City board OKs pact to lock in fuel price

Contract enables officials to bypass volatile market

Cost Of Energy

September 15, 2005|By John Fritze | John Fritze,SUN STAFF

Baltimore moved closer yesterday to purchasing the millions of gallons of fuel it burns annually with a locked-in, long-term price, a practice other governments have used for years to mitigate the rising cost of gas.

At a time when fuel prices have reached record highs, the Board of Estimates unanimously approved a $7 million contract that should keep police cars, garbage trucks and other city vehicles running for two years.

In a departure from the city's past practice of paying market price for fuel -- a price that has jumped drastically in recent years -- the new contract will let city officials lock in a price that won't change with fluctuations at the pump.

"It makes more sense to have a fixed amount for budget purposes. That way we know exactly how much our fuel costs will be," said Comptroller Joan M. Pratt, a Board of Estimates member. "Gas prices, most likely, will continue to rise."

Many municipalities, schools and businesses, from Anne Arundel County to Southwest Airlines, have benefited in recent weeks because they committed to purchasing fuel before prices swelled this summer.

The average price for a gallon of regular gas in Maryland was $3.145 yesterday, up from $2.459 a month ago, according to AAA. The price has dropped from a high of $3.268 recorded earlier this month.

In all, the city expects it will need about 2.3 million gallons of gasoline and 1.5 million gallons of diesel annually for its 5,600- vehicle fleet.

Generally, large fuel distributors set prices based on a per-gallon standard published weekly by an industry group, at rates lower than motorists pay at the pump. To that price they add a per-gallon fee. Locked-in prices, by contrast, are based on the futures market.

In a rare procedural move, the Board of Estimates yesterday rejected bids by two companies -- Mansfield Oil Co. of Gainesville, Ga., and Baltimore's Carroll Independent Fuel Company -- because they did not offer the city the option of locking in costs.

Representatives of those companies could not be reached for comment.

The two-year contract was awarded to ISObunkers, of Norfolk, Va., over the objections of Bill Irish, the city's purchasing manager, who said that by rejecting the other bids, ISObunkers will become the city's exclusive supplier of gas and diesel. Irish also said locking in prices can be risky, especially given the recent dips in price.

"It's like playing the futures market," Irish said. "It's also a guessing game."

Guessing, so far, has paid off for other county governments that locked in a price of about $2.52 earlier this year. Anne Arundel, which banded with other counties to purchase in bulk, bought all of its fuel at that rate, said Fred Schram, whose office oversees county purchases.

If gas prices stay high, the decision will be a good investment. If prices drop, however, the counties will end up paying more than they would have in the marketplace.

"It's hard to say what the effects will be because this market ... has fluctuated up and down for some time," Schram said. "But it doesn't appear that there's any relief in sight."

Charles E. Joanedis, general manager of ISObunkers, said many cities are beginning to purchase a combination of fixed price and spot-market fuel, which reduces risk.

The flexibility also provides an option of locking in a rate if an outside force -- such as a hurricane -- threatens to send fuel up again, he said.

"Pricing is so volatile right now. It's a moving target," Joanedis said. "This really gives them a much better deal."

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