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MEMORANDUM |
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City of Lawrence |
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CENTRAL MAINTENANCE GARAGE |
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TO: |
David L. Corliss |
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FROM: |
Steve Stewart, Fleet Manager |
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CC: |
Chuck Soules |
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DATE: |
January 22, 2009 |
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RE: |
Fuel Hedging |
Please include the following item on the City Commission Regular Agenda for consideration at the January 27, 2009 meeting.
Background
Staff has researched alternatives to individual bid fuel purchasing. Fuel hedging contracts are available but most require more gallon usage than we can support. Other options include supplier contracts that would lock delivery charges, but the fuel rate would float with the rack prices and OPIS Index contracts that would lock us into a monthly or quarterly index price. Price comparisons between our average purchase price paid and contract prices for the last three years indicate a substantial savings on contract.
Current Status:
Of the three vendors who have submitted pricing when fuel is purchased, only Capital City Oil Company would provide a contract. The Capital City Oil Company contract would require a one year commitment of 168,000 gallons of diesel or unleaded gasoline. In 2008 the City used approximately 220,000 gallons unleaded gasoline and 240,000 gallons diesel. The contract is broken in quarters with a commitment of 42,000 gallons per quarter. To meet this minimum we would commit to purchasing 67% of our current total usage for either gasoline or diesel. Their contract pricing is based on the Topeka fuel rack futures. Contract prices for the purpose of this memo are based on prices per gallon from Thursday 1/22/09. Diesel contract prices for first quarter $2.039, second quarter $2.139, third quarter $2.249, and fourth quarter $2,349. The risk factor, as always, is the price dropping below the price at the time you lock into the contract.
On this same date (Thursday, 1/22/09) we purchased a split load of diesel and gasoline (attached quote). The price paid for diesel was $1.6383. At this time we are purchasing diesel at $0.40 less than the quoted first quarter contract price.
The challenge of contracting will be monitoring rack prices like we do now and forecasting whether to purchase at rack price or from the contract, while making sure to not leave any fuel in the contract during a quarter. The other challenge will be getting all approvals in place to allow the contract to be locked in the first part of February. Historically contracting after February 1 is more costly.
The attached spreadsheet shows what our costs and savings would have been in 2006, 2007 and 2008.
Funding:
Funding would be through the Central Maintenance Garage budget line item for fuel purchases.
Action Request:
· If the City Commission believes fuel prices will increase through the remainder of the year then hedging may be appropriate. In this case then, the City Commission should authorize the City Manager to enter into a contract for the purchase of fuel.
· If the City Commission believes fuel prices may decrease or are uncertain, then staff would not recommend a hedging contract but would continue to monitor the issue.
Quarterly reports will be generated for the City Commission and staff will present an overview at the end of the year to discuss the appropriateness of this type of fuel purchasing.
Attachment: Cost and Savings