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Overcoming Misconceptions Regarding the Use of Cooperatives for Energy Procurement

Savvy energy procurement specialists often look for other options to augment their energy purchasing arrangements. One such option is the cooperative purchasing contract. But before launching a full-scale plan that revolves around a cooperative, you need to ask, “Can I use a cooperative purchasing contract to procure energy, such as electricity and natural gas?”

Vote for the idea. Vector illustration

At first blush, this sounds like a very easy question to answer. The answers to this question, though, are more complicated than you might guess.

There are those who immediately answer, “Yes” and use a cooperative contract but don’t really understand the real reasons why they can do so. Then there are those whose knee-jerk reaction is, “No,” many times due to a significant misunderstanding of their own state’s statutes governing the use of cooperatives and energy procurement in general.

The vast majority of the time, governmental entities are engaging the services of an energy procurement advisory firm to coordinate the procurement of energy, and this further clouds the answer to the above question.

To delve in to this subject, we must un-package this into several key areas. After all, nothing does more to ensure that a jurisdiction gets the best deal for energy products and services than guaranteeing that their buyer is a fully informed.

Misconception: I must publicly procure energy per state statutes.

To understand the state statutes for procurement of energy as they stand today, it is important to recall the history of electricity and natural gas utilities. Not too long ago, all utility companies were monopolistic: Their energy was supplied under a state-regulated tariff, and you paid what you paid. There was no opportunity for competitive supply, so it was never an issue that crossed the desk of a purchasing professional.

Now fast-forward to a time when states started deregulating utilities, allowing a competitive market for supply. Although this might sound like a great opportunity for purchasing professionals to bid for the best rates, this isn’t always the reality – and, in fact, often complicates matters. Even when a state deregulates something like electricity supply, the actual rules differ within the various utility companies in that state. One area is competitive, while another area is not. This has created so much confusion in how to address in-state procurement statutes that most states with deregulated energy markets still officially “exempt” electricity and natural gas from competitive bidding requirements.

Because statutes differ by state, it is important that you read up on the statutes governing your particular state. But keep in mind the vast amount of “grey area” here: It is not unusual to talk to two different city attorneys in the same state who have both studied all the statutes and receive opposing advice. The first attorney concludes that the city must competitively procure energy supply, and the other surmises that this is not necessary.

Misconception: I must procure an energy advisor as a “professional service.”

Even attorneys who understand the ins and outs of legalese are confounded, so don’t feel bad if you are a bit confused in trying to understand what you must legally do to procure the energy commodity itself.   Now consider the situation when you hire an energy procurement advisory firm to assist in the process.

As polls have shown over the years, there has been an increasing trend toward the use of expert advisory firms to assist in the procurement of electricity and natural gas. A quality energy advisor will assist with everything from market timing to contract structure to ongoing management of energy supply. Consider the fact that the price you pay for energy supply is a direct function of the underlying wholesale cost of the commodity – which fluctuates so dramatically that signing a contract on one day as opposed to another could result in a double-digit percentage swing in your contract rate. Bringing an energy advisor on board is a smart move that adds as much energy market intelligence to your procurement process as possible to most successfully navigate the volatility of the market when securing a price.

But the confusing and very state-specific legal jargon is just the beginning. Just like the energy commodity itself, statutes governing how to engage an advisory firm differ by state.

In some states, this is considered a “professional service” that, in many cases, is procured differently than other goods or services – sometimes allowing for a best value evaluation and sometimes exempt from competitive procurement altogether.

In other states – such as Massachusetts, for example – a “service” that is “integral” to the procurement of the associated commodity is itself then considered the same as that commodity. So in Massachusetts, energy advisory services are considered the same as the energy commodity they are hired to help procure. Massachusetts also exempts energy commodities from the competitive procurement statutes, meaning that the procurement of the energy advisory services are themselves exempt from competitive procurement – even though your attorney may stop at the word “service” and tell you this must be procured as a professional service.

