Guidebook for Evaluating Fuel Purchasing Strategies for Public Transit Agencies (2012) / Chapter Skim
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Pages 66-126
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From page 66... ...
66 A p p e n d i x A Case Studies Case studies of fuel purchasing strategies were developed for fifteen transit agencies across the United States and Canada based on interviews with transit agency representatives. In general, commonalities are greatest among case studies with similar geographic region and fuel purchase volume.
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From page 67... ...
Case Studies 67 Fuel Volumes: • transit system: Diesel – 624,445 gallons (FY 2009) , Gasoline – 9,407 gallons (FY 2009)
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From page 68... ...
68 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies such as hedging on the New York Mercantile Exchange (NYMEX) to lock in fuel prices.
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Case Studies 69 smaller with 20,000 gallons of diesel (approximately 1.3 weeks' usage) and 10,000 gallons of gasoline (approximately 3 months' usage)
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70 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies and provides third-party information for the city's hedging activities and assurance to the city Commission that the program is on track. The group develops a plan for the hedge program for the next quarter or longer and uses scenario analysis to determine how to manage uncertainty.
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From page 71... ...
Case Studies 71 Interdepartmental Discussions Regarding Hedging Program Purpose and Structure Is Key Interdepartmental communication about the purpose and operation of the hedging program was vital when the transit system was included in the city's program to explain the program to all involved staff. Birmingham-Jefferson County Transit Authority (BJCTA)
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72 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies budget certainty. The BJCTA procurement officer gave a presentation to the board of directors to educate the members on how forward pricing mechanisms (i.e., hedging)
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From page 73... ...
Case Studies 73 Approval and Execution Process BJCTA did not require board approval before it began using the fixed-price contracts. The fleet also noted that board approval would not be necessary if it decided to initiate an in-house hedging program.
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From page 74... ...
74 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Natural Gas. BJCTA is also managing its future fuel costs by diversifying the fuels used by its buses, in this case by replacing diesel buses with CNG buses.
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From page 75... ...
Case Studies 75 of 1.3 million.3 HRT's fleet consists of 185 diesel transit buses, 26 diesel hybrid-electric buses, and three 150 passenger paddle-wheel ferry boats.4 HRT will continue to add to its diesel hybrid-electric bus fleet and, starting in 2011, will have a light-rail component as well.5 During FY 2009, HRT used just over three million gallons of diesel fuel at an average cost of $3.00 per gallon, and approximately 528,000 gallons of gasoline at an average cost of $2.58 per gallon. Together, these represent approximately 11% of HRT's annual budget.6 One third of HRT's funding is from the federal government.
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From page 76... ...
76 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Strategy & Risk Management HRT noted that the fuel market in recent years has not followed the fundamentals of supply and demand, but rather has been closely following the stock market. This is problematic because stock market performance has been based on perceptions and not reality, so rationality has been eliminated.
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From page 77... ...
Case Studies 77 Nashville Metropolitan Transit Authority (Nashville MTA) Summary Location: Nashville, Tennessee Fleet: 200 buses: 12 sixty-foot, 115 forty-foot, 10 35-foot, and 63 cutaway buses sized for 12 to 14 people Fuel Volumes: Diesel – approximately 1.7 million gallons (FY 2009 and 2010)
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From page 78... ...
78 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Commodity Price Risk Management History Amid dramatic increases in market volatility and fuel prices across the nation, Nashville MTA's average fuel cost increased from $2.07 per gallon in FY 2007 to $2.87 per gallon in 2008. This, along with a fuel usage increase from 1.4 million gallons to 1.68 million gallons, significantly increased the agency's annual fuel cost from approximately $3 million to $5.16 million, surpassing the agency's 2008 fuel budget by $1 million.
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From page 79... ...
Case Studies 79 The initial hedging legislation became effective in May of 2009. The initial hedge agreement for OTC swaps started July 1, 2009 and was slated to run until June 30, 2011 to lock in the hedge price of $1.88 per gallon for seven contracts of diesel and $1.82 per gallon for three contracts of gasoline.
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From page 80... ...
80 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies make sure that the program is on target. The program results are also compared to the state fuel contract prices to gauge as a reference point for local prices.
