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, CoEv, 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 and 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 1st Contract 2nd Contract - Actual Current Contract - forward Spot Mkt. 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#2 Load Structure BlockLoad Following BlockLoad Following Total Score % of Maximum 79%80%79% Weighting Factor 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