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RTD losing fuel bet, locked in on up or down price

By Kevin Flynn, Rocky Mountain News (Contact)

Published November 21, 2008 at 12:05 a.m.

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A bus waits to be refueled Thursday at RTD's Platte Division in Denver. The transit agency uses 6 million gallons of diesel a year.

Photo by Darin McGregor / The Rocky

A bus waits to be refueled Thursday at RTD's Platte Division in Denver. The transit agency uses 6 million gallons of diesel a year.

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Fuel prices have tumbled, but while drivers are saving a hefty sum, RTD is losing money for every penny the price falls.

That's because for the past several years, the transit agency has "locked in" a fixed price for diesel fuel to feed its bus fleet to stabilize its budget against the spikes in the world oil market.

The strategy has saved RTD - and its taxpayers - millions of dollars. But with the steep drop in oil prices in the past two months, RTD is paying the equivalent of 87 cents a gallon more than current pump price. The price locked in for 2009 is 77 cents higher than the current Denver diesel price average.

If that difference were to hold all next year, RTD would end up paying $4.6 million more than the market price.

RTD knew that its strategy would mean sometimes you win, sometimes you lose. And being on the plus-side of the deal since 2003, it has saved a total of $5.47 million over six years.

And, RTD cautions, it won't know whether locking in at $3.10 a gallon is a loser until next year is over.

"I'd say, 'Sit tight,' " said Cal Marsella, RTD general manager. "When you're dealing with fuel hedges, it's a bird in hand is worth two in the bush. We'll just have to see where 2009 ends up.

"We had budgeted at $4 per gallon (for 2009), so we are already guaranteed to be under that, which has helped us maintain service levels."

RTD consumes about 6 million gallons of diesel a year.

Marsella locked in next year's price in September after analysts predicted diesel would stay over $4 a gallon. Because RTD is exempt from state and federal fuel taxes, it pays 44.9 cents less than the pump price.

On Thursday, according to AAA's national fuel price report, diesel in Denver averaged $2.78 a gallon. Deducting the tax amount means RTD could be paying $2.33 a gallon now instead of its $3.20 contract price. But because the price had been so much higher for much of the year, RTD is still nearly $1.1 million to the good for 2008.

Denver's Public Works Department also locks in a price each year, spokeswoman Christine Downs said, and already has committed to $3.27 a gallon for 2009.

But unlike RTD, Denver chooses to pay an additional 16 cents a gallon for "insurance" that guarantees if the price falls below the ceiling, Denver gets the lower price. Essentially, the city will pay the market price plus 16 cents up to $3.27, but no more even if the market price goes higher.

Downs said the city of Denver consumes about 1.5 million gallons a year across all departments except the airport.

At the Colorado Department of Transportation, spokeswoman Mindy Crane said there is no annual contract except for provision of stockpiled fuel at a few remote locations, such as Rabbit Ears Pass. Otherwise, CDOT pays market price at the time it refuels each facility.

Marsella said pricing fuel these days is a crapshoot, even with the best of advice. "We've monitored and managed the fuel market successfully for the past several years," he said. "The wild fluctuations in fuel prices make it very difficult to project prices at any point in time."

Comments

  • November 21, 2008

    5:48 a.m.

    Suggest removal

    Nosybear writes:

    Uh, remember back in the Summer when diesel was over $4.00 per gallon? This story is really a non-story. RTD bet on high fuel prices in September. The economy tanked in October. Fuel prices dropped below RTD's hedge. If the economy turns around and fuel prices return to normal (read high) prices, will you do a story on the genius of RTD at hedging fuel at lower than market prices?

    I doubt it.

  • November 21, 2008

    8:27 a.m.

    Suggest removal

    AC writes:

    They probably would write that story, Nosybear. They wrote it in September when RTD did the lock and expected to SAVE money.

    http://www.rockymountainnews.com/news...

    Funny how things can change on a dime.

  • November 29, 2008

    2:19 p.m.

    Suggest removal

    prk166 writes:

    If RTD is making a commitment to buy the commodity, it is not a hedge. A hedge would be purchasing the option to buy.

    Marsella is correct that what we should be asking is how well has RTD done with this program over a long period of time. And in knowing that, he should know better than to characterize the market as a crap shoot, a roll of the dice. If it truely was a roll of the dice RTD shouldn't be buying these contracts at all. The reality is this is not gambling, RTD should be using these tools to manage it's fuel budget and Marsella should be publicly telling us how likely RTD believes certain future fuel prices will be.