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Case Studies 81 Southeastern Pennsylvania Transportation Authority (SEPTA) Summary Location: Philadelphia, Pennsylvania metropolitan area Fleet: 2,788 vehicles: 1,073 diesel transit buses (primarily 40-foot and 155 sixty-foot articulating)
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From page 82... ...
82 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies 18-month period that ended August 31, 2010. The weighted average market price was $2.36 per gallon over the 18-month contract period and $2.41 per gallon over the last six months of the contract period -- slightly lower than the contract price.
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From page 83... ...
Case Studies 83 bank could provide was also ranked highly. The ability to achieve budget certainty was critical because of concerns over decreasing transit funding due to the recession.
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84 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies market. There is no formal process for evaluating the program effectiveness.
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Case Studies 85 Commodity Price Risk Management History In 2005 Houston METRO began exploring ways to control fuel costs after the agency's fuel budget nearly doubled over three years from $10.37 million ($0.65 per gallon) in FY 2002 to $19.00 million ($1.13 per gallon)
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From page 86... ...
86 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Strategy and Process The goal of Houston METRO's fuel price risk management strategy is to minimize operating budget variance attributable to fuel price variability. The philosophy behind Houston METRO's fuel price risk management strategy is to engage in discrete, situational hedging.
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Case Studies 87 (excluding $0.0893 additional for additives and transportation)
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88 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies strategies. Continuous, rule-based strategies, on the other hand, rely less on timing decisions because futures contracts are purchased on a continual basis.
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From page 89... ...
Case Studies 89 one million passenger trips in FY 2009, and "operates 12 regular fixed routes, three school tripper routes, paratransit services for the elderly and disabled, and a seasonal trolley service in downtown Sioux Falls."22,23 The city contracts with another company to operate and maintain the city's transit fleet. The majority of the operating funds come through fare box revenue, city funds, and federal government grants.24 The fleet consists of 54 diesel powered buses, including two seasonal diesel trolleys, and one gasoline passenger van.
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From page 90... ...
90 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies The city believes that this approach allows it to receive the most competitive pricing as fuel costs fluctuate, and to take advantage of locked-in pricing at a time of year when prices are generally lower. The city also believes that this approach avoids any cost premiums or long-term obligations from June to March.
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From page 91... ...
Case Studies 91 Minneapolis–St. Paul Metro Transit Summary Location: Minneapolis-St.
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From page 92... ...
92 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies the agency tracked its fixed-price contracts and compared them to what price would have been paid if it had floated by paying market prices. Metro Transit was confident after the analysis was completed that instituting an in-house hedging program had the potential to meet its fuel price risk management goals at a lower average cost than by using fixed-price contracts with its fuel suppliers.
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From page 93... ...
Case Studies 93 near-term fuel use. Subsequently, the Council's approach evolved into a rolling hedges purchases strategy where it bought futures contracts without regard to whether the current market price was high or low.
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From page 94... ...
94 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies of projected natural gas consumption was hedged due to more volatile price movements associated with natural gas. Hedging of natural gas was performed for four years, but the Council ceased purchasing natural gas futures contracts at the end of November 2010 for the following reasons: 1)
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From page 95... ...
Case Studies 95 Find the Best Advisor for Your Agency, Be Careful About Doing It Yourself Metro Transit stressed that agencies that are interested in operating an in-house hedging program need to have sufficient funds for the margin account and also need to have substantial inhouse expertise covering investing and accounting (and/or access to a good consultant)
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From page 96... ...
96 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Delivery Price Risk Management Fuel Contracting Prior to 2006, RTA purchased diesel fuel on the open market. Worried about rising fuel prices, RTA used physical fixed-price contracts to cover fuel purchases in 2007 and 2009.
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From page 97... ...
Case Studies 97 4. Is continuous; 5.
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From page 98... ...
98 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies legitimately doing what it was approved to do and that participants are not engaging in "speculative" investment activity. Results RTA's experience with fixed-price contracts and financial hedging has yielded mixed results in terms of performance against spot market purchases.
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From page 99... ...
