Utilizing Six Sigma and eAuction Tools in Electricity

Utilizing Six Sigma and e-Auction Tools in Electricity Contracting California Manufacturers and Technology Association 2004 Energy Conference Roger D. Riley, Tyco Electronics

Company Overview n One of five operating units of Tyco International (NYSE: TYC) n High quality electronic component manufacturer with many well-known brands: AMP, Raychem, Power Systems, Co. Ev, Potter & Brumfield n Direct Access eligible facilities in CA: – Former Raychem operations – All located in S. F. Bay Area: Menlo Park, Redwood City, Fremont – 10 accounts total including transmission, primary and secondary

Six Sigma n A rigorous, objective methodology focused on eliminating defects n Utilizes a well-defined DMAIC approach: – Define – Measure – Analyze – Improve – Control n Primary focuses: – Statistical analysis – Evaluation of alternatives: No “sacred cows” – Control of process after improvements: “Sustain the gains”

Electricity Contracting Project n Business problem definition: As a direct access electricity customer, we must hedge and subsequently contract for our electrical energy requirements. For the period of 5/03 to 4/04, the hedge was incorrect resulting in significant additional costs. These additional costs were incurred as the result of an incorrect hedge and subsequent sales of excess energy at a loss. n Team based approach n 70, 000+ lines of data n 5 month schedule

C&E Matrix and FMEA n Cause and Effect Matrix – Hedging (cause) and associated costs (effect) of demand consumption matching are critical to the success of the process – Hedging is focused on reducing/eliminating scrap (excess energy sold at a loss) – Hedging process is also focused on controlling risk • Risk of exposure to spot market pricing volatility (matching demand to consumption) • Value at Risk (VAR): How much opportunity is left on the table as part of hedge n Failure Modes and Effects Analysis (FMEA) looks at future variables affecting the hedge and performs a Monte Carlo analysis on those variables: – Usage above or below hedge quantity – Spot market pricing: Net cost after sale (within plausible limits)

Significant Hedge Process Improvement 1 st Spot Contract Mkt. 2 nd Contract - Actual Current Contract - forward Avg. = 15. 28% Avg. = 0. 52%

Weighted Contract Scoring n Evaluation of each supplier and each structure contract n Analyzed for risks to Tyco Electronics n Examples of evaluation criteria: – Credits/Charges for over/under consumption – Title transfer location – Payment terms – Audit provisions – Creditworthiness – Disputes / Force Majeure n Each supplier and contract structure was assigned a weighting factor for e. Auction – Pricing from each supplier is not the same as they represent differential risk to Tyco Electronics – Weighting ultimately “transforms” each submitted price into an equivalent

Example Weighting Factors Supplier #1 Load Structure Block Total Score 873 #2 Load Block Following 839 Load Following 875 833 % of Maximum 79% 80% 79% Weighting Factor 1. 21 1. 20 1. 21 Difference does not seem large, however…. . $50 is transformed to $60. 50 (1. 21) and $60. 00 (1. 20)

E-Auction n Efficient, cost-effective means of capturing executable pricing from multiple suppliers n Simultaneous assessment of multiple structures n Attempts to drive competition n Provides a repeatable process that “levels” the playing field for participants via transformation

Project Results n Process – Statistical “proof” of our hedge – Documented, sustainable system for future contracting – Independent, but cognizant, of “uncontrollable” factors