A supply of service

Gas, electricity, water. Now there's a triumvirate to consider. And many businesses have had to do exactly that during the past few years, grappling with the ways and means to pay for these utilities as the prices fluctuate - sometimes down, but mostly up. Looking back to 2004, business was talking about risks in the volatile gas market. Indeed, in October that year, the annual utility market convention run by EIC - the Energy Information Centre - was focused on clarity regarding government strategy on energy. So, if the markets were unpredictable and risky then, what has happened since? A quick check on the Eurostat website (epp.eurostat.ec.europa.eu) is quite revealing. In euros per Giga Joule (GJ) of natural gas, without taxes and since 2004, the price in the EU 25 countries has risen from E4.56 to E7.53 per GJ for large industrial customers (ie, consuming more than 418,600 GJ). That, by my reckoning, is a 67% increase (in Germany, it worked out at 74% in the same period; in the UK, a staggering 131%). For electricity, we need only look back one year to find a telling statistic. The website reports: "Between July 2005 and July 2006, EU-25 electricity prices rose on average by 15% for industrial customers." Unfortunately, the largest price increases came in the UK (35%), whereas in Hungary, for example, they actually fell. The market for electricity appears to be cyclical. From 1996 to 2002, it declined, then began to rise once more and since 2002 has continued to rise. Gas rose sharply from 1999-2000, plateaued and, since 2005, has been rising sharply again. How can buyers deal with this? One means is to turn to the Charted Institute of Purchasing & Supply (CIPS), a professional organisation that represents buyers, and lobbies on their behalf. On the CIPS website, there is a link to its energy committee, where members can submit their most pressing questions, which are then forwarded to committee members for their response. One senior member of that committee is Chris Lewis, whose role includes meeting with the regulators every four months. However, he is also an energy consultant and advises members on the best means of buying gas, electricity and water: "how to buy and who to buy from". According to Lewis, the market price has risen in general and last winter particularly so when there were "massive price hikes, with a perceived shortage of gas. Since the summer of 2006, prices have come down dramatically", he adds What, then, would be his advice on contracts for gas and electricity? Lewis believes there are two main ways to structure a deal. There is the traditional 12-month fixed price contract, but for those businesses that do not want to lock in to a fixed price, the alternative is to opt for a "contract for supply". As the contract proceeds, the buyer can choose when to 'lock in' the price. With prices falling, those with a 'buy as you go' contract have gained over those fixed into higher prices. Lewis says energy consultants and the CIPS should be making appropriate users aware of the availability of this second type of contract. However, most users will probably only be able to obtain a fixed price contract, Lewis warns. Consumption needs to be at the higher end, if a monthly contract is to be secured, so it is more for operators of fairly large sites. At the same time, a number of buyers have chosen the first type of contract of late, as they preferred to budget at a fixed price and wanted protection from any potentially damaging fluctuation s in prices. Looking back to see whether a business would have benefited or not from this approach can work both ways. As Lewis adds, "hindsight is a wonderful thing in this game". Monthly price contracts can be set up, based on an index. For example, a business can 'lock in' the January price on a gas contract at a certain point or let it go on to the index price. The indices can vary, and be set anywhere between one month and one day ahead. The prices are all published figures, so buyers know the suppliers are not just making up different rates. If a buyer chooses not to lock in, the price will default to the index price - in other words, the supplier locks it in for them. These types of contracts apply to gas and electricity utilities. "One supplier led the innovation of these contracts: Gaz de France" says Lewis. Water contracts are a very different proposition. When the concept of allowing competition within the water industry was introduced, one opportunity that emerged was for brokers to buy water direct from a water company and sell this on. While this is fine in principle, in reality there appears to be little opportunity for users to make savings. There has not been much change overall, adds Lewis, who suggests the best option for a large water user might be to secure, and treat, their own water from a well by digging a borehole - or by being close to a natural supply. Rachel Dobson is continuous improvement manager at Anglian Water, one of the leading providers of water and wastewater services in the UK. Located in the east of England, it serves the needs of around six million industrial, commercial and domestic customers. A typical business customer should find the tariffs more or less defined by the regulator Ofwat, but there is scope for "understanding, planning and developing a water supply to suit business needs", says Dobson. The part of Anglian Water responsible for this is