§ 69.4. Purchasing procedures.
(a) General. The Commission recommends that a utility adopt the following general purchasing guidelines:
(1) A balance of long-term, short-term and spot purchases should be utilized. This balance should provide a reasonably stable supply while allowing the utility the option of taking advantage of changing market conditions. At coal receiving sites, such as generating stations, central storage or loading facilities supplied by truck, coal handling equipment and procedures should be designed to accommodate numerous suppliers.
(2) Vendors should be selected on the basis of overall price and quality specifications of fuel that include, but are not limited to, Btu, moisture, ash and sulphur content. Service reliability is also a consideration. However, a utility is encouraged to give new suppliers every opportunity to compete, particularly in short-term/small-quantity fuel purchases. Documented service reliability becomes more important as contracts increase in duration and quantity. A utility should use its own staff in seeking and procuring adequate fuel supplies and should minimize the use of brokers, except where the use of brokers is consistent with the basic fuel procurement policy of obtaining fuel at the lowest reasonable price.
(3) Fuel agreements should include bonus/penalty provisions or be priced according to Btu, moisture, ash and sulphur content to insure that quality provisions are met. A utility should clearly state in fuel agreements the quality specifications of the fuel. Rejection limits for sulphur, ash and moisture content should be incorporated into contract or bid proposals.
(4) Fuel shipments should be adequately sampled when received at the generating plant. Contracts should include sampling procedures providing for an additional sealed and dated sample for independent verification if necessary.
(5) [Reserved].
(6) [Reserved].
(7) A utility should maintain documentation of reasons for rejection of bids on file in accordance with FERC’s Record Retention Table. During audits, Commission staff will inspect this documentation as deemed necessary.
(8) A utility should actively seek and maintain a significant number of vendors from which to solicit bids. This vendor list should be frequently updated with advertisements in newspapers and coal and oil publications.
(b) Short-term agreements and spot purchasing.
(1) [Reserved].
(2) Sealed bids should be considered on large orders covering more than 6 months’ supply.
(3) Verbal agreements, including telephone conversations relating to fuel price, quantity and quality, should be formalized by letter or a log confirming details. In securing vendors for inclusion on the vendor list referred to in subsection (a)(8), a utility should omit unnecessary provisions and requirements which restrict or discourage small suppliers from submitting bids. Requirements include engineering, geological and financial studies and reports which are not necessary for small, short-term or spot purchases.
(4) [Reserved].
(5) [Reserved].
(c) Long-term contracts.
(1) [Reserved].
(2) Cost escalation clauses included in long-term contracts should be based on measurable supplier costs, such as labor, material, transportation and equipment costs, and the like. Escalation clauses may also be based on regularly published relevant indices, such as those published by the United States Department of Interior, Bureau of Mines, the United States Department of Labor, and the like.
(3) Right to audit clauses should be included in contracts that provide for cost escalation. The right to audit clause gives the utility the authority to audit specific records of its suppliers. It is recommended that the utility enforce the right to audit provisions either through the use of qualified internal audit staff or outside independent auditors on a regular basis. Contracts should contain resumption clauses to provide for continuation (at the utility’s discretion) of contracts that are temporarily curtailed due to strikes or similar occurrences.
(4) It is recommended that all contracts, escalation clauses, or terms of purchase of fuel agreements be reviewed by the legal office of the utility. Contracts should include specific reference to special arrangements, such as loan agreements, which may affect the operation of the utility or the price of fuel.
(5) [Reserved].
(6) Minimum tonnage requirements should not be set at unreasonably high quantity levels which would prohibit competitive proposals from reliable and competent small suppliers. Investigations should be conducted to insure that potential vendors have adequate owned or contracted supplies to fulfill all contract provisions.
(7) A utility should seek contracts with greater ranges in minimum/maximum tonnage requirements to be exercised at the utility’s discretion. Contract tonnage would increase or decrease based on market conditions. The contracts would also provide a means of control over suppliers with excessive price or inferior quality.
(8) Escalation clauses based on market prices are discouraged. Market escalators, if used, should have a reasonable geographic limitation, yet should be sufficiently broadly based so that no supplier or group of suppliers could materially influence the market price. De-escalation should also be incorporated in the contracts based on the same market data. Data used to calculate the increment or decrement in coal prices should be based on comparable fuels and should not be influenced by short-term aberrations in coal prices. When incorporating market price escalators/de-escalators, the utility should delineate in the contract the comparable market data to be used and the time frames for adjustments. The Commission will review the reasonableness of market priced data on a case-by-case basis.
(d) Dedicated fuel supplies. Dedicated fuel supplies are those in which a utility, through ownership, contract tonnage requirements, location, or guarantee of debt, has substantial influence and interest in the contracted fuel supply. The following guidelines are recommended for dedicated fuel supplies and are in addition to the general and long-term contract guidelines in subsections (a) and (c):
(1) In order to insure efficient management over dedicated fuel supply, a utility should not provide, assume or guarantee an excessive amount of the project financing. The owner, operator or developer of the mine, or fuel supplier, should maintain substantial equity in the project or guarantee a substantial portion of the project financing.
(2) The use of cost-plus contracts is strongly discouraged.
(3) Contracts for dedicated fuel supplies should contain additional provisions so that if fuel prices exceed an average range of prices for fuel with similar characteristics for an extended period of time, the fuel price charged by the dedicated supplier would be adjusted to fall within the price range of the similar fuel. Under certain circumstances, similarities in methods of producing the fuel, contract provisions and geographic areas may also be considered. As with market-adjusted long-term contracts, the utility should establish and monitor the comparable market data that is to be utilized.
(e) Wholly-owned fuel sources. The following guidelines are in addition to the general, long-term contract, and dedicated fuel supply guidelines in subsections (a), (c) and (d):
(1) A utility should regularly compare the costs of fuel from its wholly-owned sources to that available in the competitive market place for fuel with similar characteristics. The Commission may take appropriate action when wholly-owned fuel costs differ significantly from comparable market prices for an extended period. A utility may be called upon to explain why its coal prices should not be reduced to the comparable market price. Decisions on a long-term deviation from market prices will be made by the Commission on a case-by-case basis.
(2) A utility should retain independent auditors to verify the charges affecting wholly-owned fuel costs. The Commission may review the audit of the fuel subsidiary or division and conduct reexaminations considered necessary.
Authority The provisions of this § 69.4 issued under the Public Utility Code, 66 Pa.C.S. § § 501, 1301 and 1307.
Source The provisions of this § 69.4 amended October 18, 1985, effective October 19, 1985, 15 Pa.B. 3730. Immediately preceding text appears at serial pages (33014) to (33016).
Cross References This section cited in 52 Pa. Code § 69.1 (relating to general).
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