Joint utility purchasing: a case study Lane Electric Cooperative.

• Author: O'Brien, John

One method rural electric systems are using to reduce costs and improve service and competitive positions is to utilize joint purchasing agreements with other utilities. Through two examples, our author illustrates that the key to effective purchasing is to analyze and understand the cost drivers for the particular inventory item under examination.

The threat of competition is forcing utilities to change, doing things today better than we did them yesterday so that we will be around tomorrow. One way that Lane Electric Cooperative (LEC) is controlling costs is through cooperation.

LEC is involved with two purchasing groups: one for distribution transformers and one for 15 KV underground primary cable. The cable buying group consist of four cooperatives and two municipal system, whereas the transformer buying group consists of three cooperatives, four municipal systems, and four People's Utility Districts (PUDs). The common thread of the buying groups is public power agencies working together in order to lower costs and improve quality of service.

CABLE BUYING GROUP

The process for the cable buying group began by coming up with a common specification for two standard wire sizes. The largest municipal system formed a task force to evaluate the EPR (Ethylene Propylene Rubber) vs. TRXLOPE (Tree-Retardant Cross-Linked Polyethylene) insulations. Due to so many problems with our present cable, an economic evaluation based on a 40-year life looked at expected cable life, energy costs, cable purchase cost, labor installation costs, and costs to locate and repair cable faults. This thorough study resulted in an EPR insulation specification for 1/0 and 750 aluminum. Okonite was the successful bidder based on cost and their ability to meet the service requirements of the contract.

With completion of the specification, each utility forecasted their annual usage for each wire size of the first year of a three-year bid. Each subsequent year's usage would be forecasted by November of the preceding year. The idea was to offer a quantity in a bid to a manufacturer that was large enough for them to offer a lower price.

Once a given cable is chosen, the largest cost driver is volume. For example, even though no individual utility forecasted using over 100,000 feet in 1994, the total cable purchased by the group totalled over 500,000 feet. LEC realized a savings of 25%, totalling approximately $100,000.

Cost savings are related to cable volume. The savings top...