Dale Bunton, director of energy management, and Greg Steagall, manager of energy procurement for Dallas-based Dean Foods Corp. have saved their company a pretty penny in electricity costs at their Texas plants this year. After working with a consultant and amassing a great deal of research data, they decided to buy their electricity from the wholesale market rather than direct from the generator. Result: savings of a penny per kilowatt hour under their already-aggressive energy budget.

Bunton and Steagall could go that route because Texas has de-regulated the electricity market, freeing them to reject electricity pricing from the local utility and to build relationships with competitive power suppliers. It's an option that legislators in Maine, Massachusetts, California, Connecticut, Delaware, the District of Columbia, Maryland, New Jersey, New York, Pennsylvania and Illinois have given buyers too.

Buyers like Alan Meyer, director of energy management for Federal Way, Wash.-based Weyerhaeuser Corp. He buys electricity for his company's plants in those de-regulated states from whatever source is most economical.

So does Mark Kopera, manager of energy services at United Technologies' East Hartford, Conn.-based Pratt & Whitney. He goes through third parties for his electricity needs. "Because of their defined processes, the utilities in our state buy twice a year at specific times regardless of what's happening in the marketplace," he says. "If pricing isn't favorable when they buy they just don't get the best price." Kopera is free to find better prices.

That freedom isn't available everywhere, of course, since most states regulate the purchase of electricity, making it difficult, though not impossible, for buyers to save money. For other energy sources, such as natural gas and fuel oil, buyers use an array of strategies to cut costs.

Negotiations will only take you so far. "You can only squeeze so much cost out of the process," Weyerhaeuser's Meyer says.

So, Bunton, Steagall, Meyer and Kopera have mounted efforts to cut down energy usage in their respective facilities too. At Dean Foods, for example, Bunton and Steagall have spearheaded efforts that have resulted in $20 million in energy savings over the last six years through co-generation technology, purchase and use of more efficient motors on their processing lines and purchase and installation of improved piping that lets them pump air at lower pressures. The co-generation initiative includes using natural gas to fire conventional Caterpillar engines to drive generators, then using the heat from the engines to run their processing lines.

At Pratt & Whitney, as well as other United Technologies companies, there are regular energy audits and goals for reducing greenhouse gas emissions. And at Xerox, Megan McDonald, supplier manager, has worked with others in the company to purchase more efficient compressors and reduce lighting expenses. She soon will switch jobs and take responsibility for the MRO buy at the company.

All of those activities are critical, the buyers say, because of the volatility of energy prices and their potential impact on the bottom line.

"Volatility" may actually be too weak a term to describe energy pricing. The New York Times reported in mid-October that crude oil for November delivery was at a new nominal high of $87.61/barrel, up $1.48. Futures hit $93.53/barrel October 29. Some economists were saying that $100/barrel oil was no longer a distant prospect.

“Take the long view and link energy costs to revenue plans.” —Michael Kagan, Constellation New Energy

“Understand how your utilities charge, and the savings opportunities.” —Mark Kopera, Pratt & Whitney

“Work with engineering to promote energy-efficient product designs and packaging.” —Mike Kilgore, Chainalytics

And it's not just crude oil that's going up. Diesel prices rose nearly a half a percent in mid-October to $3.09, according to the Energy Information Administration (EIA).

Meanwhile, Purchasingdata.com, this magazine's website for tracking commodity prices, forecasts electricity rising 1.9% this year.

The EIA expects the Henry Hub spot price for natural gas to average about $7.21/1,000 cubic feet this year, but then rise by 9% to $7.86 in 2008. Purchasingdata.com sees a 15% growth in natural gas prices next year.

"Today's energy markets pose an incredible challenge to supply professionals who need to manage the costs," Rob Barkley, vice president of national accounts at Dublin, Ohio-based energy-procurement firm EnergyGateway told attendees at the 92nd Annual Institute of Supply Management Conference in May. EnergyGateway is now part of World Energy Solutions.

Barkley said there are three areas of price risk for buyers of electricity and natural gas: the commodity component of the delivered cost of natural gas; the transportation component; and the transmission components of electricity bundled together. Failure to understand and manage those risks, he said, can lead to high prices.

"The entire energy complex has to be managed, not just a slice or two," says Steve Wilhite, president and CEO of Summit Energy in Louisville, Ky., a firm that provides natural gas, electricity and alternative-fuel-management plans. "The purchasing organization needs to be in control of what and how much is being consumed and exactly how much purchased energy has cost."

