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AUGUST 1997 · Volume 71, Issue 8

POWER & ENERGY

Kimberly-Clark and S.D. Warren rely on third-party expert to own and operate the power island for their Mobile, Ala., operations

Energy Partnership Serves Well at Mobile Pulp, Paper Complex

BY KIRK J. FINCHEMTechnical Editor

In its 1996 annual report, energy giant Southern Co. (Atlanta, Ga.) proudly compares itself to a "900 lb gorilla" in terms of strength, speed, and its ability to thrive while other companies struggle. In his letter to shareholders, Southern's chairman, president, and CEO A.W. Dahlberg, concludes the analogy saying, "[We[ are the 900 lb gorilla of the electric utility industry. We are a leader, strong and fast. And we take care of our family of shareholders, customers, and employees."

When Scott Paper elected to sell the energy assets at its Mobile, Ala., pulp and paper complex in 1994, the Southern Co. moved quickly to purchase the assets, strengthening the company's ties to the pulp and paper industry. With the creation of Mobile Energy Services Co., LLC (MESC), the stage was set for a unique operating partnership at the complex. MESC continues to own and operate the energy assets at the complex, while the pulp mill and the tissue mill are operated by Kimberly-Clark, which purchased Scott Paper. The fine paper mill is operated by the S.D. Warren division of SAPPI.

REVERSE INTEGRATION. "Historically, the paper industry has been highly vertically integrated. Paper producers have tried to own everything from the dirt that their trees grow in to the trucks that deliver their products," says Newton Houston, a manager in Southern Company's Southern Energy Trading and Marketing (Atlanta, Ga.) unit and one of the architects of the MESC enterprise in Mobile.

"It is very difficult to manage such diverse businesses," continues Houston. "Partnerships like this (Southern's venture at the Mobile complex) are going to become more prevalent. And as focused specialists-transportation specialists, energy specialists, information specialists-come into the industry, competitive pressures will continue to increase. The specialists bring expertise and economies of scale in their areas of specialization that traditionally integrated paper companies will have difficulty matching."

According to Houston, the shift toward such operating partnerships will be an important element of many paper companies' changes in business focus and drive to aggregate market share in their core businesses. "We are actively pursuing similar arrangements with other pulp and paper producers. One measure of the trend toward energy asset partnerships is the increasingly competitive environment that we are seeing."

FINISHING THE 'BUSINESS UNIT OPERATIONS' SHIFT. Prior to the purchase of the mill's energy assets, Scott Paper had already begun aligning the mill's operating departments into business units. With the purchase, MESC hired most of the in-place personnel (management, supervision, technical, maintenance, and operating).

"The transition was not as difficult as one might think," recalls Houston. "The 'asset team' business unit staffing was in place. We hired all of the operators, the engineers and the supervisors, including MESC's current plant manager Ed Fitzgerald."

Fitzgerald adds, "During the acquisition, we realized that process technology competency would be an important issue. We made sure that the people transferring into the unit had needed expertise. We maintain our own in-house expertise, and have access to outside consultants as the needs arise." MESC's staff is also active in a number of paper industry technical associations, committees, and foundations.

FEW SHARED SERVICES. Interestingly, the complex's partners make little use of shared services. "Prior to the acquisition, the mill went through an extensive downsizing," Fitzgerald says. "After the Southern Co. acquired the utility island, we had to bring in our own support staff-environmental, safety, and procurement people.

"We manage our own capital, maintenance, and procurement programs. We warehouse our own parts and inventories, independent of our partners. We use the leverage and buying power of the Southern Co., and exchange information on critical issues such as chemicals, fuels, and some of the big purchases."

However, Fitzgerald says that MESC has the flexibility to do what makes the most sense from a business standpoint. "We can use Southern Company Services (SCS)-the engineering 'arm' of the Southern Co.-on major expansion projects, or we can use outside engineering contractors."

And while MESC uses the purchasing leverage of its parent company and has access to its technical resources, the extent to which MESC can share services with its regulated "sister" utility companies is very limited. "Operating in Southern's core business territory-as compared with any other part of the world-gives us very little strategic operating advantage," explains Fitzgerald. "We have to deal at arms length with the regulated utility portions of the company. For the most part, this business unit is clearly separated from Alabama Power (the local electric utility and an operating div. of Southern Co.) and the Southern Co."

"While we have an advantage requesting help in the event of a problem, we have to be very careful about bringing the utility in to do work for us at less than a fair market cost. That could amount to 'subsidization,'" explains Dick Koch, MESC's general manager. "A regulated utility like Alabama Power cannot perform work for us and then pass the cost along to its captive, rate-paying consumers. That is a line that we and Alabama Power avoid carefully."

In fact, each of the complex's partners -- including MESC -- negotiates its own utility service contracts with Alabama Power. And while Kimberly-Clark and S.D. Warren are bound to MESC for their base service (their demand at the time the partnership was launched), they can elect to purchase the electricity required to meet increased future demand from MESC, Alabama Power, or any other supplier.

"Each of our partners is responsible for optimizing its own energy purchases," explains Fitzgerald. "But we-the partners-work together closely to coordinate efforts."

THE MORNING MEETING. "Like most mills, we-MESC, Kimberly-Clark, and S.D. Warren-meet each morning to talk about the day's operating plan, such as outages and production rates," explains Fitzgerald.