Confusing, huh? And, again, you can find two different city attorneys with vastly different opinions on the subject. All the more reason to engage an advisor to weed through it all with you.

Misconception: I can’t use a cooperative contract to procure the services of an energy advisor.

Now let’s talk about using a cooperative contract. This, too, becomes a bit confusing until you study all the various pieces.

Almost every state in the US has statutes in place that enable local governments to utilize cooperative purchasing contracts, to some extent, to procure goods and services. This is a hot topic in trade publications, so you probably know that using a cooperative purchasing contract means that you are taking advantage of a competitive procurement process already conducted by another entity, thereby fulfilling your own competitive procurement requirements.

If your state requires competitively procuring the services of an energy advisory firm, you can use a cooperative purchasing contract that has already procured an advisory firm. In those areas where it is not necessary to competitively procure an advisory firm because it is considered a “professional service,” we still see many jurisdictions opting for the use of a cooperative contract because this ensures that they are getting a publicly evaluated firm contracted at a competitive rate. (But bear in mind that the individual metrics differ by the quality of the cooperative program itself).

Now for one final piece of confusion, we’ll return to our Massachusetts example. In that state, a local government cannot procure “services” through a cooperative purchasing contract. That would appear to eliminate the possibility of hiring an energy advisory firm through a cooperative, right? But that’s not actually the case: You can take advantage of the evaluation and pricing secured by a cooperative program in hiring an energy advisory firm because the state considers this a “service” integral to the delivery of the product/commodity. And in Massachusetts, energy commodities such as electricity are exempt from competitive procurement statutes – meaning that you can procure the advisory service and/or the commodity in any method you choose, including the use of a cooperative purchasing contract.

Moving Beyond Misconceptions

When you look at the intricate legalities behind procuring energy, you might conclude that there is a lot of latitude in how this can be done. In fact, taken literally, in some states there is no regulation governing the process at all. You’re left with your common sense and the need to follow the “spirit of procurement law.”

Your organization counts on you as the energy procurement specialist to ensure that you get the best possible solution, and you want to do this through a competitive procurement process. This is where the logic behind the use of cooperatives comes in to play. Using a qualified energy advisory firm gives your jurisdiction the upper hand in understanding market dynamics, leading to the best contract for energy supply. By taking advantage of a cooperative contract that has already evaluated and awarded a contract to an advisory firm, you are saving time and money by leveraging the dynamics of the cooperative program’s clout and membership to ensure you are getting a quality advisor – which ultimately leads to meeting your jurisdiction’s energy needs and goals.

Disclaimer: Although the information contained herein is from sources believed to be reliable, TFS Energy Solutions, LLC and/or any of its members, affiliates, and subsidiaries (collectively “TFS”) makes no warranty or representation that such information is correct and is not responsible for errors, omissions or misstatements of any kind. All information is provided “AS IS” and on an “AS AVAILABLE” basis and TFS disclaims all express and implied warranties related to such information and does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information. The information contained herein, including any pricing, is for informational purposes only, can be changed at any time, should be independently evaluated, and is not a binding offer to provide electricity, natural gas and related services. The parties agree that TFS’s sole function with respect to any transaction is the introduction of the parties and that each party is responsible for evaluating the merits of the transaction and credit worthiness of the other. TFS assumes no responsibility for the performance of any transaction or the financial condition of any party. TFS accepts no liability for any direct, indirect or other consequential loss arising out of any use of the information contained herein or any inaccuracy, error or omission in any of its content. This document is the property of, and is proprietary to, TFS Energy Solutions, LLC and/or any of its members, affiliates, and subsidiaries (collectively “TFS”) and is identified as “Confidential.” Those parties to whom it is distributed shall exercise the same degree of custody and care afforded their own such information. TFS makes no claims concerning the validity of the information provided herein and will not be held liable for any use of this information. The information provided herein may be displayed and printed for your internal use only and may not reproduced, retransmitted, distributed, disseminated, sold, published, broadcast or circulated to anyone without the express written consent of TFS.

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