A plastics manufacturer in Pennsylvania had a natural gas contract due for renewal in March of 2014. When we reviewed their existing contract with their incumbent supplier, we noticed there was an auto renewal clause buried in the language, as well as a clause allowing the supplier to adjust “Basis” pricing during the last 2 months of the contract. Basis comprises supplier margin in addition to the long distance transportation of natural gas.
In addition, it was our view that the renewal price the incumbent was offering was not competitive.
To prove our point, we conducted an auction with 6 natural gas suppliers bidding on a volume of 43,000 Decatherms/year for a fixed Basis price for 12, 24, and 36 months with 0% swing and 10% swing included. (Swing means bandwidth above or below their historical usage levels).
The RFP was standardized and all contracts vetted to ensure that no auto-renewal clauses or spot-market pricing language was buried in the contractual language. These measures are standard in our process regardless of the commodity or auction type.
In total, we received 18 bids, and the Client captured $7,000 in annual savings compared with their previous contract.
This auction was a great example of how head-to-head competition forces suppliers to significantly reduce prices in order to compete for the business. In this case, a day before the auction, the client’s incumbent supplier offered a rate 3 cents/Decatherm higher than the price they bid when forced to compete against other suppliers.
Even though the incumbent lowered their price for the auction, they still lost, and the customer switched to a new natural gas supplier. This is typical in most of our auctions, as the incumbent supplier will retain the business only 10% of the time.