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Home My WebLink About _ 4.5(a)--Authorize Modifications to Bid Sched No 5220 Single-Phase Pad-Type Distribution Transformers CITY OF REDDING REPORT TO THE CITY COUNCIL Recommendation Authorize the following modifications relative to the previously awarded Bid Schedule No. 5220, Single-Phase, Pad-Type Distribution Howard Industries, Inc: (1) Accept a proposed change in contract pricing based on Howard Industries, Inc.’s, price request; (2) Authorize staff to amend Purchase Order 114711, previously issued to Howard Industries, Inc., for a total of $279,684.24, to the increased amount of $325,803.60; and (3) Authorize staff to amend Purchase Order 114116, previously issued to Howard Industries, Inc., for a total of $220,010.51, to the increased amount of $256,312.24. Fiscal Impact Adequate funding for the pricing modification is available in Redding Electric Utility’s (REU) adopted budget for Fiscal Year 2022-23. Alternative Action The City Council (Council) could choose to not accept the pricing policy proposed by Howard Industries, Inc., and provide alternative direction to staff. Background/Analysis On August 17, 2021, the Council approved the award of Bid Schedule No. 5220 to Howard Industries, Inc., (Howard) in the evaluated amount of $350,072, not including tax (annual evaluated cost of $483,251.13). Due to fluctuations in costs of raw materials, labor shortages, supply chain issues, and unprecedented inflation, Howard Industries, Inc., along with other vendors, are unable to sustain long-term agreements based on Producer Price Index (PPI) increases identified at the time an order is placed (as originally awarded per the bid specifications). MEETING DATE: February 7, 2023 ITEM NO. 4.5(a) FROM: ***APPROVED BY*** nzettel@cityofredding.org btippin@cityofredding.org SUBJECT: 4.5(a)--Authorize Modifications to Bid Schedule No. 5220 Single-Phase, Pad- Type Distribution Transformers Nick Zettel, Director of Redding Electric Utility Report to Redding City Council January 30, 2023 Re: 4.5(a)--Authorize Modifications to Bid Sched No 5220 Single-Phase Pad-Type Distribution Transformers Page 2 The proposed price changes are based on the Howard Pricing Index (HPI). The HPI is the price adjustment mechanism that has been used by Howard, during the supply chain crisis, on all of its long-term transformer contracts. The HPI has been agreed to be used on previous contracts between the City of Redding (City) and Howard during the years 2021 to 2023. If the City does not accept the HPI deviation, it will be at risk of not receiving the necessary transformers to serve its customers. Howard Industries, Inc., has requested a price increase related to Purchase Orders 114711 and 114116, that would bring the original total of $499,694.75 (slightly higher than what was originally evaluated due to fluctuations in the cost of materials) to the increased amount of $582,115.84. These are the only purchase orders related to Bid Schedule No. 5220 receiving this price adjustment. Environmental Review This is not a project defined under California Environmental Quality Act (CEQA), and no further action is required. Council Priority/City Manager Goals This agenda item is a routine operational item. Attachments Howard Price Index Distribution Transformer 2021-08-17 Staff Report Award to Howard Industries Howard Core Steel Letter_Redding Document No. 2.4.140, Revision 5 Page 1 of 2 Howard Industries, Inc. 12/7/2021 Howard Price Adjustment Policy For Distribution DOE Transformer Contracts The Howard Pricing Index (HPI) is the price adjustment mechanism used on long-term transformer contracts to compensate for upward or downward changes in key commodity costs. Prices are adjusted quarterly using the weighted percent change in commodity cost occurring since the date of the proposal as shown in the hypothetical example below. Price Adjustment Example In this example a revised transformer price is established for orders placed in the 2nd quarter of 2021, using the quarter-preceding March 2021 HPI as shown below. March 2021 Howard Pricing Index for DOE Distribution Transformers (Silicon Core / Mineral Oil Filled) XYZ Utility Company Contract Commodity Current Commodity Cost or Index Base Commodity Cost or Index Percent Change Weighting Factor (% of Price) Weighted %Change Carbon steel N/A N/A 6.16% 8.0% 0.49% Silicon steel N/A N/A -1.40% 24.0% -0.34% Copper $8214.50 $8090.02 1.54% 2.0% 0.03% Aluminum $2017.61 $1998.23 0.97% 10.0% 0.10% Oil $101.33 $90.53 11.93% 8.0% 0.95% Paper $1450.00 $1075.00 16.88% 2.0% 0.34% Labor $24.34 $21.1% 15.36% 18.5% 2.85% Transportation $167.5 $145.00 15.52% 5.0% 0.78% Components $222.2 $205.10 8.34% 1.0% 0.08% Supplier Fabrication $114.17 $100.00 14.17% 28.0% 3.97% HI Fabrication N/A N/A N/A N/A 6.0% All other variable costs and margin 0.00% 21.5% 0.00% Total percent change from base month 15.25% Price multiplier 1.1525 Base price as stated in the Howard proposal (Quote).