business customer services, which liaises with manufacturers regarding the quality of the water, waste and usage, among other factors. For example, Anglian Water works with clients to provide the water they really need, perhaps to avoid treatment of water by the manufacturer or to assess actual demand. This, says Dobson, is a "delicate area", with water companies having clear domestic obligations and manufacturing users taking water from the same network of pipes. Both parties still need to be satisfied with the service they receive, so Anglian has introduced a tariff for manufacturers that looks at demand and can change accordingly. Even here, it talks to its users about how demand can be best managed - for example, can storage be used on site to eliminate peaks? Of course, users can go elsewhere for their water. A very large user, greenfield site or a user that is on the edge of the supply area for its incumbent supplier could switch, but in reality this is quite rare. Most contracts are agreed annually and water companies such as Anglian Water are constantly managing manufacturing accounts with a view to both parties benefiting. So discussions about water contracts are more about usage, quality and service than price. But what is general good practice? When negotiating any utilities contract, says Lewis says, buyers should be looking for a supplier to deliver exactly what they should be getting as a customer - and this doesn't necessarily mean focusing on price. Basics such as customer service and invoicing are equally important aspects of a deal. "You can get suppliers to quote margin. It is not that easy... but you can get it." With the charges based on the wholesale prices of gas or electricity, the margin is the only really negotiable part of the deal. "Nowadays, I wouldn't say that it is always necessary to look round each year," Lewis adds. "If you've a good supplier with low margins, you might as well stick with [that supplier]." So how do the suppliers see things? Steve Fitzsimons, head of mid markets at npower business, describes the energy market as a dynamic and hugely volatile one, moving towards being a commodity market. As a supplier, Fitzsimons buys his gas and power from a trader, with his margin - "pretty small" - being the difference in price when he supplies the utility. For a client to try to squeeze the margin might not be an effective strategy, he argues, as the market commodity price moves around. In manufacturing, businesses are used to put in place hedging strategies on commodities they buy, says Fitzsimons, so he encourages clients to adopt these kind of strategies in order to reduce or spread risk on their energy purchases. "At the big end of the market, these strategies are more recognised, but may not be at the small end." Where a company has a purchaser that is effectively a jack-of-all-trades, putting together an energy purchasing strategy in this volatile market is not a natural skill. So companies like npower are offering 'products' - different types of contracts that allow people to purchase across time - to the market. Think differently Apart from helping purchasers with new risk-reducing types of contracts, Fitzsimons is also encouraging manufacturers to think about energy differ- ently. "The cheapest energy is the gas or electricity you don't use." Deals can now include enabling customers understand what they are using, which means quite basic monitoring and targeting can prove very valuable. He cites the case where a customer was leaving the aircon on all night. Monitoring identified this and reduced his bill. But the 'service' offered in deals goes further. "We offer anything from audits to entirely bespoke managed packages where we take all the people, and run the plant, in return for shared savings. A complete end-to-end solution. We can look at the development of on-site generation, which is much more on the agenda than it has been, particularly green generation: plant that burns waste or the use of wind farms." And what of the future? It seems deals to come will embrace "carbon management and carbon trading, and include how we can assist in the future exchange of carbon credits or report on carbon emissions", he says. And on top of seeking advice from the CIPS or your supplier, users can also call on the services of a consultant. Furniture manufacturer The Morris Company started using utility consultancy Audits Unlimited some years ago, continuing the association when it moved to a new plant in 1999. Audits Unlimited negotiated a new gas supply, based not just on cost, but also lead times. Since then, it is estimated that more than £400,000 has been saved on utilities bills. Robert Morris, managing director of the group, says: "having worked with their consultants over a period of time, I value their independence and expert knowledge in the utility field. They have saved us many hours checking bills, and negotiating discounts and contracts, which has resulted in reduced costs, reduced administration time and has provided more clarity, enabling us to see why and where we are being charged. "They have a greater knowledge of the utilities market and are able to predict when prices are going to go up and down," he adds. "They have been able to get quotations for us six to eight weeks before our utility suppliers require us to renew our contracts and recently we have saved between 10-12% on increases in a rising market."