Which brings us back to the individual strategies and tactics buyers like Bunton, Steagall, Meyers, Kopera, McDonald and others employ. Here are 19 suggestions from them and others on steps for saving money in energy purchases and energy use.

Send us your own suggestions and comment on energy at www.purchasing.com/energy


Here are 19 suggestions:

1. Thoroughly research the market, gathering information from every source you can find, including suppliers, so you'll know the direction the market is going before it goes there. That may seem elementary, but too many purchasers spend little time collecting data and analyzing it.
   —Dale Bunton and Greg Steagall, Dean Foods
2. Understand how utilities charge, especially in an unregulated market. There may be many opportunities to review your rates and save money.
   —Mark Kopera, United Technologies
3. Let regular commodity-market volatility work for you. Energy markets trade 250 days a year and energy prices vary 1–3% per day, so don't treat de-regulated energy buying as if it's a same-time-each-year process. Buy when energy costs are below your budget. And watch for "trigger" prices from natural gas providers that allow you to set target prices below current market levels that are locked in if the market trades to that level.
   —Craig Schultz, Energy Buying Strategies
4. Review your costs frequently. Transportation costs, interest rates and other costs can change quickly.
   —Mike Kilgore, Chainalytics.
5. Look closely at how, when and why you use energy, and consider the bottom-line impact of your energy program and your overall tolerance for risk. Take the long view on managing overall costs and linking energy costs to your revenue plans.
   —Michael Kagan, Constellation New Energy
6. Develop flexible supply arrangements, ranging from fixed-term contracts with price-adjustment indexes to spot purchases to hybrid combinations.
   —Steve Wilhite, Summit Energy
7. Avoid over-insuring. Natural gas suppliers and other energy providers may offer volume-fluctuation insurance that guarantees a certain price for the differences in your actual consumption from the estimates in your contract. If you're comfortable with the risk, you might be able to save 10% off, say, your gas bill by asking for no-volume insurance. Check other insurance products in energy contracts too.
   —Craig Schultz, Energy Buying Strategies.
8. To ensure costs and revenue are linked, get your CFO involved in the energy-procurement process.
   —Michael Kagan, Constellation New Energy
9. Create a database of all supplier/utility/pipeline agreements, copies of invoices, a list of primary operation contacts, historical and forecasted usage profiles and fuel-switching and alternate-fuel opportunities by location.
   —Rob Barkley, EnergyGateway
10. Investigate alternate energy technology such as co-generation, capacitor banks and different fuels to lower costs. Weyerhaeuser substituted biomass for fossil fuels in plants and is using hydrogen in one facility rather than natural gas.
    —Alan Meyer, Weyerhaeuser
11. Enter into national enabling agreements with several suppliers. They help ease the energy-purchasing process. If you see an opportunity to save, you can take it quickly without having to issue a formal request for proposal (RFP).
    —Dale Bunton and Greg Steagall, Dean Foods
12. Have staggered terms in all energy contracts so they don't all end at the same time.
    —Dale Bunton and Greg Steagall, Dean Foods
13. Streamline purchasing so all decisions are made at one desk. Form an energy-buying group and empower the group to make decisions fast so you can take advantage immediately of changes in the market.
    —Doug Bushing, CB Richard Ellis
14. Work with "intervener groups." They investigate rate cases and disseminate information to their members on energy issues and the potential effect. This is especially important for small staffs without many internal resources.
    —Megan McDonald, Xerox
15. Follow local politics to be sure you know when states may be moving toward de-regulation of the market and what incentives may be available for using alternative energy sources.
    —Mark Kopera, United Technologies
16. Work with engineering to promoteenergy-efficient product designs and specify energy-efficient components.
    —Mike Kilgore, Chainalytics
17. Collaborate with engineering to ensure design of energy-efficient packaging. Hewlett-Packard changed the shipping packages for its notebook computers from wood to plastic and saved 28 lbs. in the packaging. That amounted to a big cost reduction, especially since the company ships 100,000 units a year from China to Europe.
    —Judy Glazer, Hewlett-Packard
18. Make shipping packages smaller. Wal-Mart and P&G have an initiative to use more concentrate in detergent to save shipping weight and space so they get more on a truck and shave fuel costs.
    —Mike Kilgore, Chainalytics
19. Purchase energy-efficient IT products, particularly in data centers, which require energy for cooling.
    —Judy Glazer, Hewlett-Packard