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Betting on fuel prices 

Government agencies buying gasoline contracts roll the dice

Believe it or not, when a city vehicle pulls up to a city fueling station, the gasoline pumped into its tank costs taxpayers more than consumers pay at the pump these days. It's true even though government agencies don't pay the federal and state taxes on fuel that other consumers do — 40.40 cents per gallon for unleaded gasoline, and 44.90 for diesel.

In fact, Colorado Springs government has agreed to pay its vendors $2.82 per gallon for 80 percent of its unleaded gasoline supply this year — nearly $1 more a gallon than fuel-tax-paying motorists are shelling out now.

click to enlarge Government agencies buying gasoline contracts roll the dice

Here's what's happening: Some government agencies try to hedge against price fluctuations by locking in prices for a year, and while that doesn't always give them the lowest price, they at least know what price they'll pay months down the road. It helps them operate on fixed revenues and budget a year in advance.

"It is a proven strategy to guarantee our fuel supply, ensure that budgets are met, and save costs over time," Ryan Trujillo, city contract compliance manager, says via email. He adds that from 2010 through 2014, the city's strategy yielded savings of $2.4 million compared to the average market price during that time.

States, cities, counties and school districts are traditionally big fuel consumers, operating fleets of police cruisers, firetrucks, snowplows, lawnmowers and dump trucks. Last June, the city contracted for 80 percent of its supply for 2015 — for both the city and Colorado Springs Utilities — at a cost of $3.17 per gallon for diesel and $2.82 per gallon for gasoline. Both prices were about 2 percent more than their 2013 prices, and much better than the rates that regular consumers were paying at the time for diesel ($3.90, according to the Energy Information Administration) and unleaded ($3.50, according to gasbuddy.com).

So it seemed like a good deal — especially, Trujillo notes, given the unrest in the Middle East, where much of the world's oil supply originates.

In October, as prices began to fall, the city contracted for a small portion of its 2015 supply at $2.74 per gallon for diesel and $2.44 for gasoline. (At the pump at the time, the price of diesel was $3.65 a gallon, and gasoline, $3.30.) As prices continued to drop, the city took the unusual step of contracting for 80 percent of its 2016 supply at $2.83 per gallon for diesel and $2.47 per gallon for gasoline.

"The primary goal of utilizing the hedging strategy is to guarantee the City's fuel supply, not necessarily to continually beat the market price," Trujillo explains. "That said, the hedging strategy does allow the City to mitigate price volatility and look for opportunities to decrease fuel costs in future years."

While prices are low today, what happens in the next 22 months is anyone's guess. Meantime, by freezing its price for most of its 2016 fuel supply, the city expects to save nearly $700,000 compared to this year's fuel bill, Trujillo says.

El Paso County, meanwhile, locked in a diesel supply at $3.13 per gallon for 80 percent of its needs from May through September 2014, with the balance purchased on the spot market, says county spokesman Dave Rose in an email. That move saved $41,625 compared to the amount budgeted, he says.

For 2015, the county contracted for diesel at $2.79 a gallon and unleaded gasoline at $2.39 a gallon for 80 percent of its needs.

"We will continue to purchase a portion of our fuel requirements on the spot market, thereby taking advantage of the current market conditions," Rose says. "But our price lock guarantees our supply at the above rates when prices begin to climb."

In fact, Rose says, the purchases translate to an expected savings of $292,000 this year over what was projected when the 2015 budget was prepared months ago.

Some agencies don't go the hedging route.

Colorado Springs School District 11 has an annual fuel cost of only $350,000, a fraction of its $350.6 million budget, so it buys fuel on the spot market, Glenn Gustafson, D-11's CFO and deputy superintendent, says via email. When its tanks run low, about every four to six weeks, the district gets bids from three suppliers and accepts the low bid, he says.

Academy School District 20 runs 154 buses, plus other vehicles, which require roughly 254,000 gallons of fuel per year. Contracts officer Greg Stephens says the district used to buy fuel weekly, based on price checks with suppliers. But quality varied from supplier to supplier. When some of the buses wouldn't start in winter, it was impossible for the district to know which supplier's fuel was to blame because all deliveries had been co-mingled in the district's tanks.

So last year, the district contracted with one supplier. It requires a specific grade of fuel and pays 1 cent per gallon more than the average fuel price in Colorado as reported by the Oil Price Information Service, a benchmarking agency. For example, the district paid $1.4625 per gallon for a Jan. 16 unleaded fuel delivery, Stephens says. The change also allows the district to forgo staff time spent taking bids every week.

While Stephens admits agencies that lock in prices long-term can get lucky and pay less, that method also carries risk. "We felt it would be safer for us to go with OPIS," he says.

Like D-20, the state of Colorado doesn't speculate by inking year-long fuel contracts for its 4.6 million gallons per year, says Sabrina D'Agosta with the Department of Personnel and Administration in an email. "Virtually all of our fuel is purchased at public fuel stations," she says. "As a result, we will see the full advantage of any sustainable reduction."

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