With the cost of fuel typically representing more than 10 percent of a solid waste collection company’s total operating expenses, it is important to develop and execute strategies to reduce this cost. Since late 2007, the Solid Waste Division of Veolia Environmental Services North America has carried out a multi-pronged plan, which the author of this article has overseen, to reduce its fuel expenditures and has realized a reduction of more than 4 cents per gallon. The division has used several strategies to realize these gains, such as consolidating its supplier base, encouraging competition among suppliers, timing the market and taking advantage of emerging truck technologies.
Veolia’s first move was to consolidate its supplier pool from around 250 local fuel distributors that were servicing more than 100 operating locations into about 10 strategic suppliers that either owned and operated oil refineries, or had extensive regional or national distribution coverage. Veolia found that suppliers that have hard assets (refineries, pipelines, bulk terminals and trucks) plus sizeable inventories have a distinctive cost advantage and are well-positioned to provide high service levels. This approach effectively compressed the supply-chain at least one step, moving from a local retail or wholesale relationship to a direct-refinery, or at least a national wholesaler, supply chain. This effort reduced fuel costs by around 2 cents per gallon and provided more reliable supply sources.
Like most purchasing situations, the effective facilitation of market competition results in lower fuel prices. At a minimum, it’s wise to make sure all operating units routinely are evaluating at least three bids before ordering a load of fuel. Veolia found that sites that consistently used this basic approach have fuel costs that are at least 2 to 12 cents lower per gallon than sites that use a single, local distributor as their supply source. Veolia also found that if a local supplier has affixed some type of equipment to the tank or has a captive supply agreement, then prices typically are significantly higher.
For larger refuse companies with national or regional market coverage, it makes sense to go through a request for proposal process to establish an index-based pricing mechanism (such as one based on a third-party index like the Oil Price Information Service or Platts, or the price of heating oil on the New York Mercantile Exchange [NYMEX], etc.) for markets in which annual fuel consumption is more than 3 million gallons within a 100-mile radius. It is beneficial to have at least one supply agreement based on yesterday’s closing price and one that is based on today’s closing price. Having the option to select from more than one supplier with pricing set in different time-frames is an important marketing-timing strategy. If it is not practical to form two strategic supply agreements in a single market, then it’s important to have at least one strategic supply agreement with pricing set at yesterday’s market close and another supply option that will be priced according to the spot market — usually reflecting the position of the market at the time of the quote.
Timing Is Everything
It is generally accepted that it is impossible to “time the market” to achieve a significant, sustainable economic advantage. However, in the case of the bulk purchase of fuel, most refuse companies could readily use the real-time spot market price change of heating oil to predict the change in tomorrow’s diesel price. This is valuable information that is readily available for free on the Internet. It is not an exact correlation, but in general, if the NYMEX heating oil price is up today, the price of tomorrow’s diesel (which is set a few hours after the close of the market) will be up by about the same amount. This information can be used to make a real-time decision to purchase fuel today if the heating oil price is up, or, if the price is lower and you have enough inventory to operate without the risk of running out of fuel, wait until tomorrow. If the firm’s prevailing operating strategy is to keep the bulk storage tank at its fueling station full, then this strategy is simple to execute if the tank is at least 14,000 gallons, and the daily fuel consumption rate is less than 1,000 gallons. As volatile as the markets have been in the past few years, this approach has helped reduce Veolia’s costs by an average of 1 to 2 cents per gallon. Veolia currently uses the services of FuelQuest to help develop strategic sourcing plans and manage the daily load sourcing decisions and related transactions.
One longer-term corporate-level decision is whether to hedge your fuel supply costs with a fixed-price contract. While some managers may see hedging as a way to improve profitability, Veolia Environmental Services North America looks at this option as a tool to reduce the volatility of the income statement and to help meet fuel budget targets. Veolia entered into several fixed price supply agreements in 2009 and 2010 with good results. However, so far this year, the price of fuel has been higher than the firm budgeted, so no fixed-price contracts have been formed.
One metric Veolia used in the 2009 decision was the ratio of the price of West Texas Intermediate (WTI) crude oil versus an ounce of gold. Since the long-term correlation of these two commodities is fairly consistent, it was apparent in the spring of 2009 that the price of oil was out of balance on the low side and therefore was a reasonably safe price position to form a fixed-price fuel contract. More importantly, the price of diesel at that time was significantly lower than Veolia’s 2009 budget targets, so forming the contracts improved the chance of meeting the fuel budget targets.
Restructure the Truck
There are several intriguing options available now (or that will be available soon) that significantly restructure the basic diesel engine drivetrain that has been the prevailing technology for decades. These options offer compelling methods to reduce fuel costs. The rapidly growing acceptance of compressed-natural-gas (CNG) powered Class 8 trucks in the refuse industry is a trend that should be embraced, as they offer at least a 50 percent reduction in fuel costs on a diesel gallon equivalent basis. Furthermore, their carbon-dioxide emissions are 22 percent less than traditional diesel-fueled trucks. However, the reduction in operating costs is somewhat offset by the significant amount of capital investment required ($1 million to $2 million) for the typical natural gas compression fueling station.
Technology breakthroughs have made domestic natural gas readily available and seemingly insulated from supply and valuation imbalances caused by weather and operating disturbances, global geopolitical conflicts, and currency volatility. Natural gas has truly become a domestic, inland energy source that is in abundant supply. In operating terms, the price of natural gas diesel gallon equivalent is currently running $1.75 per gallon or less versus $3.50 for a gallon of diesel.
Also compelling is the emerging technology of hydraulic hybrid trucks. Manufacturer statements claim that these trucks reduce fuel consumption by 10 to 40 percent while also improving refuse collection efficiencies, increasing driver satisfaction and significantly extending brake life. Veolia’s internal analysis showed that these systems did provide a favorable return on investment and will likely be adopted as the technology is proven and if diesel prices stay above $3.50 per gallon.
Roger S. Koehler is the vice president of purchasing for Veolia Environmental Services North America.
Sidebar: Want to Know More about Reducing Fuel Costs?
Roger S. Koehler will speak at the “Reducing Fuel Costs Is a Gas” WasteExpo conference session. The session, which is part of the Fuel Management track, will be held on Wednesday, May 11, from 10:15 a.m. to 11:30 a.m. Other scheduled speakers include Ryan Mossman of FuelQuest, and John Ford and Matthew Milcetich of KeyBanc Capital Markets.
For complete information on the 2011 WasteExpo conference program and other show events, visit www.WasteExpo.com.