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<td width="75%" valign="top"><strong><big><big><big><font face="Arial">DOVER FINDS
COMPETITION AND LIKES IT</font></big></big></big><p><font size="4">City-Owned Utility
Brings In Power Marketer To Meet Future Power Supply Needs</font></p>
<strong><p ALIGN="JUSTIFY"><font face="Arial">by Elizabeth R. Benson, President, Energy
Associates<br>
</font><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine: 04/98</em>)</font></p>
</strong></strong><p align="left"> </p>
<p><font face="Arial" color="#000000">Officials in Dover, Delaware believe they have found
competition in the electric utility market. And they like it. On March 11, 1996, the Dover
City Council voted 9 - 0 to contract with Duke / Louis Dreyfus to operate Dover's
generation and sell power to the city at a guaranteed price for a 10.5-year term. The vote
was the culmination of almost two years of work that started when the city began exploring
how best to acquire additional capacity to serve an expanding community, and continued as
Dover sought lower electricity costs that would enable it to compete effectively in the
power markets of tomorrow. </font></p>
<p><font face="Arial" color="#000000">"This is a perfect example of what competition
can do," noted Bob Lambert, chairman of the City Council's utility committee, and the
council member vested with the responsibility of overseeing the complex power supply
solicitation. "Over the term of this contract, we expect to save over $77 million in
power costs. That's a 20% decrease in what we would have expected to pay otherwise, and
because of the profit sharing incentives Duke / Louis Dreyfus built into the bid, we have
a real opportunity to save even more."</font></p>
<p><font face="Arial" color="#000000">"We were able to garner the benefits of the
competitive electricity market, while maintaining our traditional structure as a
municipally-owned utility," said Councilman Tom Leary. "The most frequent advice
I got from my constituents throughout this process was 'don't sell [the utility], but get
us the best deal for our future.' With this decision, we accomplished both goals."</font></p>
<p><font face="Arial" color="#000000">In addition to its financial return to the city, the
Dover deal is significant in a number of other important ways. Duke / Louis Dreyfus will
be responsible both for operating Dover's 175 MW of generation, and for procuring energy
and capacity from the broader market place as the city's needs change. In this way Dover
will be able to maintain its operating independence while taking advantage of both access
to broader power markets and the deeper resource base of Duke / Louis Dreyfus. </font></p>
<p><font face="Arial" color="#000000">The price of energy and capacity that Duke / Louis
Dreyfus will sell to Dover over the 10.5 year term is guaranteed. This means that Dover
knows how much it will spend on power for the next decade. Simply put, the price on the
table now will never be higher. However, as an incentive for Duke / Louis Dreyfus to
improve its price to Dover, the deal also contains profit sharing provisions for both Duke
/ Louis Dreyfus and Dover if Duke revenues exceed costs.</font></p>
<p><font face="Arial" color="#000000">In recognition of what is expected to be an even
more competitive future electricity market place, the Dover deal includes provisions to
keep the city competitive on into the future. A price reopener clause - a first for a
contract of this type - will maintain competitive prices should there be significant
market changes. </font></p>
<p><font face="Arial" color="#000000">Equally significant perhaps are provisions that
reinforce the partnership forged between Dover and Duke / Louis Dreyfus. Key among these
is an agreement binding the parties to work actively to provide competitive power to
Dover's most price sensitive load in the event of direct access opportunities. Added to
this are substantive agreements by Duke / Louis Dreyfus to assist Dover in underwriting
important environmental compliance, substation upgrade, and retail customer support
activities. </font></p>
<p><font face="Arial" color="#000000">But beyond these provisions, the Dover deal is
precedent-setting because it represents the first time in the United States that a major
municipal utility has entered into a long-term agreement with a power marketer to operate
generation and provide full power supply requirements. In selecting Duke / Louis Dreyfus,
Dover has put power marketers on an equal footing with the more traditional suppliers. </font></p>
<p><font face="Arial" color="#000000">For public power utilities, this can be especially
good news. More qualified competitors mean more choices and more opportunities for public
power. So - above everything else, Dover's experience shows that competition can work well
for wholesale electricity customers. But is there more? Do the reasons for Dover's success
go deeper? </font></p>
<p><font face="Arial" color="#000000">"Things didn't just happen," said Bob
Lambert. "In fact, the whole activity was very carefully planned. It started with our
recognizing that we needed a strong team approach to a very complex situation.
Fortunately, our city manager, Jim O'Connor, had considerable experience working on public
power issues. He was the driving force behind our assembling an effective team and
obtaining community consensus on a direction." </font></p>
<p><font face="Arial" color="#000000">O'Connor in turn credits Lambert for actively
shouldering the responsibility of the City Council's utility committee and using it as a
means to communicate to and unify the council. </font></p>
<p><font face="Arial" color="#000000">In addition, Lambert, O'Connor, and Mayor James
Hutchison kept city business leaders fully informed on progress being made regarding the
power supply deal, and on major decisions affecting its status. "It became clear to
Dover's business community that we were looking to make a sound business decision that
would provide a lot of benefit to them," said City Council President Robin
Christiansen. "When it came time to select from among the final bidders, the business
community gave the council its strong support." </font></p>
<p><font face="Arial" color="#000000">In addition to the work done by the city to involve
and inform its citizens, Dover's success hinged on the consultants it hired to prepare and
evaluate the city's Request for Proposal (RFP), and to negotiate with the three
"short-listed" bidders. A team of three, Kirk Betts, a Washington, D.C.
attorney, Curt Wilson, a consulting engineer with RMI, and Betsy Benson, a management
consultant specializing in competitive power markets, assumed professional responsibility
for the complex power supply solicitation. </font></p>
<p><font face="Arial" color="#000000">"As a rule, I'm not big on hiring
consultants," noted Tom Leary, "but if there was ever a time to hire
consultants, this was it! This decision was worth between $325 - $350 million to Dover.