Case Studies 99 advantage of the attractive buying opportunities in early 2009, RTA also hedged its fuel consumption for as many months in 2011 as the agency's hedging policy's 24-month forward limit would allow. Realizing the potential of locking in low prices for the long term, the EPRM committee quickly returned to the RTA board and, after two sessions, convinced the board to extend the forward hedging limit to 36 months.
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From page 100... ...
100 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies The Greater Dayton Regional Transit Authority (GDRTA) is the public transportation authority that serves the Greater Dayton metropolitan region, an area of more than 500 square miles that includes 19 communities within two counties, and more than 11 million passenger trips per year.
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From page 101... ...
Case Studies 101 the purpose of the risk management program, the program infrastructure, the physical supply of fuel, the strategy process, the program execution, and the monitoring and reporting requirements of the program. The program document was adopted by the board in March 2008 and was subsequently revised in July 2010.45 The fuel advisor was paid a set monthly fee for services.
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From page 102... ...
102 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies updates to keep the involved parties informed. Monthly status and results reports are generated, which also include a risk analysis and a summary on the futures account activities.
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From page 103... ...
Case Studies 103 it far more difficult to implement an effective hedging strategy compared to prior years when forward pricing contracts were used. GDRTA notes that it takes experience to have an educated understanding of fuel pricing, supply and demand, and the ability to factor in how Wall Street speculation and current events affect fuel and hedging prices.
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From page 104... ...
104 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies Pooling CTA participates in a fuel purchasing cooperative for its non-revenue vehicles only. A number of other municipal departments and sister agencies belong to this cooperative.
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From page 105... ...
Case Studies 105 The policy stipulates that CTA use OTC swaps that reference the price of the NYMEX No. 2 heating oil futures contract, which effectively tracks the price of ULSD with little basis risk.
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From page 106... ...
106 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies qualification criteria related to creditworthiness and experience with derivative instruments, CTA also requires that its counterparties be willing to accept one-way cash collateral. This means that CTA can require its counterparty to post cash collateral to back up its swap position, but the counterparty cannot require CTA to do so.
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From page 107... ...
Case Studies 107 five months of 2005. Each of these contracts covered 16% to 17% of its annual fuel consumption.53 Thus, by the end of May 2005, CTA had fully hedged its 2005 fuel requirements and had partially covered itself for 2006.
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From page 108... ...
108 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies CTA's average fuel price was $4.55 per gallon. Illinois retail diesel prices averaged about $2.00 per gallon in the same year.57 At the end of 2009, the 22 swap agreements hedging 2010 consumption covered 14.1 million gallons of fuel (about 77% of projected usage of 18.4 million gallons)
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From page 109... ...
Case Studies 109 Market Orders Offer Additional Price Controls CTA has included market orders in its hedging strategy since 2008. Market orders initiate swap contracts when certain target prices are reached.
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From page 110... ...
110 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies the agency must request (or return) additional funds from (to)
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From page 111... ...
Case Studies 111 to deal with unexpected circumstances, such as budget cuts or strikes. The remaining 20% of fuel purchases are purchased on the spot market.
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From page 112... ...
112 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies GO Transit's financial statements disclose its financial obligations through contracts with fuel suppliers. There is no need to maintain a margin account or for separate accounting because the supplier executes the hedging.
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From page 113... ...
Case Studies 113 To establish an in-house program, GO Transit will need to develop an amendment to the agency's investment policy that would allow for the utilization of hedging instruments and define which instruments are to be utilized. This amendment will have to be approved by GO Transit authorities and then by the Ministry of Finance.
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From page 114... ...
114 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies and the agency's fuel supply contracts included both fuel and freight. After the mandate, however, fuel suppliers would not allow biodiesel to be blended at their delivery trucks.
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From page 115... ...
Case Studies 115 in a time of expected volatile price increases. This strategy is aimed at protecting against extreme price shocks and creating budget predictability.
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From page 116... ...
