FINANCIAL MANAGEMENT/Fueling up for winter
Not very long ago, local governments followed simple rules when planning for yearly energy costs. Gas and oil prices went up in the winter when demand was high and dropped in the summer when demand was low. To save money, cities and counties purchased enough energy during the summer to use in the winter. But in the last year the rules have changed because of increasing demand from China and the United States.
While summer is still the best time to purchase energy, buyers should focus on price shopping as early as possible to get the best deals. They also should not expect huge cost savings as in the past. Instead, purchasers need to understand the benefit of locking into a fair price and not having to ride the energy price roller coaster.
There basically are three ways to lock in an energy rate. Before choosing an approach, buyers should determine what is most important: total cost savings, flexibility or maintaining cash on hand.
The first method requires prepaying for bulk supplies of energy. Those programs usually offer the best deals but require money spent up front at the time of purchase.
The second option involves negotiating a fixed price for the winter season. The price paid for the entire agreement will not change, regardless of increases or decreases in the market, and the government can pay monthly rather than all at once. But because the option does not require payment up-front, the cost per energy unit typically will be higher than the first option.
While the first two methods protect against price increases, they cannot take advantage of any potential market drops. The third option is to negotiate a “cap price,” or a ceiling on the price of oil or gas. While that may sound like a no-lose situation, it is important to note that the capped price will generally be higher than a fixed price by several cents per gallon and significantly more expensive than paying up front.
In addition, local governments can save money by purchasing energy for all departments in a single contract. The volume can be used as a way to help negotiate a better price from providers. Many city and county departments piecemeal their utility bills, but by working together and shopping for a provider, they probably will be able to realize better rates.
Whatever the method, local governments should read the fine print before committing to any program or contract. They need to make sure that the fixed contract is really fixed and that the agreement does not allow the provider to increase the commodity price if any underlying market conditions or distribution company charges increase over the contract period.
In the last 12 months, in fact, the price of oil has broken through $50 per barrel and has edged close to $60 per barrel. Some energy experts are predicting that prices will only keep rising. And despite adequate supplies of natural gas, costs continue to rise along with oil.
There has been a significant change in the mindsets of those looking to broker the best energy price. The goal now should be to stabilize energy prices as much as possible and to provide a sense of fiscal security when dealing with the highly volatile natural gas and oil industries.
The author is president of Canton, Conn.-based Utility Analysts.