Alternative Strategies to Reduce Fuel Costs
Source: Government Fleet – Cover Story
By Thi Dao
|At a Glance
|Fleets are trying out new methods (or sticking with their tried-and-true approaches) to reduce fuel costs:
- Consolidating fuel purchases.
- Direct-billing user departments for fuel.
- Using reverse auction for fuel purchases.
- Locking in fuel prices.
- Installing aftermarket products to reduce fuel consumption.
- Changing motor pool policy to make sure drivers use CNG sedans.
There’s no doubt fuel costs have risen considerably in the past few years. At the same time, government agencies have been pressured to reduce expenses. Government Fleet conducted an informal fuel survey, which had 134 respondents, and found for public agencies, fleet fuel budget has increased for 82 percent of fleets in the past five years (from 2006 to 2011). Of these, 28 percent say it’s increased by more than 25 percent.
There are two main ways fleets are reducing fuel costs: one is to change purchasing methods and the other is to reduce fuel consumption. The graph on page 11 shows statistics on fuel cost reduction strategies fleet managers have implemented. More common methods to reduce fuel expenses include purchasing more fuel efficient vehicles and enforcing anti-idling policies. However, other fleet managers are trying out alternative ways to reduce fuel costs.
Changing Fuel Purchasing Methods
One concrete way for fleets to save on fuel is to make sure they’re buying at the best possible price. Of agencies operating a fueling facility, the highest number reported purchasing fuel through an annual or longer-term bid award (44 percent), followed by those purchasing more frequently through distributors based on rack pricing (41 percent). Some combined their bulk purchases with a fleet fuel card.
Others are testing out new puchasing methods in the hope of achieving savings.
Jeffery Hart, fleet supervisor, City of Oceanside, Calif., discussed a new method the City is using to purchase fuel: reverse auction. Previously, three distributors faxed in their quotes to a purchasing agent every day, and the fleet looked through the quotes whenever it needed to purchase fuel, awarding the purchase to the lowest bidding distributor. Hart said the City’s water company had been using an outside vendor, K2 Sourcing, to handle reverse auctions for chemicals, and Hart decided to test the program out for fuel.
The bidding takes place online and is open to all distributors, including those the City previously did business with. The idea is that various bidders will drive down the price. “We’ve agreed to give [the winning bidder] the contract for one year, so they can get the most out of winning the bid, and we get the most savings possible,” Hart said. (The first contract will expire after six months to coincide with the end of the fiscal year; future contracts will be for one full year.)
The City has some flexibility with this type of contract. “We reserve the right to cancel at any time. We reserve the right not to go with the lowest bidder,” Hart said. He explained that even if a distributor doesn’t have the lowest bid, he may consider the bid if the company is local. In addition, the winning bidder pays any service fees.
Hart said the estimate he received from K2 Sourcing was between 5-7 percent in potential savings. In a one-year period, the City purchases about 236,600 gallons of gasoline and 88,900 gallons of diesel.
Consolidating Purchases & Changing Billing Methods
The City of San Diego is also making changes to its fuel purchasing methods. Previously, the fleet division purchased most of the City’s fuel but some departments, such as Fire, purchased its own.
“We’re consolidating all of those purchases under one contract and one administrative unit,” said John Clements, deputy director of the fleet services division at the City of San Diego.
In addition, the City is switching its fuel billing procedures from a monthly rate (an average by class of vehicles) to direct billing. “We’re hoping to incentivize our departments…We feel that by direct billing, they’ll pay a little more attention and if they implement some of our fuel savings ideas we propose, that they can see the direct savings in their department budget,” Clements said. This program is scheduled to take effect in July.
Hedging and Locking Fuel Prices
Keith Condra, fleet management director at the Town of Fishers, Ind., has found locking in fuel prices for gasoline is the most effective way to control costs. In 2010, Condra was able to lock in a price for the entire 2011 calendar year at $2.58 per gallon of gasoline, with taxes included. He roughly estimates retail price for fuel to have averaged $3.25 for the year. For 2012, he has only locked in January to March so far, at $3.14 per gallon, taxes included. At 56 cents higher than last year’s price, it exceeds the fuel budget increase he requested this year – 15 percent. Condra said he hopes prices will lower before he locks in prices for the remainder of the year.
Condra plans to lock in 200,000 gallons of gas for the year. Fleet vehicles usually use about 10 percent more than that, which provides for some leeway in case prices fall temporarily or the fleet uses less fuel.
The City of Loveland, Colo., has been hedging fuel prices with the neighboring City of Longmont since 2008 in order to combine its fuel volume, according to Steve Kibler, ACFM, fleet manager for the City. He also purchases price protection insurance that pays the difference in case fuel prices fall below his hedge amount – in this case, he gets a refund for the difference.
In 2010, the City saved $17,000 over rack prices by hedging more than half a million gallons of gasoline and diesel. Kibler said while savings may not be great, the value lies in a stable fuel budget.
“The overall average [cost] allows me, the fleet manager, to project my budget for the year, and that’s the value to me. I can project my budget and get it approved. If I save money, good. If I don’t, it doesn’t go over that budget amount,” Kibler said.
Awarding the Lowest Bidder
Going out to bid can yield a variety of proposals, and fleets often choose the cheapest option – one city lucked out when the cheapest option was better than it expected.
The City of Beverly Hills, Calif., went out to bid for gasoline and diesel in July 2011. The previous contract was a three-year agreement with pricing based on a weekly OPIS average plus markup. Fleet services staff was pleasantly surprised to have a vendor bid below the OPIS price for gasoline – the daily average minus 0.0115 per gallon (1.15 cents).
“I had to verify it with them twice,” said Rene Biadoma, fleet manager for the City.
According to Biadoma, the vendor considered the City’s projected gasoline use for the year – 150,000 gallons – just a drop in the bucket. Although the bid for diesel was 0.0081 per gallon (0.81 cents) higher than it was under the previous year’s contract, annual diesel use was less than gasoline – 90,000 gallons per year. After calculations, Fleet Services staff found this to be the best offer. The vendor won the one-year, renewable contract out of six bids.
Biadoma reported no issues with fuel quality or service. Read More…