116 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies oil prices surged from US$70 to US$108 per barrel and the futures market remained in contango. In its 2007/08 annual report, BC Transit explained that the its decision to remain unhedged despite unprecedented volatility was due to the significant hedging premium in western diesel markets and the inability to develop synthetic instruments to cover price fluctuations in the extremely volatile market.65 BC Transit remained exposed to market fluctuations, and by July 2008, at the height of the market, the agency was paying a rack price of C$1.25 per liter (roughly US$4.72 per gallon)
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From page 117... ...
Case Studies 117 King County Metro Transit Summary Location: Seattle, Washington metropolitan area Fleet: 1,300 vehicles Fuel Volumes: Diesel – 11.9 million gallons (2009) , Gasoline, Electricity King County Metro Transit operates a fleet of about 1,300 vehicles, including standard and articulated coaches, electric trolleys, dual-powered buses, hybrid diesel-electric buses, and streetcars.
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From page 118... ...
118 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies reduced its biodiesel consumption by more than half. By 2009, Metro Transit completely discontinued the use of biodiesel.
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From page 119... ...
Case Studies 119 across its biannual fiscal period. In 2010, Metro Transit began the process of seeking approval to start hedging with financial derivatives rather than relying on fixed-price contracts.
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From page 120... ...
120 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies volatile market, while operating within the constraints of the state of Colorado's tax laws. RTD used approximately 10.4 million gallons of fuel in FY 2009 at an average cost of $3.10 per gallon, and expected to use about 10.5 million gallons of fuel in FY 2010.
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From page 121... ...
Case Studies 121 or procurements, so even though the supplier is hedging its own position, RTD can treat it as a regular contract. The supplier has also offered RTD the option of including downside protection in the contract agreement.
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From page 122... ...
122 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies The results of these evaluations and discussions determine the purchasing recommendations regarding when RTD should float or lock in fuel prices for the following budget year. The final purchasing recommendations are presented to the RTD general manager and senior leadership team officials for discussion and approval.
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From page 123... ...
Case Studies 123 address RTD's requirement for meeting budget certainty and guaranteed delivery. The senior manager of materials management, upon approval of a fuel purchase recommendation, places the order with the supplier to lock in at a particular price when a fixed-price contract is selected.
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From page 124... ...
124 Guidebook for evaluating Fuel purchasing Strategies for public Transit Agencies RTD's FY 2010 fuel price forecast was for $2.65 per gallon and the fleet locked in prices at $2.25 per gallon. Market prices were below $2.25 per gallon for much of the beginning of the year, but prices rose towards the end of the year.
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From page 125... ...
Case Studies 125 and Risk Management section) studies and reports on the market and other factors, and provides the board with update reports that factor in budget assumptions, including a target range for fuel prices.
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From page 126... ...
Abbreviations and acronyms used without definitions in TRB publications: AAAE American Association of Airport Executives AASHO American Association of State Highway Officials AASHTO American Association of State Highway and Transportation Officials ACI–NA Airports Council International–North America ACRP Airport Cooperative Research Program ADA Americans with Disabilities Act APTA American Public Transportation Association ASCE American Society of Civil Engineers ASME American Society of Mechanical Engineers ASTM American Society for Testing and Materials ATA American Trucking Associations CTAA Community Transportation Association of America CTBSSP Commercial Truck and Bus Safety Synthesis Program DHS Department of Homeland Security DOE Department of Energy EPA Environmental Protection Agency FAA Federal Aviation Administration FHWA Federal Highway Administration FMCSA Federal Motor Carrier Safety Administration FRA Federal Railroad Administration FTA Federal Transit Administration HMCRP Hazardous Materials Cooperative Research Program IEEE Institute of Electrical and Electronics Engineers ISTEA Intermodal Surface Transportation Efficiency Act of 1991 ITE Institute of Transportation Engineers NASA National Aeronautics and Space Administration NASAO National Association of State Aviation Officials NCFRP National Cooperative Freight Research Program NCHRP National Cooperative Highway Research Program NHTSA National Highway Traffic Safety Administration NTSB National Transportation Safety Board PHMSA Pipeline and Hazardous Materials Safety Administration RITA Research and Innovative Technology Administration SAE Society of Automotive Engineers SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (2005) TCRP Transit Cooperative Research Program TEA-21 Transportation Equity Act for the 21st Century (1998)
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