The consulting team gave us the expertise we had to have. Their backgrounds and experience
enabled them to weigh each proposal fairly and dispassionately, and to make a
recommendation aligned with the complex needs we had." </font></p>
<p><font face="Arial" color="#000000">"We hired the right consultants at the right
time," added Councilwoman Holly Malone. "They understood that Dover needed to
stay competitive in the market place, and that the city wanted to be able to establish a
partnership with its new supplier. It was important for us to know that the consultants
had our best overall interest in mind, and they did." </font></p>
<p><font face="Arial" color="#000000">An important piece of the overall Dover puzzle was
the way the consulting team approached the RFP. </font></p>
<p><font face="Arial" color="#000000">First, because of the breadth of the city's needs
and interests, the RFP laid out a comprehensive set of goals which - taken together -
addressed the city's near and longer term needs. Rather than prescribing solutions, the
RFP asked potential bidders to address Dover's needs creatively. The city wanted to see
what solutions the market had to offer. </font></p>
<p><font face="Arial" color="#000000">Second, the RFP sought responses from the full
market rather than limiting the bids to specific groups, or to selected companies within
certain groups. It solicited proposals from power marketers and independent power
producers as well as from investor-owned utilities; it encouraged both single bidders and
alliances; and it reached out broadly, seeking participation from companies both close to
home and far away. And there was a lot of interest.</font></p>
<p><font face="Arial" color="#000000">In response to its RFP, Dover received solid
proposals from 15 qualified bidders. Following an evaluation of each proposal, the
consulting team and Dover Electric's executive assistant, Les Blakeman, recommended
narrowing the bidders to Delmarva Power, Duke / Louis Dreyfus, and Public Service Electric
& Gas Company, and conducting simultaneous negotiations with each bidder. It was
already clear that Dover would do substantially better with any of these three bids than
it was currently doing on its own. </font></p>
<p><font face="Arial" color="#000000">Nevertheless, the consulting team knew that there
was still considerable opportunity to sharpen each bid through effective negotiations.
Dover, realizing that thorough, confidential negotiations with more than one bidder would
benefit the city, agreed that its consulting team should negotiate the three remaining
bids simultaneously. This left the bidders. To make simultaneous negotiations effective,
each of the bidders had to trust that the process would be fair. They were skeptical. Each
of them had experienced negotiations where they had been disadvantaged, either because
confidential bid terms and pricing had been disclosed to their competitors, or because one
bidder had clearly been favored over the others. </font></p>
<p><font face="Arial" color="#000000">In Dover, the commercial terms and pricing for each
bid remained absolutely confidential throughout the negotiations. No numbers were
"shopped"; that is, low bid figures were not leaked to the other parties to
encourage them to lower their price. In addition, each of the bidders had equal standing.
One was not preferred over the other two. </font></p>
<p><font face="Arial" color="#000000">After testing the integrity of the process, each
bidder responded favorably and actively negotiated. In effect, this meant that each
supplier competed against its own bid, as well as those of the other two. </font></p>
<p><font face="Arial" color="#000000">In the end, the terms in each proposal were better
for Dover, and the prices in each were lower. The process bore tremendous dividends for
the city. </font></p>
<p><font face="Arial" color="#000000">Faced with the fact that it really couldn't go wrong
financially with any of the final proposals, Dover was able to weigh its options based on
important policy issues, as well as on the numbers. As it turned out, the Duke / Louis
Dreyfus bid contained both the best financial terms as well as a host of other provisions
which were especially attractive to the city. Duke / Louis Dreyfus turned out to be the
best choice. As Dover now moves from power supply negotiation to contract implementation,
the city will focus on enhancing support and service to its own electricity customers. And
this is exactly where the city wants to be. </font></p>
<p><font face="Arial" color="#000000">Thanks to competition, a thoughtful process, and the
right professional resources, Dover has significantly lowered its power supply costs and
increased its access to critical resources. As the world changes, the city believes it is
in an excellent position to remain competitive. </font></p>
<p><font face="Arial" color="#000000">Robin Christiansen sums it up this way,
"Municipal utilities will benefit if they take advantage of the opportunities today's
market offers them. For us, what looked like a major problem turned out to be a tremendous
opportunity because we didn't panic, and decided to look around before we rushed headlong
into a decision. Our approach worked. We recommend it. There's no reason why it can't work
for other public power communities, too." </font></p>
<hr>
<p><font face="Arial" color="#000000"><strong>Elizabeth R. Benson heads Energy Associates,
a Falls Church, Virginia-based management consulting firm specializing in competitive
power markets, strategic planning and marketing. She was part of the consulting team which
managed, negotiated and concluded the Dover power supply and services deal. She also works
with clients to develop effective power marketing capabilities, to gain practical
intelligence on both competitors and potential customers, and to tailor their deals to the
unique needs of individual customers. </strong></font></p>
<p><font face="Arial" color="#000000"><strong>In addition to the City of Dover, Ms.
Benson's clients have included Detroit Edison, General Public Utilities Corporation,
Hydro-Quebec, Minnesota Power, New York State Electric & Gas Corporation, Pacific Gas
& Electric Company, and Trigen Energy Corporation. </strong></font></p>
<p><font face="Arial" color="#000000"><strong>Inquiries about the Dover deal, or about
other competitive issues can be addressed to Ms. Benson at (703) 641-7948. </strong></font></td>
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