management practices among member companies.

  • Explore innovative solutions to maximize value (crew sharing and resource leveraging).

Success Measures

The principal means by which success was to be judged included the following (in no particular order):

  • Large positive vendor response.

  • Cost increases lower than those experienced in the past as a result of volume discounting, flat equipment rates, and the sharing of costs (between members and vendors) associated with increases in overheads, such as labor and fuel.

  • Enhanced understanding of vendors' cost structure.

  • Improved quality.

  • Increased competition through aggressive vendor development, eliminating regional market dominance of a single contractor.

  • Vendors partner with consortium members to facilitate information on best practices.

  • Improved customer satisfaction.

  • Improved safety performance.

  • Improved reliability.

  • Adherence to schedules/accomplishment of all work objectives.

Joint Vegetation Management Initiative Team

A team was assembled with representatives from both PNM and KCP&L. At a minimum, each appointed a contract administrator and a forester to work on the project team. The team members included: Hoang Nguyen, Contract Administration, KCP&L; Dale Myers, Line Clearance, KCP&L; Nate Gould, Purchasing, KCP&L; Brad Williams, Line Clearance, ECI (KCP&L); Rita Pidcoe, Contract Administration, PNM; and Anne Beard, Forestry, PNM. KCP&L's Mark Schuler was the project lead and PNM's Chris Hickman was the executive sponsor.

From the team's initial meeting and kickoff session, which was held in Oklahoma City in May 2004, a draft was developed that addressed the overall business plan, ethics and rules for membership. At the same time, the team developed a document that compared and contrasted terms and conditions and specifications of current line clearance contracts from each of the participating member companies. An announcement and solicitation of interest from potential vendors was created, and in July 2004, the MSUC notified nine vendors from across the industry of our intentions. We wanted to gauge the level of interest from the vendors in such a process.

General Strategy

Collectively, KCP&L and PNM spend approximately US$11 million annually to control vegetation on their respective distribution systems. We collaborated to aggregate that work (including standardization of contractual terms, conditions and work standards) and jointly solicit bids from qualified vegetation management contractors as though we were a single customer. Upon evaluation of the returned bids based on several predefined criteria, the two companies were to award work to common vendors who, in turn, would perform vegetation management services for both. Originally, bids were to be evaluated by a third party to ensure full integrity of the process while complying with SEC rules and regulations. It was determined later that those concerns were unfounded and bids were evaluated by the Joint Vegetation Management team.

It was essential that all parties benefit from this process. Both companies recognized that they had a substantial interest in vendor success and development. It was further acknowledged that we did not expect bidding vendors to submit a uniform price for both companies; prevailing wage rates and other cost drivers vary throughout the country, so there is no expectation of total pricing parity. However, each vendor was strongly urged to develop a bid package that delivered maximum value to both companies.

Benefits to Vendors

PNM and KCP&L understood that this is a concept that would require a great deal of effort on the part of vendors to assimilate. There was a period of uncertainty as the entire process was developed and refined. However, both companies wished to emphasize that an aggregated approach offers substantial benefits to vendors, including:

  • The opportunity to penetrate new markets.

  • Work force stability, because contracts will be for a multiyear term. Such stability is of great value because it leads to: increased productivity (and thus enhanced competitive position); improved safety performance; and improved morale.

  • Ability to deploy underused assets on a broader scale.

  • Enhanced ability to strategically deploy crews (both routinely and in emergency situations).

Concrete Risk Factors

The team was cognizant of the risks that an approach such as this might present. While not all-inclusive, the following items seemed to constitute the most significant risks:

  1. Ensuring that no antitrust regulations are violated.

  2. Contractors may refuse to participate in the process if it is too restrictive.

  3. Labor relations issues (union versus nonunion).

  4. Accurate identification of switching costs.

  5. Inexperience in managing an initiative of this order of magnitude.

Request for Quotation

Vendors met with PNM and KCP&L prior to development of standardized specifications to clarify understanding and to offer additional input. The bid document language was standardized and distributed as an RFQ document to eight potential bidders. After a pre-bid conference was held to clarify the bid documents, a deadline for submittal was set for October. Five finalists were chosen, and in November, we met with the finalists to review each potential vendor's proposal and to answer questions. RFQ evaluation criteria for the participating utilities considered a range of criteria. Business objectives associated with line clearance included safety, reliability, cost and customer satisfaction.

