Oncor Sourcing Transformation in Support of ERCOT’s Transmission Capacity Increase and Connectivity to Future Texas Wind Farms  An interview with Hagen Haentsch, Oncor Director, Asset Investment Strategy, by Lee Ann Moore, EquaTerra Chief Marketing Officer Oncor is a regulated electric distribution and transmission business that provides electric delivery to consumers. It operates the largest distribution and transmission system in Texas, delivering power to approximately three million homes and businesses operating approximately 117,000 miles of distribution and transmission lines. In 2008 the Public Utility Commission of Texas (PUCT) finalized a multi-billion dollar plan to increase ERCOT’s* transmission capacity by building 2,200 miles of new transmission lines and related facilities. These facilities are targeted to areas of future wind generation. Oncor was awarded approximately one fourth of the projects. This five year project meant Oncor had to significantly increase its construction capacity and forced a major review of its sourcing and contracting processes. Hagen Haentsch, Oncor Director, Asset Investment Strategy, shared some of the exciting work going on at Oncor. *ERCOT (Electric Reliability Council of Texas) operates the electric grid and manages the deregulated market for 75 percent of the state. EquaTerra: To bid and win these projects, Oncor had to compete with firms around the globe. How did this unique situation force you to look at procurement and construction, already a core competency for Oncor, differently? Hagen Haentsch: It was a healthy exercise for us to look at the strong work we had done in construction in the past and look at how we would compete with some of the world’s leading firms. We feel one of our big differentiators came with our understanding of how to manage the procurement process as the critical enabler for the construction work. Since much of the work would be performed by specialized service providers and suppliers, we had to develop a strategic alliance approach to our purchasing as opposed to a more traditional project by project, bid-based procurement or sourcing process. EquaTerra: You use the term ‘strategic alliance’ to frame how you evaluate and build relationships with your construction services providers and suppliers. What were some of the unique procurement and contracting approaches you developed for these projects with these partners? Hagen Haentsch: We knew the only way to be successful would be to find companies that could act like extensions of our organization. We had to approach these relationships more like long-term relationships. Similar to outsourcing, we had to develop a core master services agreement knowing that the specific project scopes remain unknown at the beginning of the relationship. Efforts like this cut our project execution time down by several weeks per project. By agreeing on structure and pricing of work units up front, we were able to dramatically reduce our workload and deliver these projects more efficiently. Additionally, we looked at our services and contracted for a formula-based pricing methodology to eliminate market demand volatility as much as possible while allowing for commodity-driven price fluctuations that are out of the control of the service provider or supplier. Commodity prices are driven by the open market, but we wanted to make sure to avoid situational or crisis, demand or shortage, pricing. We could only enter these types of relationships with a long-term, strategic partnership approach and by doing so, this approach provided us greater resource availability and pricing and planning certainty. EquaTerra: Can you go into a bit more detail on your approach to unitization? Hagen Haentsch: We worked with our providers and internal experts to develop a modular (or unit-based) approach to describe typical activity scopes in the construction process. Our goal was to describe in detail the scope of each small step required to construct a transmission line or substation. We knew we needed to get this down to a science. It placed quite a bit of pressure on our partners to understand their costs and for us to understand the processes and resources the service provider utilizes during the construction of such projects. Traditionally we had priced our work based on a fixed scope description for each construction project. We managed changes in scope and costs through a rigorous change control process. However, the risk premiums and the required administrative efforts in this approach did not lend itself to replicate or scale efficiently in an environment of many unknowns. It was this unitization approach that helped us index specific purchases, allowed us to scale resources quickly, eliminated exposure to demand-based pricing and hence created a strong competitive advantage in the process. EquaTerra: What were some of the key lessons learned in this project? Hagen Haentsch: First and foremost, we wanted all our decisions on this project to benefit our customers. We generated a lot of good will by using contractors in our service footprint, like Falcon and Nucor, who are making our transmission towers from recycled-in-Texas steel and Texas-based construction labor providers like Chapman Construction and Weaver Construction. There’s a lot of excitement about our CREZ projects because customers know this will have positive economic and environmental benefits. We also learned quite about our construction process and the importance of pragmatic and operationally-relevant contract provisions such as force majeure clauses and governance and issues resolution. We also learned the importance of translating contract provisions into procedures and tools that are useful to field resources and operational management to support execution.  Another interesting point is that this sourcing process highlighted areas of ambiguity around basic definitions of risk of loss and ownership during the projects. Through this sourcing process we were able to clarify acceptance of the work and better define liabilities and responsibilities. We also tried some creative approaches with performance management. In some cases we felt that monetary penalties did not always promote partner-like behavior. We learned that it is critical to balance transparency and open discussion with performance accountability and liabilities. If we are truly going to operate as partners, we have to be prepared to deal with all issues, particularly the tough ones.. EquaTerra: Thanks so much for sharing your thoughts with us, Hagen. If you would like more information on the topics covered in this interview, please contact Lee Ann Moore at +1 713.669.9292.