………………. $1,000.00 Weighted change in commodity cost since date of proposal………… 15.25% Multiplier on base price…………………………………………………… 1.1525 Price for orders places during the 2nd quarter of 2021………………… $1152.50 Key Commodities The table below lists the key commodities tracked by the HPI and identifies sources of the cost data. Costs for carbon steel, copper, aluminum, labor, transportation, components, paper, and oil are obtained from third-party data sources that are readily available to the public. Costs for silicon steel, FR3 fluid, supplier fabrication and HI fabrication are tracked using confidential internal supply chain data, since no third party data sources exist for these commodities. Key Commodity Cost Data Source Carbon steel CRUspi: Global Steel (Index), average for previous month http://cruonline.crugroup.com/SteelFerroAlloys/PriceIndex/tabid/143/Default.aspx/homepage.aspx) Document No. 2.4.140, Revision 5 Page 2 of 2 Howard Industries, Inc. 12/7/2021 Silicon steel Confidential Howard Industries supply chain cost data, current month Copper LME: Grade A Copper, Cash Seller (US$ per metric ton), average for previous month (https://secure.lme.com/Data/community/index.aspx) Aluminum LME: Primary Aluminum, Cash Seller (US$ per metric ton), average for previous month (https://secure.lme.com/Data/community/index.aspx) Oil EIA: Weekly Petroleum Status Report, Spot Prices for Crude Oil, Motor Gasoline, and Heating Oil (US$ per barrel), average for previous month (www.eia.gov/petroleum/supply/weekly/) FR3 fluid Confidential Howard Industries supply chain cost data, current month Paper Unbleached softwood Kraft Labor Series Id: CEU3133530008 – Average hourly earnings of production and nonsupervisory employees, electrical equipment, not seasonally adjusted (latest data). Transportation Federal Reserve Economic Data, Link: https://fred.stlouisfed.org, PCU484484 (latest data). Components Series Id: PCU335931335931 – PPI industry data for Current-carrying wiring device mfg., not seasonally adjusted (latest data). Supplier Fabrication Confidential Howard Industries supply chain cost data, includes carbon steel, oil, high voltage wire, low voltage strip and paper. HI Fabrication Confidential Howard Industries supply chain cost data, includes indirect materials, utilities (gas and electric), labor overtime and double time, in-bound transportation, and other) Weighting Factors The table below lists the weighting factors used in the HPI calculations. Commodity Mineral Oil Filled FR3 Fluid Filled Carbon steel 8.0% 8.0% Silicon steel 24.0% 24.0% Copper 2.0% 2.0% Aluminum 10.0% 10.0% Mineral oil or FR3 8.0% 12.0% Paper 2.0% 2.0% Labor 18.5% 18.5% Transportation 5.0% 5.0% Components 1.0% 1.0% Supplier Fabrication 28.0% 20.0% HI Fabrication N/A N/A All other variable costs and margin 21.5% 17.5% Total 100.0% 100.0% Future Revisions to the Pricing Policy Howard Industries reserves the right at its discretion to revise this pricing policy, including key commodities, adjustment frequency, data sources and weighting factors, due to changing market conditions and/or government implementing tariffs or quotes. Howard Industries reserves the right to increase prices if the customer specifies component(s) that are not covered by the HPI Indexes and the costs of the specified component’s increases outside of Howard Industries control. In the event the Federal Government raises the minimum wage or significant labor wage increase occurs, we reserve the right to adjust our pricing accordingly. CITY OF REDDING REPORT TO THE CITY COUNCIL Recommendation Authorize the following relative to Bid Schedule No. 5220, Single-Phase, Pad-Type Distribution Transformers: (1) Award to Howard Industries, Inc. in the amount of $350,100 before tax for Fiscal Year 2021-22; and (2) Authorize the Purchasing Officer to extend the bid award annually with Howard Industries, Inc. through August 31, 2026, if mutually agreeable, with all terms and conditions remaining the same, and price adjustments in direct proportion to a Producer Price Index. Fiscal Impact Adequate funding is available in Redding Electric Utility’s (REU) current biennial General System Improvements fund for the purchase of distribution transformers. These costs include the annual recurring expenditures for installation of facilities required to maintain reliable electric service. Alternative Action The City Council (Council) could choose to not award the bid to Howard Industries, Inc., (Howard Industries) and provide alternative direction to staff. Background/Analysis This is a routine bid for the purchase of single-phase, pad-type distribution transformers through August 31, 2026, on an as-needed basis subject to the availability of budgeted funds. These single-phase, pad-type distribution transformers are required to support residential and commercial development and provide emergency replacement of the existing transformers that are presently in service. MEETING DATE: August 17, 2021 ITEM NO. 4.5(b) FROM: ***APPROVED BY*** dbeans@cityofredding.org btippin@cityofredding.org SUBJECT: 4.5(b)--Award of Bid Schedule 5220, Single-Phase, Pad-Type Distribution Transformers Daniel Beans, Director of Electric Utility Report to Redding City Council August 10, 2021 Re: 4.5(b)--Award of Bid Schedule 5220, Single-Phase, Pad-Type Distribution TransformersPage 2 On Monday, July 19, 2021, three bids were opened for single-phase, pad-type distribution transformers. In the evaluation process, staff analyzed the bids based on bid price and compliance with the bid specifications. The evaluated responsive low bid was submitted by Howard Industries, furnishing Howard transformers, and it is in compliance with the specifications, general conditions, and proposal requirements. Howard Industries