“When the futures mature we sell them and use the excess or the deficit as an offset to augment the actual market purchase price,” Fisk says.
Fisk says investing in future commodities rather than locking into a single long-term contract makes a lot of sense. The contract represents a single decision point, a price at a specific moment of time. And that can turn out to be really right or, like the $3.17 contract, really wrong in terms of where the market is heading, Fisk says. Buying futures lets the mass transit organization make a hundred different decisions over time, something that should lead to a better price.
The Greater Cleveland Regional Transportation Authority has a fleet of roughly 500 buses and served some 57.9 million passengers in 2008.
Like the other transit organizations, reducing cost fluctuations is the main goal.
“The first thing is managing risk and second is saving money,” Fisk says.
While managing risk is a sure thing with a well constructed program, saving money is more of a gamble since predicting the market perfectly is an impossibility.
With where the market is now, Cleveland anticipates reducing its fuel budget to around $9.8 million in 2010, down from a recent peak of $18.8 million. That $9.8 million figure would be the lowest amount spent on fuel since 2004, Fisk says. To do that, Cleveland will have some 90 percent of its fuel for the upcoming year hedged with futures.
The Cleveland RTA was spurred to look at fuel cost containment after determining its prices had gone up 200 percent between 2004 and 2008 and another 60 percent in 2008.
Those wild fuel price fluctuations forced Cleveland and Austin to look at how they could control the risk associated with fuel price cost, but hedging prices to avoid spikes isn’t a new invention.
Some fleets have been working on the issue for years.
The Metropolitan Atlanta Rapid Transit Authority has been working to reduce fuel price risk since the late 1980s, according to Richard Marsh, senior director of treasury and capital programs at the transit authority.
MARTA has used a stand-along hedge structure, avoiding long-term fuel contracts. The efforts have created cost avoidance in excess of $20 million, according to Marsh.
The hedge program covers roughly 80 percent of diesel fuel and compressed natural gas used by the transit authority and has been very successful in eliminating price risk for fuel. The system has been using the same price risk reduction tactics since its program began about two decades ago.
“The program removes uncertainty,” Marsh explains.
MARTA is the ninth largest mass transit system in North America serving 105 million passengers in its 2008 fiscal year. In addition to light rail lines, the system has more than 600 buses, most of which run on clean diesel or compressed natural gas.
“After salaries, energy is MARTA’s largest expense and it is essential to remove the price volatility to properly plan,” Marsh says.
Because fuel costs are often one of the largest line items in a budget, fleets and mass transit organizations need to think about more than simply fuel price when they come up with a strategy.
“You need to look at the entire breadth of what the fuel plan is,” says Mossman, the vice president at Houston-based FuelQuest. “Sometimes there’s all this focus on fuel price that people forget other things.”
Mossman urges organizations to study how much fuel they have on hand to make sure reserves aren’t too high. Many organizations have far more fuel than needed on hand, creating, in effect, resources that are sitting around waiting to be used.
Having too much fuel on hand isn’t the only way an organization that hadn’t taken a comprehensive look at its fuel system could be spending more than it has to. Given the up and down nature of fuel prices, errors can easily creep in to fuel invoices.
Lastly, too many organizations take the freight of the fuel for granted. Money can often be saved on the freight charge by shopping around instead of using the company supplying the fuel as the default freight company, Mossman says.