to: |
Roger L. Stancil, Town Manager |
from: |
K. Stephen Spade, Transit Director |
subject: |
Authorization to Enter into Fuel Contract for FY 2009/10 |
date: |
March 9, 2009 |
The purpose of this memo is to recommend that the Council adopt a resolution authorizing the Town Manager to enter into contracts to purchase diesel fuel under a guaranteed price for FY 2009/10.
Chapel Hill Transit operates public transit services for the Town, Carrboro and UNC. Chapel Hill. Transit consumes over 600,000 gallons of diesel fuel annually, making it one of the largest consumers of diesel fuel in the Triangle. The FY 2008/09 budget projected diesel fuel costs at $3.40 per gallon. Because of market volatility, Chapel Hill Transit staff has begun to investigate the feasibility of purchasing fuel via long term contracts to minimize the effect of volatility on the Chapel Hill Transit budget.
Chapel Hill Transit consumes 600,000 gallons of diesel fuel annually at a cost of $2 million. The diesel fuel budget is over 10 % of Chapel Hill Transit’s total budget. During the last 12 months the diesel fuel market has been very volatile. Prices have ranged from $4.00 per gallon to $1.40 per gallon.
In order to protect against price swings, the Chapel Hill Transit budget is based on a price of $3.40 per gallon. In recent months fuel prices have decreased from the extreme highs of the summer of 2008. Economic experts project that fuel prices will increase again in 2009.
Chapel Hill Transit and Business Management staff have investigated the feasibility of fuel contracting as a method of saving money and providing budget controls. We believe contracting is a good strategy to employ during this time of economic instability and fuel price volatility. Last month the Town entered into a contract for the remainder of the fiscal year to purchase diesel fuel at $1.40 per gallon for Chapel Hill Transit resulting in a $300,000 budget savings.
We believe that it will be in the Town’s best interest to consider fuel purchase contracts for the FY 2009/10 budget. The current draft FY 2009/10 budget projects fuel costs at $3.40 per gallon. We believe it is possible to budget less but as volatile as the market has been it is not prudent to take a lot of risk. Currently fuel prices are low but economists predict that fuel prices will rise in the first and second quarters of 2009.
In order to take advantage of the low fuel prices, the staff needs the ability to negotiate and execute fuel contracts now rather than after the budget is approved in June. This will allow us to get the lowest price possible and then have better information to finalize the transit budget. A separate Council resolution is necessary to authorize the Town Manager to negotiate and execute full purchase agreements for FY 2009/10 prior to final approval of the budget.
That the Council adopt the attached resolution authorizing the Town Manager to enter into fuel purchase contracts for FY 2009/10.