has previously supplied distribution transformers to REU. Transformers are purchased based on two criteria, purchase price and efficiency. The initial savings from purchasing a less costly transformer can be lost if the transformer is inefficient. Inefficiency results in much higher costs for energy losses, thereby increasing the life cycle cost of the unit. Bidders are made aware of this methodology which is used in the bid evaluations. Council Priority/City Manager Goals This agenda item is a routine operational item. Attachments Bid Tabulation Sept 1, 2022 Amber Fancelli Edenburn, Procurement REU 777 Cypress Ave Redding, Ca Hello Amber: As you may know from our previous communications, Howard Industries has been working on innovative ways to increase the number of transformers we can produce amid the many constraints that have affected our industry, including an electrical steel supply shortage. In this endeavor, we call our redesign process the Material Utilization Program or the Lighter Core Program. We believe that by maximizing our material usage in this time of supply shortages, we can increase the number of transformers we produce. The initial redesign process under this program projected an increase in our manufacturing output at a price increase of 12% to offset the cost of copper designs. We are pleased to be able to announce that after a great deal of time and effort spent to obtain additional tonnage of electrical steel, Howard has successfully secured an increase in our electrical steel allocation, which will help one of the supply chain constraints affecting production. This added electrical steel will be available to Howard beginning in November of 2022 and through 2023. However, this steel is being offered at a significant price increase for BOTH the additional allocation AND the steel in our existing contract. This price increase will begin on November 1, 2022, on deliveries made to Howard Industries. While the additional allocation will certainly help alleviate some of the pressure on Howard’s production system, we will still not have all of the silicon core steel required to meet our currently planned increases in production based on customer demand. As mentioned, the Lighter Core Program converted designs to copper high voltage windings while minimizing the core steel required, resulting in a net price increase of 12%. However, the new, higher price for electrical steel with the copper redesigns under the Lighter Core Program would bring the combined price increase to above 24%. To maximize the material available to us and produce the most transformers with the lowest possible price increase based on materials, we are again re-optimizing designs to use the least possible amount of electrical steel. The re- optimizing will be done on many designs in Howard’s system, maximizing core steel usage for production. The process will minimize the effect on your prices due to the electrical steel price increase by providing you with the lightest core possible. At the same time, we plan to pair these new, lightweight core designs with aluminum conductors for additional cost savings. These designs will increase the amount of aluminum conductor material used while minimizing silicon core steel usage, but the designs will be less than optimal. Taking into account the price increase on electrical steel, labor cost increases, and the overall Lighter Core Redesign, the new price adder will be 16.5%. We also want to inform you that in addition to hiring new employees, we are also increasing wages in key areas that have historically been bottlenecks in our manufacturing processes. We believe that the combination of additional electrical steel, additional personnel, and personnel retention (both of the latter aided by increased wages) will help us reach our goal of increased output starting in the fourth quarter of this year. In addition to securing this silicon steel, Howard has also obtained additional amorphous steel for our production. Unsurprisingly in these market conditions, the additional amorphous (as well as that under the current amorphous delivery contract) has gone up in price. Therefore, for those who had existing amorphous designs or who agreed to move to amorphous, the Lightest Core Redesign will result in a price increase of 6% due to both the amorphous and labor costs increases. To summarize, while we must pass on price increases like those discussed above, we plan to minimize the impact on our customers. We will do this by redesigning high-volume items to minimize silicon core steel usage and using aluminum conductors. Once approved, the 16.5% net price increase (note: this is 16.5% or 6% total--not in addition to the previous 12% discussed) will be applied to all open orders (all orders—past due and present, orders not just redesigned items that have not yet begun production in the plant) with Howard Industries starting November 1, 2022. As a valued customer, we appreciate your business and understanding during these unprecedented times. We continue to work to develop innovative ways to minimize the impact on both your shipments and prices from the ongoing supply chain and inflation issues. One of our sales agents or regional managers will contact you soon to further discuss the new Lighter Core Program to confirm your acceptance. Sincerely, Michael Howard CEO Howard Industries, Inc.