T&D Spending and Reverse Auctions

Transmission & Distribution World December 2001

By Chuck Newton, Automation Editor

It has not been a blockbuster year for distribution equipment manufacturers. Yes, the industry will produce and sell more than a million fused cutouts to U.S. electric utilities, and, yes, manufacturers will supply several thousand medium-voltage vacuum circuit breakers and thousands of distribution reclosers. Yet there is a sense in the supplier community that utility investment is only edging slowly toward increased automation spending.

If just some of the anticipated deregulation developments pick up steam in the various states, and as a result, performance-based rates are put in place, then distribution-equipment spending will most certainly rise – perhaps dramatically – and certainly with an eye toward automation of the distribution network.

Reverse auctions – where utilities, independently or in groups, request quotations for certain equipment or products and ask vendors to provide their lowest price for the lot – are becoming more important with both buying co-ops and with the development of online supply-chain service firms such as Pantellos.

The relatively few utilities with online e-procurement experience in buying distribution equipment in this auction fashion have reported they like the “economies of scale” or cost savings enabled by such group purchases. They also like the idea of being able to swap or borrow from their neighboring utilities or inter-utility inventories. Smaller and mid-size utilities believe that buying groups help even more.

Utilities have expressed some concern with reverse auctions. Some don’t want other utilities to know the specifications and quantities of equipment they buy. Others have unique bid evaluation techniques that address features, services and prices.

Beyond the substation, distribution-automation spending continues to lag. After speaking with more than a dozen high-level officials of important suppliers of overhead-distribution equipment, it was clear that overall growth was slow, but there were areas of the country with pockets of growth.

The role of reverse auctions is starting to play havoc with traditional selling methods, at least for those vendors invited to participate in such reverse auctions. Reverse auctions are forcing suppliers to closely evaluate costs, margins and low-price quotations. Fundamentally, the emergence of reverse-auction techniques takes the control of product price out of the hands of the suppliers.

Unlike many utility buyers, not one of the industry officials interviewed liked the idea of reverse auctions. Keep in mind these officials represent more than 90% of the country’s sales of distribution equipment. If these officials are correct in their reasoning, it won’t be long before many utility buyers come to understand the limits of buying at auction, at the lowest price. Utilities may find no follow-on support and minimal post-sale services just as they are becoming more reliant on outside firms to provide more services, more training and more technical support, not less.

Some industry officials believe that service components previously bundled in with equipment prices will now have to be unbundled and separately priced. In the end, the utility will have to pay for value received; there is simply no way around it. The industry cannot do justice to its own cause nor to the benefit of its utility customers by losing money.

Some industry officials believe that service components previously bundled in with equipment process will now have to be unbundled and separately priced. In the end, the utility will have to pay for value received; there is simply no way around it. The industry cannot do justice to its own cause nor to the benefit of its utility customers by losing money.

If engineered products become part of the reverse-auction process, there will be even more difficult issues to face, and it is doubtful, based on our interviews, those automation suppliers will be willing (or perhaps able) to participate in such “opportunities.” In response to this, utilities indicated they would find it difficult to evaluate apples and oranges when it came to engineered products and sophisticated equipment that have appreciable differences in operation, ergonomics, functionality, reliability and cost from vendor to vendor.

Several observers believe reverse auctions make it more difficult for smaller vendors to compete. Others feel that each auction has its own case-by-case differences that may accommodate some of the smaller niche market suppliers on occasion. Interestingly, several utility officials believe reverse auctions will help smaller utilities. They also believe more suppliers, rather than a short list of suppliers, should be brought into the auction process.

Reverse auctions are cause for promise or concern, depending where you are in the supply chain – equipment provider or utility buyer. Perhaps the only good use of such auctions from the supplier point of view is for true commodity-class products requiring short lead times and very large quantities of units to be provided, with no or very minimal support and follow-on services.

I expect that an era of performance-based rates will result in rapid upgrades and retrofits to existing distribution systems. Buying with “partners” may actually help speed up the process by lowering unit prices and helping make universal some ongoing, but perhaps unnecessary, uniqueness in each utility’s distribution-equipment buying habits.