Beat the Price at the Pump

Capital Metro has more than 500 fleet vehicles, including 402 buses for 60 routes. The organization served more than 35 million riders in its 2008 fiscal year.

And, despite a falling price market so far this year, that’s exactly what the program has done. Austin hedged at an average price of $1.74 per gallon for some 126,000 gallons between January and September, Hume says.

Estimates are that the same fuel could have been purchased at $1.55 per gallon in January and around $1.41 in February and March. The difference between the market and the hedge has come to about $100,000 in the three month span. But the long-term picture is what is far more important.

“Diesel savings compared to budget (are) $2,075,000 and savings projected through the fiscal year ending (Sept. 30) is $11.5 million,” Hume says.

That budget confidence is the absolute key to the Austin Capitol Metro program. Saving money is a distant second to being able to stay within budget on fuel.

“Our major funding source is a local sales tax, which is down about 9 percent from 2008,” Hume says. “Better management of diesel price volatility has allowed us to offset with some confidence a significant portion of that revenue loss without a major impact on service.”

Capital Metro has swap contracts only through December. The transit system anticipates more purchases in late spring or early summer, Hume says.

Risk Planning
Creating a plan to reduce fuel price risk is a complex undertaking with multiple strategies available, all with strengths and weaknesses depending on an organization’s goals.

To best approach price hedging, a fleet needs to understand a few major points. First, trying to pick a price or seek the lowest possible cost isn’t advisable in such a volatile market, says Wayne Penello, president of Risked Revenue, which creates strategic energy hedge programs to help companies manage costs.

Next, one needs to understand the price potential of the fuel market. It’s a market that has risen about 12 percent per year in recent decades, but individual years can see much wilder swings, either up or down, Penello says.

Lastly, a group needs to establish what its “can’t live with it” price is. Once established, by looking at the market’s potential for change in the short-term and combining that with what the cut-off price is, a fleet can decide what percentage of fuel needs to be hedged at what price, Penello says.

“Most municipalities are very clear about their objectives,” he says. “They don’t want to be guessing on price.”

It might seem to be a tough market to hedge in by buying futures right now. Wholesale prices are around $1.21 per gallon for April. For next year, the price is around $1.62 per gallon. But, buying futures, selling them off at maturity and using that to offset the purchase price of off-the-rack or wholesale fuel, can create insurance and cap what someone pays if there is a price spike.

The question for mass transit systems, like any other fuel user, is “Is the fuel program worth the cost?”

Smaller fleets probably don’t have someone with commodities market experience on hand and hiring someone or employing an outside consultant might create more costs than savings. But, for something as complex as investing in futures, instead of simply seeking a long-term fuel contract, the risks are high for people without significant financial market experience, Penello says.

Pricing for the Future
The Greater Cleveland Regional Transportation Authority has turned to commodity buying to help hedge fuel prices. The transit authority locked into a fixed-price contract at $3.17 per gallon for this year. At the time that seemed like a great price and, despite being significantly above the market now, will still allow the Cleveland RTA to meet budget on fuel prices, says Fisk, the executive director of the office of management and budget.

“At that time we felt really good about that price level,” Fisk says.

The RTA pushed for a state law that would allow the mass transit organizations to buy fuel futures. Currently, the organization is buying futures at $1.80 per gallon for 2010.