Across the nation, local and state governments and, of course, citizens are feeling the pinch of increasing energy prices.

The growing costs are wreaking havoc on local government budgets by siphoning funds from surpluses that could otherwise be used for program enhancements, capital improvements and tax-relief. In worst-case scenarios, the unanticipated costs are adding even more red ink to already bleak budget shortfalls.

"Escalating energy prices present a real challenge to local governments in the region and nationally," said Larry W. Klimovitz, Executive Director of the Baltimore Metropolitan Council, who previously served as Director of Administration in Harford County Government.

In New York, for example, the State Comptrollers Office found that local governments there will have to spend approximately $375 million more for fuels and electricity than the previous year, according to a comprehensive survey released in 2005.

Market fluctuations in energy prices also make budget planning for the future more difficult. Fiscal analysts cannot predict exactly how much government will spend on energy. They can only predict, roughly, what will be consumed.

Strategies to deal with these rising costs are typically focused on energy efficiency, which often has an added environmental benefit. However, little focus and attention is paid to developing procurement strategies that take advantage of the new energy markets that have emerged as a result of deregulation.

"Energy efficiency is key, but it’s also important to have an evolving strategy for government to get the best price possible," Klimovitz added. "This has been the guiding principle of the Baltimore Regional Cooperative Purchasing Committee (BRCPC)," he added.

BRCPC is a standing committee of the region’s government procurement officers and is professionally staffed by the Baltimore Metropolitan Council. By collaborating on large expenditures, BRCPC provides millions of dollars in savings to the region’s local governments.

Since 1999, these local government entities, through BRCPC, have consolidated electricity accounts and began establishing large contracts for electricity on behalf of the entire region.

From 1999 through 2005, these cooperative contracts resulted in significant savings for the region in both dollars and administrative costs. But, what is perhaps just as important, the exercise placed more emphasis on the need for a more efficient procurement strategy as the deregulated electricity market continues to develop.

"The more we learned about the electricity markets, the more we understood the potential cost savings we could achieve by doing things differently," said Stephen Myer, a purchasing officer from Baltimore County who now serves as chair for the BRCPC energy sub-committee.

At its June 2005 meeting, the BMC Board agreed and voted to secure the services of South River Consulting, to assist in the development of a formal electricity procurement strategy and take advantage of these new markets.

"The money we spend on electricity is money that can’t go into programs, buildings or savings for our citizens," said BMC Board member Baltimore County executive Jim Smith. "This new Strategic Energy Initiative gives us the flexibility to respond to market changes," Smith added before the board voted unanimously to proceed.

BRCPC then worked with South River to devise a risk management strategy that allows participating agencies in the region to combine purchasing power and use the license of a retail supplier to buy electricity directly from the wholesale market.

In January, through a competitive process, the agencies collectively agreed to hire Pepco Energy Services to act as its licensed buyer in the wholesale electricity makets. For a fee, the company will purchase energy on the region’s behalf based on BRCPC’s approved risk management strategy.

The new strategy enables the government agencies to reduce the supplier margins and supplier risk premiums associated with the traditional retail based fixed rate contract by limiting the scope of the supplier’s role and by assuming a quantifiable amount of volumetric risk.

In this case, the supplier margin and volumetric premiums will be reduced from roughly five dollars per megawatt hour down to 55 cents per megawatt hour, said Noel Chesser an Energy Consultant for South River.

"When you ask a supplier to hold a fixed price, even if it’s only for a week, they’ll typically charge you a premium to cover their risk of changing prices in the marketplace," Chesser said. "The new strategy is far more efficient and expeditious."

BRCPC expects these savings in premiums will result in as much a $5 million annually for the region as the new strategy becomes fully implemented.

By late February 2006 the participating agencies will begin the process executing this new strategy. "For the first time, we will be buying directly off the grid markets, it is quite innovative." Myer said.