PGamp;E Corp. and Ultramar Diamond Shamrock Corp. (UDS) signed aletter of intent last week to enter into what is probably thelargest energy purchasing alliance to date in the industry,representing about $2 billion in electricity, natural gas and steampurchases over a seven-year period. UDS is one of the largestindependent refiners in the U.S., with seven refineries in the U.S.and Canada processing 650,000 barrels per day, 6,400 branded retailgasoline/convenience stores, and a large home heating oil businessin the Northeast.

“This represents a new level of significant involvement on thepart of an energy consuming company and a broad national energyservices company like PGamp;E,” said Robert D. Glynn, Jr., PGamp;Echairman. The next largest deals announced so far have been in therange of several hundred million, Glynn told NGI. Although he hadno firm figures, he reported that UDS was a large purchaser ofnatural gas as well as electricity.

As part of the deal U.S. Generating Co., one of PGamp;E’sunregulated companies, will build a 750 MW cogeneration merchantplant on the site of UDS’s refinery in Three Rivers, TX, to meetthe steam and electricity requirements of the facility, with plansto sell excess electricity in the state of Texas. “Actually, thisproject is going to engage all four of our unregulated lines ofbusiness in one single project,” said Glynn. In addition to U.S.Gen, PGamp;E’s natural gas pipeline will transport gas for theproject, its energy trading will provide electricity, and PGamp;EEnergy Services will be deeply involved in improving efficiency atUDS facilities.

PGamp;E actually won’t be paid for the energy it provides to UDSbut instead will receive a portion of the money it saves itsclient. “I call this a ‘shared savings’ plan,” said Glynn. UDSspends about $310 million a year in energy, and it expects to save15-25% a year in the deal. PGamp;E will earn a cut of the savings.Within the next 60 days he expects the two sides to nail downestimated energy savings potential within the first year, with atimetable and implementation plan for achieving those savings.

Although the exact percentages have yet to be worked out, “it’sa substantial financial opportunity for PGamp;E Corp.,” said Glynn.Savings will come from several sources. The first involves reducingenergy demand by instituting more efficient equipment and processesin all of UDS’s facilities. The alliance will seek non-recoursefinancing to change equipment and processes at the company’s sevenrefineries across the country, retrofit lighting in every facility(including thousands of convenience stores), and install high-techvariable-speed motor technology at pumping stations, along with avariety of other measures. [UDS needs to finalize a merger withPetro-Canada before work can begin on its Canadian refinery, butthe alliance anticipates that the Canadian facility will be part ofthe contract.] Other savings will come from reduced commodity costsfor electricity, natural gas and process steam, as well as matchingthe reliability of those supplies as closely to the actual needs ofthe facilities. Even though electric deregulation is not a realityyet, “one of the reasons we structured a long-term agreement was tomake sure that UDS was going to be able to take advantage of thoseopportunities,” said Glynn.

“It’s an exciting opportunity to show, in a tangible form, whatthe national energy strategy of PGamp;E Corp. is,” added Glynn. Heexpects to be making other announcements about contracts with majorcompanies. So far PGamp;E has signed up McDonald’s, Safewaysupermarket chains, Rite-Aid/Thrifty drug stores, communitycolleges in California and Neiman Marcus department stores. “Overthe last year PGamp;E Energy Services went from a standing start toa company with well over 300 professionals working in offices in 20cities, steadily signing up a stream of clients.”

Sarah McKinley

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