UT: UTA Skips Fuel Hedging, May Cost $3.6 Million

June 1, 2011
The Utah Transit Authority's decision to not hedge, or lock in, fuel prices may cost the agency an additional $3.6 million this year, forcing fares to rise as diesel prices jump.

The Utah Transit Authority's decision to not hedge, or lock in, fuel prices may cost the agency an additional $3.6 million this year, forcing fares to rise as diesel prices jump. For 2011, UTA planned on spending $13.8 million on fuel. That was before Rocky Mountain-region diesel prices averaged $4.10 per gallon, up 32 percent in the past year, the Energy Department said May 23. During the first quarter, UTA spent $900,000 over its fuel budget, UTA spokesman Gerry Carpenter said. To counter the extra expense, the agency raised single-ride fares by 25 cents in February and may raise them by another 25 cents to $2.50 on Aug.

1. The agency has also cut seven weekday and 16 weekend routes since 2009. "I have to tell you; I don't understand the fuel market very well," UTA Chief Financial Officer Ken Montague said about possible hedging to combat rising prices. "We could probably hire some expert to help us get us comfortable with it. But assuming others have done it, I could probably get there if we had the ability to do that."

This year the UTA plans to buy 5.5 million gallons of diesel fuel to run its nearly 600 buses. After the UTA approves its annual budget each December, it buys fuel when needed at market prices. With that plan, the agency came in $242,176 under budget last year. That was after going over budget by $728,770 in 2009.

"It's not about making money; it's about making your budget not rupture," said Peyton Feltus, president of Dallas-based Randolph Risk Management, which advises organizations on hedging. Taking no thought to hedge may have been a smart plan until the falling price trend changed in March 2009, said Richard Ellis, Utah state treasurer, in an email.

"They looked like a hero until the market moved against them." With hedging, a buyer can lock in prices for a specific volume over a certain time period. For example, UTA could enter a swap contract with another party based on regional diesel fuel. The two parties agree on a price. If prices rise above the agreement, UTA buys the fuel and the other party sends UTA money to cover the difference. If prices fall, UTA buys the cheaper fuel and pays the other party the difference, keeping prices even during the whole period.

During a May interview with the Deseret News, Montague said state laws barred operational hedging. The Utah Attorney General's office disagrees. "UTA may have its own rules and policies to follow in purchasing gas, but we are not aware of any state laws prohibiting hedging," said Paul Murphy, a spokesman for Utah Attorney General Mark Shurtleff.

While Utah limits investments in certain assets for money management, that legislation does not affect the UTA and potential fuel hedging. "These are political entities, and they are very afraid of what happens to them," Randolph's Feltus said. "They decide they are going to pay the market and that is a defendable position to the electorate."

Municipal hedgers Many other Western U.S. municipalities lock in their fuel costs to avoid uncertainty. San Diego's Metropolitan Transit System has been hedging fuel for its natural gas-powered buses for two years, said spokesman Rob Schupp. It's the first time in the agency's history that any type of its fuel has been set at a fixed rate.

"We ended up saving money over the market for the first year, but over two years it's been a bit of a wash," Schupp said. "But at least in doing so, we know what the budget would be and can try to finagle budgetary stuff a bit better."

The Regional Transportation Commission of Southern Nevada, which covers Las Vegas, hedges fuel purchases for its 527 diesel-powered vehicles, which make up more than three-quarters of its fleet. In 2009, Nevada passed a bill to expand hedging from a one-year limit to as long as five years, said Tracy Bower, a spokeswoman for the commission. The agency is in its second year of a two-year deal.

"The ability to hedge our diesel fuel was readily available on the market," Bower said. "There's volatility of fuel prices, but based on market conditions from last year, it was a decision our finance staff made because they saw the benefits by the end of this second year." The story is similar for the Phoenix Public Transit Department. The agency is two years into a three-year agreement to hedge its natural gas, which fuels about 47 percent of its vehicles, said spokeswoman Marie Chapple.

Yo-yo prices Under its fuel surcharge program, UTA raises fares when fuel costs surpass $4 per gallon, in dollar increments. Single-ride adult cash fares increase by 25 cents and day passes rise by 50 cents. The UTA re-evaluates purchase prices every three months. The adult, student and minor monthly passes increase by $8 and the senior monthly pass will go by up $4. A surcharge typically generates about $600,000 per quarter. When prices retreat, the agency must alter fares once again, creating a yo-yo effect.

Ride options have also decreased. Since August 2009, when oil and product prices rebounded from the commodity crash, the UTA cut 3.5 percent of weekday service and 9 percent of weekend services. Along with the surcharge, the UTA will begin using 10 buses that operate on compressed natural gas next year, an addition to the diesel and diesel hybrids that the agency currently uses, Montague said. Until now, the UTA shied away from using natural gas-fueled vehicles because Utah road conditions, terrain and refueling times made it difficult, UTA's Carpenter said.

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