The site operating committee-which includes a representative and an alternate from MESC, the pulp mill, the tissue mill and the paper mill-meets on a weekly basis. According to Fitzgerald, "The committee looks a bit more long-term, integrating the activities at the site on a monthly and annual basis. We will coordinate such issues as outages, hurricane plans, bridge protection, shared services, site services, etc."

The site's executive board, made up of corporate representatives of the partnering firms, meets quarterly. Theoretically, unresolved disputes between partners at any level are "kicked upstairs" to the next level committee for resolution. Issues that cannot be resolved by the executive committee are bound-over for arbitration. According to Fitzgerald, "The system has worked well. In 21/2 years, no issue has gone beyond the site operating committee."

MESC's OPERATIONS. At the Mobile complex, MESC operates two recovery boilers-one Ahlstrom unit and one ABB C-E unit-with a combined capacity of nearly 6.35 million lb of dry solids/day. The recovery boilers, in combinations with MESC's three power boilers -- one Babcock & Wilcox unit and two ABB C-E units -- can generate 2.1 million lb/hour of steam. The site's three steam turbine generators have a combined output of 111 MW.

MESC also operates two sets of HPD falling film evaporators with high solids crystallizers. The No. 5 unit is a seven-effect set rated at 1 million lb/hour of evaporation, and the No. 6 unit is a six-effect set rated at 600,000 lb/hour of evaporation. While process water treatment at the Mobile complex is the responsibility of the Kimberly-Clark pulp mill, MESC generates its own boiler feed waters.

IMPROVEMENT INCENTIVES. "The contract was set up on a 'process model concept,'" explains Houston. "The facility's historical fuel efficiency performance was to be used as the benchmark for future performance. If our operation of the facility is not up to the historical standard, we -- MESC -- pay the additional costs. If, on the other hand, we out-perform the standard we enjoy the monetary gain."

Looking back, Houston says, "Since the partnership took over operations, the importance and scope of the process model diminished. It is a lower priority issue than we thought it would be when the initial contract was negotiated."

Koch adds, "The benefits of overall fuel efficiency improvements are shared by all of the partners. Fuel costs are, in effect, 'passed through' to our customers at indexed rates. If we can buy our fuels (coal, gas, and oil) at a discount to the index, the gain is ours. If we have to pay more than the index price, MESC pays the difference. And, of course, we are responsible for managing our other operating costs, enjoying the benefits of improvements the penalties of poor performance."

Fitzgerald says, "But by the same token, we have an obligation to keep our customers well informed about their energy costs. Every morning, during the production meeting we report our performance to our partners-steam quality, steam usage, power consumption, and recovery boiler performance. We give them information on fuel consumption (bark, gas, and coal)."

CORE BUSINESS BUDGETING. "Like most integrated mills," says Fitzgerald, "we have a five-year capital spending plan that we adjust annually. We focus on availability and reliability. But, unlike integrated mills, this is our core business and budget decisions are made on that basis. We are not comparing boiler improvements and calendar stack replacements."

Similarly, the "power-generation-as-core-business" focus has affected training priorities. According to Fitzgerald, "We've made a huge training investment here, including computer-based simulators. The simulators have look and feel of our Honeywell TDC 3000-controlled system. The only thing the operator doesn't have is the radio going and a foreman asking why the system went down and when it will be back."

The training investment also included an update of all training manuals, revisions of all lock-out manuals, and the completion of substantial valve identification and line labeling programs. MESC has also significantly expanded the predictive and preventative maintenance programs.

SEPARATING THE COMPLEX. Because of the ownership arrangement at the site, the utility metering is much more extensive than at a typical single-owner mill. explains Fitzgerald, "It would have also been less extensive if we were supplying a 'single customer' from the utility island. To support the independent operation of three different companies, the mill processes were segregated."

More that $1 million was spent to "separate" the pulp mill sewers from the energy complex. Similarly, $3 million was spent on steam and electrical metering. "We installed 'billing-quality' meters throughout the mill-wide utility system-water, steam, electrical, and condensate returns, as well as the weak black liquor system," says Fitzgerald.

Ownership and maintenance of the utility distribution systems has also been segregated. "Boundaries were established for each system (steam and electrical)," he explains. "Generally, where steam enters an operating building, ownership of the steam, piping, and controls transfers to the operating department company. MESC owns, operates, and maintains everything up to that point, controlling pressure, temperature, and the safety devices."

Likewise, the high-voltage power distribution system belongs to MESC, although the ownership is somewhat less geographical. "We own the distribution system up to the 'high side' of the transformers, some of which are located in the customers' operating areas."

SHARING A UNIONIZED WORKFORCE. Each of the partners -- MESC, Kimberly-Clark, and S.D. Warren -- negotiates and operates under its own union contract. According to Fitzgerald, "Organizationally, our labor agreements work like they would at a single employer worksite. We have our own 'operation,' and MESC's workforce is represented by two unions -- the UPIU and the IBEW. One of the big differences between a single employer mill and the arrangement at Mobile is, because of the separate contracts, hourly employees cannot transfer (with seniority) between companies."

One of the other differences is the contract negotiating process itself. "The partners at this site all have slightly different approaches to managing their labor-forces. The key is keeping the other companies informed," says Koch. The effect of one partner's labor disputes on the other partners remains untested.

Southern Co.'s ties to the paper industry