Utilizing Six Sigma and e-Auction Tools in Electricity Contracting

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

2. Company Overview • One of five operating units of Tyco International (NYSE: TYC) • High quality electronic component manufacturer with many well-known brands: AMP, Raychem, Power Systems, CoEv, Potter & Brumfield • 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

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

4. Electricity Contracting Project • 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. • Team based approach • 70,000+ lines of data • 5 month schedule

5. C&E Matrix and FMEA • 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 • 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)

6. Avg. = 15.28% Avg. = 0.52% Significant Hedge Process Improvement 1st Contract Spot Mkt. 2nd Contract - Actual Current Contract - forward

7. Weighted Contract Scoring • Evaluation of each supplier and each structure contract • Analyzed for risks to Tyco Electronics • Examples of evaluation criteria: • Credits/Charges for over/under consumption • Title transfer location • Payment terms • Audit provisions • Creditworthiness • Disputes / Force Majeure • 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

8. Example Weighting Factors Difference does not seem large, however…..$50 is transformed to $60.50 (1.21) and $60.00 (1.20)

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

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