Some towns locking in fuel prices
By Rachael Scarborough King
Dec. 12, 2007
As wintry temperatures settle in around the region, homeowners are layering on sweaters and installing double-glazed windows in an attempt to avoid rising heating oil costs.
An upward trend in the price of fuel also affects local municipal governments, which have to heat town and school buildings, as well as put gasoline in police cars and diesel in snowplows.
Some towns “lock in” fuel prices early on the assumption that they can only continue to rise, while others use a system that fluctuates with the market.
By locking in, town officials can be sure of a certain price for a set period of time, but may face jumps when they have to sign new contracts.
Guilford’s Board of Selectmen this week authorized the first selectman to lock into fuel prices for fiscal 2008-09, which starts in July.
Town officials said they signed agreements last week to lock in at a price of $2.60 per gallon for heating oil, $2.73 per gallon for diesel and $2.52 per gallon for unleaded gasoline, not including some extra taxes that the energy companies charge.
The town is paying $2.08 a gallon for heating oil, $2.22 a gallon for diesel and $2.13 a gallon for gasoline.
First Selectman Carl Balestracci said the fuel company, East River Energy, requires officials to sign an agreement within 24 hours of quoting a price “because of the volatile market.”
“It’s an increase, but not a terrible increase, so we thought it would be prudent to get it while we can,” Balestracci said
He added that the agreement to lock in the price is an extension of contracts that went out to bid for this fiscal year.
As fuel prices rose through the year, Guilford saved money because of the contracts, he said.
“We did very well last year. The price that we locked in at is much lower than what it is today,” he said. “It’s always kind of a 50-50 chance.”
Judy Doneiko, Milford’s finance director, said this year the city decided to switch from premium to regular gasoline to cut costs, decreasing gasoline expenses by 21 percent.
However, the price of diesel rose 4 percent, she said.
Doneiko said other budget items in Milford had to be cut in fiscal 2007-08 because of rising fuel and other costs, but did not provide any specific examples.
She added that the benefit of locking in a price is the “certainty involved,” although there is still a risk that the market price could drop below the fixed one.
If market prices for heating oil fall below the locked-in price, lock-in customers’ costs will not drop as a result. That is because state law requires heating oil dealers to buy nearly all of the oil they need to cover lock-in contracts at the time those contracts are signed. Therefore, by the time market prices drop, oil dealers have already bought and paid for the oil to cover contracts — and paid previously higher prices to do so.
North Branford Town Manager Karl Kilduff said that locking in to a price allows the town to forecast its budget, even at “times of year when fuel commodities go through the roof.” North Branford pays a small fee to be a member of a cooperative of Connecticut towns that negotiates with fuel companies, aiming to get a lower price through buying larger quantities.
Kilduff called the concept of locking in fuel prices a “conservative budgeting approach.”
“In recent history, I think we’ve all seen that gasoline does not go down all that much — it always goes up,” he said. “When you start seeing prices creep at the pump, obviously we have to be prepared to deal with it the next time the bid goes out.”
The city of West Haven uses a system for purchasing gasoline in which it locks into a state index that charges based on the average daily price for New Haven County, plus about 3.5 cents. Finance Director Bob Barron said that the city paid an average of $2.01 a gallon for fiscal 2006-07 and bought about 120,000 gallons. Currently, the price for gasoline using the state index is about $2.30 a gallon, according to the state Department of Administrative Services.
John Smith, facility manager for Branford, said the town decided not to lock in prices for fuel this year. The budget projected spending $1.85 a gallon for heating fuel, but the last bill included a price of $2.65 a gallon, Smith said.
“You’re doing your guess right now as to which way it might go and basically we didn’t do too well for this year,” he said. “We’ve been looking at energy-efficient (features) and consumption issues to try to make it a little better, but there’s quite a gap.”
Smith said the town is now using biodiesel with a 5 percent soybean mixture at the same price as regular heating oil. He is also installing computerized thermostat systems to cut expenses.
Branford Finance Director Jim Finch said that, in the past few years, the town has sometimes locked in fuel prices. The municipal government buys 40,000 gallons of fuel each year, he said. About four years ago, the town allocated part of the contingency fund in its budget for times when fuel prices overrun the projected costs. He added that he thinks the expenses even out in the long run.