Criteria considered in awarding agreements included the following:

  • Demonstrated understanding of scope and business objectives.

  • Ability to perform all aspects of the work specification.

  • Quoted cost per unit.

  • Flexible approach to partnering and achieving ongoing improvements.

  • Financial stability.

The Recommendation

The team's recommendation was to award work to three contractors: Nelson Tree Service, Trees Inc. and Wright Tree Service. KCP&L would be serviced by Nelson and Wright, and PNM would be serviced by Trees Inc. and Wright. Trees Inc. would serve as a first alternate for KCP&L should the need arise for the company to assign work to a different or additional contractor. Nelson would serve as a first alternate for PNM.

The benefits that have resulted or will result from this process and from the recommended awards include:

  • A common specification and contract template for tree trimming that appears superior to either party's prior documents.

  • Sharing of information regarding tree-trimming practices. Greater ability to define and implement best practices among consortium members going forward.

  • Cost reduction for PNM through the price leveraging power of the consortium. PNM will see a reduction of 2.8% for the portion of the work assigned to Trees and 0.3% for the portion of the work assigned to Wright.

  • Increased contractor competition at KCP&L resulting in continued aggressive cost management and productivity improvement. KCP&L expects to trim 2.9% more units in 2005, which would equate to a 2.5% cost savings.

  • A contractual cost escalation methodology is being implemented to incent contractors to manage their total costs as aggressively as possible. Profit, overhead, indirect costs and equipment rates will be held flat for the three-year term. Direct wages, benefits and taxes will be escalated using a blend of an appropriate index (ECI) and the percent actual bargaining unit contract escalation.

  • Reduced risk and increased flexibility for both utilities by having three identified contractors available to assign work in the event of the underperformance of one or more contractor.

  • A successful start to the MSUC; a foundation from which to grow. Future procurements might focus on commodities with less variability between utilities.

The team considered various scenarios for the number of total contractors to engage and recommends three as the optimal number, because it will likely result in lower risk and higher flexibility in the event any one contractor underperforms, moderate improvement in cost synergies and pricing leverage, and stronger appeal to potential new MSUC joiners.

Future of MSUC

It is the intention of the MSUC Joint Line Clearance team to continue meeting quarterly and observing each other's contractor evaluation process to ensure uniformity is being met as close as practical to the original terms, conditions and specifications. We will be evaluating the contractors using the same system as outlined in each contract. There is no one method for evaluating a work force's practices and production levels. A combination of quantitative (objective) and qualitative (subjective) evaluations, when objectively interpreted, should provide reasonable management decisions.

An example of a quantitative evaluation that uses statistics includes: cost per mile, cost per unit, OSHA lost workday incidence, crew-caused outages, customer satisfaction (transaction survey) and crew fulfillment.

Many efficiency items can be rated uniformly, such as tool complements, time reporting and presence of safety equipment. Items such as contractor cooperation and communication, condition of equipment, crew appearance and job setup are by nature subject to interpretation and require skilled appraisal. Some of the many criteria that can be evaluated are nature and number of pruner cuts, clearance achieved, skips, clean up, and customer complaints or compliments.

Each contractor will receive an evaluation review document including scoring and detailed contractor/crew audit information quarterly. During that review, each contractor will receive its competition's total overall scores by category. Contractor evaluation scores will be produced and reviewed by the utility each quarter. The contractor's scores will be used to help determine any contractor crew allocation modifications. The utility will review recommendations for crew reallocations, and if appropriate, allocation changes will be made.

The MSUC hopes to welcome additional members into the Line Clearance initiative in the near future and will strive to continue meeting our success measures identified in the original charter.

Anne Beard is a manager and system forester with Public Service Co. of New Mexico (PNM). Beard leads the Vegetation Management department at PNM. With 15 years of experience in the industry, she has worked for Florida Power & Light Co. (ECI), Public Service Co. of Oklahoma, Central Power & Light Co. and West Texas Utilities (now American Electric Power). Beard serves on the board of directors for Think Trees New Mexico, and she is the Rocky Mountain Chapter representative for the Utility Arborist Association. Beard also serves on the International Society of Arboriculture Certification Test Committee. Beard is an ISA-certified arborist and utility specialist. Beard graduated with a BS degree in forest administration from University of Wisconsin-Stevens Point and an MBA degree from Oklahoma City University. abeard@pnm.com

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