The Procurement Professional’s Guide to Negotiating Energy Supply Agreements
Previously in this series on negotiating energy supply agreements, we covered “Payment Terms” and “Termination Fees” – both of which are very important in structuring a contract that meets the needs of your organization. This installment will discuss the use of “Add/Delete Language.” In the final two installments, we will delve into “Usage Bandwidth” and “Material Changes.”
Add/delete language is of primary interest to organizations with a significant number of energy accounts. This can take one of two main forms:
A large number of accounts in one area – such as a city contract with hundreds of electricity accounts, or A company with many locations all under one contract – as with a department store chain that has 50 stores on a state-wide electricity contract
In either of these cases, there is a very strong possibility that an account may need to be added here or there over the life of the contract (when adding a street light or opening a new store, for example) or that some of the individual accounts will be deleted (due to things like relocating a facility or closing a branch). Regardless of the reason, it becomes very important that the energy supply agreement addresses these issues and needs so that you aren’t subject to fees or penalties of some kind.
Adding – Is This a New Contract?
Let’s consider the scenario that you are a growing school district that is one year in to a five-year electricity contract. A particular school within the district is expanding rapidly, and there is the need to place several temporary buildings on site to accommodate classes. Each of these buildings needs a new electricity meter; therefore, you need to add several new accounts to the district’s overall supply agreement.
If the account were something really small – like a guard light, for instance – most suppliers would just add to the supply agreement at the contract rate. But when it is something larger, as in the case of these school buildings, energy suppliers take other action. You may have to sign a whole new agreement, or your added account may be added at the current market rate – not your original contracted rate. This scenario is typical if the market rates have moved up since the time you signed your original contract.
If you, as the energy procurement specialist for the school district, have negotiated your contract from the beginning to include language allowing you to add new accounts, you can ensure that these new locations pay the contract rate even in if the current market rate may be much higher. Ultimately, this provides you true savings to your school district.
Deleting – Is This Terminating a Contract?
For this case, let’s say you are a restaurant chain with 30 locations around the state, all under one electricity supply agreement. The chain has decided to sell two of these locations; they are removed from the supply agreement. As in the school district case, the main impact on the energy contract has to do with how large these accounts are in relation to the overall contract.
In this restaurant chain scenario, actually removing a full-size location is significant enough that the supplier assesses an “early termination fee” to account for the unused power for the remainder of the agreement term (see our previous article regarding termination fee language). The primary way to avoid such early termination fees is to include language in your original contract that allows for deletions so that multiple sites could be removed with no resulting fee to the organization.
Add/Delete Language – How Much Leeway Is There?
From the scenarios we just discussed regarding adding or deleting accounts, a common theme has to do with how much “energy” is involved in adjusting the contract. Add/delete language is typically addressed in terms of the percentage of energy being added to or deleted from the supply agreement. So if the estimated total load of your electricity contract is 1,000,000 kWh, and you are adding a new account that will use 100,000 kWh annually, you are increasing the supply agreement by 10 percent.
Most energy suppliers address add/delete by allowing it within a particular bandwidth or percentage. Not every supplier offers add/delete language, but for those that do, the bandwidth usually ranges from 5 percent – 20 percent. This provides you contract rate stability within that range.
A “standard” energy supply agreement has no specific add/delete language – each issue is discussed individually. This usually means that significantly sized accounts are added at current market rates or are deleted for an early termination fee.
Your Contract – Does the Language Fits the Need?
Because of the convenience factor, add/delete language typically comes with a premium. When negotiating your contract, keep in mind that your rate will be higher with this language included – and even more so if you push for, say, a 20 percent add/delete clause as opposed to a 10 percent clause. The exact amount of the premium differs by supplier.
Keep in mind, though, that this kind of premium is just a small part of the overall cost. Providing yourself protection, if your organization is likely to fluctuate in size and number of contracts, can easily pay off if otherwise faced with higher energy rates for added accounts or an early termination fee for removing an account from your contract.
You always just want to pay for what you need. As with many such clauses, add/delete language should be viewed as a type of “insurance policy”… if you feel you will need it. If you are a one-location, one-account business, this doesn’t apply – so don’t bother. But if you are a city with 400 meters, you should definitely consider inclusion of this language.
Include this verbiage in the specifications as you go through your procurement and evaluation process, and ask for quotes containing different percentages of add/delete language. This way, you can specifically see the incremental costs and make an educated decision as to how much protection you need. By addressing the add/delete language, you ensure your organization’s contract is truly customized to your needs.
Bob Wooten, C.P.M., CEP, is Director of National Accounts for Tradition Energy, and has over 20 years of experience managing commercial, industrial and governmental procurement programs for a wide variety of clients. Bob holds professional certifications from the Association of Energy Engineers and the Institute for Supply Management, as well as a B.A. from Texas A&M University, and a Master’s in Public Administration from the University of Houston.