The City of Albuquerque, N.M. has saved more than $1.4 million dollars on fuel for the City’s fleet through a hedging program that began in 2011. Government Fleet magazine spoke with the City’s Mayor Richard Berry, and Finance and Administrative Services Department Director Lou Hoffman, about the program and how the City set it up.
The program originated when the City was facing a budget shortfall in 2011. Berry explained that because fuel is a commodity, Albuquerque would generally set up a contingency to cover fuel costs if they exceeded the City’s projections. He said he and his staff wanted to find a way to accomplish two goals: first, create a more predictable budget for the City’s costs and second, avoid tying up money the City could use for other purposes by setting it aside in a contingency to cover potentially high, and unpredictable, fuel costs.
“We had a conversation as we were preparing for the FY-2012 budget,” Berry said. “We’d had some informal feedback from our suppliers suggesting that the rack price could be heading toward $4 at that time. We just felt that if we could lock in a price, we would meet two goals, locking in a price and providing certainty, and save the taxpayers money.” Berry added that at the time, the City was interested in bringing best practices from the business world into Albuquerque’s operations.
“There’s a reason that large airlines, trucking companies, and others hedge fuel,” Berry said. “It’s part of their best practices in business.”
The City worked with a number of different companies to determine how to set up the fuel hedging contract so it would result in savings. City officials worked with RBC Capital on initial research. Next, the City used financial company First Southwest to manage the bidding process for the contract. Lastly, the bond council the City worked with to draft the authorizing legislation was Brownstein Hyatt Farber Schreck.
So what has fuel hedging achieved for the City? First, it’s saved approximately $1.444 million since 2011, Berry said. For fiscal-year 2012, the City’s payment was fixed at $2.475 per gallon for gasoline. In 2013, the City hedged in two, six-month blocks (renegotiating the contract after the first six months were up), with the fixed price at $2.813 per gallon for the first six months of the year and $2.99 for the rest.
According to the City’s Hoffman, if prices fall below the fixed swap price, the City would have to pay the difference, ultimately resulting in the City netting the fixed swap rate. When prices exceed the swap rate, the City receives the difference, offsetting the higher cost.
“Either way, this arrangement is designed to allow the City to incur a net cost of fuel equal to the fixed swap rate,” Hoffman explained. “And, if the contracts are bid when seasonal prices are low, the result should generally be a swap rate that is lower than the average cost of fuel for the year.”
When discussing the decision to hedge, Berry was careful to say that the City doesn’t hedge as a standard practice – the City hedges when it makes financial sense.
“Let’s not be hedging to hedge, let’s do this if the timing is right,” Berry said. “I’m careful to tell my key staff that there’s no pressure to hedge.”
Berry credits his staff, and in particular the City’s Hoffman, with doing the work needed to ensure the fuel hedging program made sense for the City and its taxpayers.
“We’re always working on doing what’s right and keeping an eye on the environment, reducing carbon emissions when we can,” Berry said. “We’re always looking for better ways to do things. I believe as mayor that a lot of those ideas come from great employees. You don’t need to be in any particular place in the organizational chart to contribute ideas.”
Berry said that to help generate ideas that improve operations, the City has set up a program that provides a cash reward to employees whose ideas improve efficiencies and save money. He said this program has led to the City implementing employee ideas that have created close to $14 million in efficiencies, and the fuel hedging program is just one example.
Berry offered advice for other municipalities that intend to put a fuel hedging program in place. He said officials should ask themselves a basic question to start:
“Do you have the team in place to ensure that you’re not buying at the top of the market?” he said. “Otherwise you’ll be having a discussion with your client, the taxpayer.” In Albuquerque’s case, the conversation about managing fuel costs has been a positive one.
By Greg Basich