(The following story by Michael Hinkelman appeared on the Philadelphia Daily News website on February 25.)
PHILADELPHIA — While fuel costs were starting to spike early last summer, SEPTA’s muckety mucks decided to gamble that the price of oil would fall.
It was a bet they would end up losing – and one that cost them millions of dollars.
Many large transit agencies typically fix fuel costs for a 12-month period, sometimes longer. “Locking in” enables them to avoid potential price spikes that can drive up operating costs.
That’s important when your fuel bill is as big as SEPTA’s: The agency burns about 15.5 million gallons of fuel every year for 1,375 buses and 600 utility vehicles.
But this year, SEPTA’s “lock in” strategy failed, and that means the cash-strapped agency had to spend about $8.5 million more for fuel in the 12 months ending August 2005, compared to the same period a year ago.
Some of that increase is due to the rise in crude oil prices, up 50 percent in the last year.
But a lot of it is the result of SEPTA’s dashed hopes that the price of oil in the Bush administration would fall.
“We’ve been very fortunate until this past year to be able to lock in at below-market costs,” said Patrick Nowakowski, SEPTA’s chief operating officer.
“This year, we got burned.”
When SEPTA received bids for a fuel contract to cover the period from Sept. 1, 2004, to Aug. 31, 2005, the winning bid was low – 99 cents per gallon. By the time the agency was able to actually sign the contract, the price was higher, but still low – $1.07 per gallon.
If the agency had locked in then, its fuel bill for the year would have been $16.6 million.
But SEPTA opted not to do that.
“Everybody kept saying the administration would bring the cost [of oil] down just prior to the election so people wouldn’t be so upset, but they never did anything,” Nowakowski said.
Throughout the spring and summer of 2004, the press was rife with stories that OPEC, the international oil cartel, would boost production, or the Bush administration would release oil from the nation’s Strategic Petroleum Reserve, to reduce prices.
So SEPTA officials waited. Even by the end of August, after oil prices had been rising for several months and just before fuel deliveries on the new contract were set to begin, SEPTA could have locked in a price of $1.20 a gallon for the year, or $18.6 million for the upcoming year.
Alas, SEPTA brass passed on that opportunity, too.
By this time, John S. Holak, Jr., SEPTA’s chief purchasing official, said officials were having second thoughts, sometimes discussing the rise in oil prices as often as thrice weekly.
With a new contract set to kick in, SEPTA officials asked their supplier, Connectiv Energy Supply, if they could in both September and October lock in just monthly prices – which are higher than annual lock-in prices.
Finally, on Oct. 28, 2004, SEPTA locked in a price of $1.45 per gallon for diesel fuel from November 2004 through the end of August 2005.
As a result, SEPTA figures to spend about $22.4 million for fuel this year – a whopping 61 percent higher than what they were paying last year at this time. In the year prior to Sept. 1, 2004, SEPTA paid a tad more than 89 cents per gallon for fuel.
Experts said market-timing is just plain risky. “The key is managing the process without undue risk because if it turns out the wrong way, the public perception will be you paid more than you needed to,” said Pippa Woods, a research analyst at the Alan M. Voorhees Transportation Center at Rutgers University.
But SEPTA officials said if they had to do it all over again, they wouldn’t do anything differently.
What happened last year on the fuel contract is viewed as an “aberration,” Holak said. He said SEPTA’s history of purchasing fuel has been successful over the years, getting SEPTA prices that were lower than what other transit agencies pay.
Before this year, SEPTA’s average annual cost for fuel from 2000 through August 2004 was 79 cents a gallon. That was lower than in New York, Chicago and Boston, but the same as in Pittsburgh.
This year, SEPTA is paying more for fuel than transit systems in Chicago and Pittsburgh, but less than in Boston and New York.