NJUS grapples with fuel price volatility

The extreme volatility of markets have made conventional wisdom useless in locking down the upcoming fuel prices. Nome Joint Utilities General Manager John Handeland explained that for the last 20 years or so, the landed fuel price in Nome was based on an average around the lift date, the date the fuel is pulled from the refinery, averaging the price of the day before, the day of, and the day after the transfer of fuel, making for what is called a three-day wrap. Now, they’ve agreed with the supplier for a 30-day average of the month that the fuel is lifted. Past practices and models are “all out the window this year,” Handeland said.

NJUS’ tank farm gets filled once a year, in the fall, when the tanks have the most capacity. But even that is changing this year, also thanks to plenty of reserves in those tanks.

NJUS will purchase around 1.7 million gallons this year, on the low end of normal. Unless some other extreme volatility occurs, NJUS will be purchasing the fuel in August, about a month later than usual.

In a Nome Common Council meeting on Monday night, councilmember and CEO of Bonanza Fuel Scot Henderson agreed historical precedent won’t work this time around. He said that in the past one could make out a trend where fuel prices are going, but this year, it is so volatile that no clear trend is visible. He added that he didn’t envy NJUS managers for having to make the difficult decision when to buy fuel to get the best price possible.

Handeland explained some of the complexities of the fuel purchase contract. NJUS has a three-year contract for fuel with Crowley Maritime, for 2022 through 2024. The fuel comes from a refinery somewhere on the Pacific Coast, and the index used for the price is the average of the low-high postings for that month on MOPS, short for Mean of Platts Singapore. Platts is a division of S&P Global, a financial information and analytics company.

While publicly traded major oil companies, are posting record profitsamidst the energy crisis and are being hauled in front of Congress to answer for allegations of price gauging, Crowley is a privately held company and does not have the same profit-reporting mandates. Crowley did not respond to emails requesting financial information, but Handeland said he didn’t feel they were taking advantage of anyone. One reason for this is that NJUS and other utilities in the state have formed the Western Alaska Fuel Group. This group allows the utilities to order fuel in bulk, sharing transport and handling costs, for more favorable pricing.

Another such group is AVEC, the Alaska Village Electric Cooperative, which serves 11 of the 15 villages in the region. President and CEO Bill Stamm said they try to buy early, and purchased fuel in January, February, and March for the summer, but did not buy futures.

“We’re crossing into new territory,” Stamm said. Even the costs for fuel companies are going up as shipping costs increase due to higher fuel prices and these costs get passed on to the utility customers.

AVEC doesn’t mark up their costs, and NJUS similarly isn’t designed to profit like a company is.

Stamm explained that AVEC is always playing catchup when it comes to raising rates. The deliveries arrive and they start to accumulate costs, and only then can they calculate electricity rates in order to recoup those costs. This does mean that there is a bit of lag between when the fuel arrives and when the rate changes. While the cost of electricity in AVEC communities varies, the cost of fuel for those communities is the same; the price difference between Yakutat and Noatak has entirely to do with shipping costs. So what is to be done?

Stamm said that people still need electricity. That means that energy conservation and efficient homes are becoming increasingly important, and people should be cognizant of what power is being used for. But it also makes renewables pencil out better, he said. Handeland agreed, saying they are actively pursuing some opportunities to expand the wind farm and cut down on diesel usage for the Nome power plant.

“Every gallon saved is more valuable, it makes that renewable asset more valuable,” Stamm said.

The burning question on everyone’s mind —much a kilowatt hour will cost once the new fuel has landed — remains to be answered.