As the winter months fade into spring, it’s easy to try and forget about heating and all the costs it incurs. For managers, board members and others with an eye on a co-op or condo building’s budgetary bottom line, now may be the perfect time to start planning ahead and taking advantage of the best options available from the city’s fuel providers. Because most companies provide some sort of flexible billing or payment option, it never hurts to shop around and see what can be done to tailor a payment program to a building’s very specific needs.
There are a number of different options available when it comes to finding the right billing plan. “Co-ops and condos can opt for floating pricing or some other type of pricing contract that may allow for a fixed price,” says Carla L. Romita, senior vice president of Castle Oil Corporation, based in Harrison, New York. “Fixed price contracts come with volume requirements within a specific time frame.”
As Fred Tamburino, vice president/commercial sales at Brooklyn-based Approved Oil Corp., explains, “You say, ‘If I wanted to buy 100,000 gallons of fuel, what would be my locked in or fixed rate?’” In order to get that rate, the building must purchase those 100,000 gallons of fuel within a year or other predetermined period of time.
There is an additional premium built into the fixed rate as well, says Mark Loughlin, vice president of the family-owned Ferrantino Fuel, based in Brooklyn, New York. “When fixing a price, there is inherent risk built into the futures market and so often, there is a premium for such a contract. Right now, there is political instability and a security premium of about ten cents per gallon built into the market.”
“Boards must remember that fixed pricing involves a binding contract between the co-op or condo and the supplier,” says Romita. “There are risks inherent for each side and these contracts must only be entered into when the board fully understands and accepts these risks.”
Floating pricing does not involve a contract. The risk, however, could be far more significant as could the reward. “The floating pricing goes up or down with the market,” says Tamburino, which means in a bad year, the price could skyrocket and a budget could be completely blown apart. On the other hand, if prices drop during the winter months, the savings could be just as huge. It all depends on where the market stands when a fuel purchase must be made.
Tamburino suggests a third option: a cap. “We have a cap, which guarantees that the price will rise no higher than a certain amount, but it could go lower than the market,” he says. So, the co-op or condo could reap the benefits of lower fuel prices but eliminate some of the risk. This arrangement, however, does require a contract—a specific number of gallons must be purchased over a specified amount of time. “I suggest a cap as a good idea,” Tamburino says. “You won’t pay anymore than that cap amount but you could pay less.”
The cap plan also involves premium insurance, which is divided out over 12 months. “Say, for example, you’re paying three dollars a gallon and it’s one cent for the insurance, so you’re going to be paying $3.01,” says Tamburino. That extra cost has to be factored into the budget over the course of a year.
Sometimes, savings can be found in other areas as well. Ferrantino Fuel, for example, offers an Automatic Delivery program that “allows us to schedule deliveries in an efficient and cost effective manner,” says Loughlin. They also provide new customers with “a free efficiency test which shows how efficient their boiler is and also provides recommendations for possible cost-saving measures.”
“At Castle,” Romita says, “we also offer credit-worthy customers level billing plans so that they can spread out their fuel costs over ten months rather than concentrating these expenses in the few cold months of the year.”
Ultimately, choosing a billing option all boils down to the needs of the building and whether they can afford to take much risk. “If co-ops or condos want to ensure their budget stays the same, they should use the capped or fixed rate,” says Tamburino. That means no surprises down the road. If, however, the board has some cushion and can afford the risk of an unforeseen spike in prices, then the freedom of a floating price option be appealing.
“Fixed pricing options and floating pricing options each bear risk,” says Romita. “The risk with a fixed price option is that the price of the product will fall and the customer has to purchase a guaranteed volume at the higher price. The customer has insulated itself against having to pay a higher price than the fixed price, but cannot enjoy any drop in market pricing.”
On the other hand, “the risk of a floating price is that it has no protection against increasing market prices. As the market goes up, the customer’s price will increase. However, the floating price customer will also enjoy any downward trend in the market in the form of lower prices.”
When it’s time to negotiate fuel billing options for the season or the year, most buildings should be able to take advantage of the various opportunities available. Some buildings, however, may not be able to participate. “The most likely reasons various pricing options may not be available are because volumes are too small or the credit worthiness of the customer is in question,” says Romita. “It is important to remember that when a fixed price contract is entered into, the supplier then takes this commitment to market and purchases contracts to cover the volumes of fuel promised by the customer. Suppliers will be reluctant to take that risk for a customer who is unlikely to be able to pay its bills.”
Also, “fixed pricing is not an option for interruptible gas customers who only use fuel oil when their gas service is interrupted. The reason is that it’s impossible to predict what volumes, if any, those customers are likely to use.”
Goodbye, Number Six
For the many buildings who use No. 6 fuel oil, the future costs of heating their buildings will soon be changing as the city of New York begins to phase it out over the next several years.
When it comes to heating oil, there are three types, says Tamburino: No. 2 oil, No. 4 oil and No. 6 oil. “Two oil means it’s the cleanest fuel, then comes four and then comes six. Six is the least refined but has a higher BTU rate, which means it produces more heat. The bad thing is that it produces more particulates.” he says. Eliminating the oil should help the environment and create better air quality. In the short term, though, “there are a tremendous number of buildings that use No. 6,” says Tamburino, and it is going to take some time to phase the fuel out.
In addition to producing more heat, No. 6 is also the least costly of the three types of oil. “So it will cost a little more, but there are benefits, too,” says Tamburino. That includes eliminating the need for pre-heating the oil, which consumes energy, and also reduces maintenance costs.
The new rules will require buildings to adapt their boilers to the alternative fuel options by 2015. “Already we have seen an increase in interest for the conversion or replacement of older boilers,” says Loughlin, who agrees that short term expenses could lead to long term gains. “Although these new rules will have a short term expense for building owners, changing to a new, more efficient boiler can ultimately save them money.”
One Brooklyn Building’s Conversion
The move away from No. 6 heating oil is already underway. One such building going that route is the Lindsay Park Housing Corp., a cooperative apartment corporation built in the 1960's as part of New York City’s Mitchell-Lama program. Lindsay Park, which contains 2,702 units in seven buildings, recently signed a contract to convert its 10 boilers from No. 6 heating oil to cleaner-burning natural gas.
The housing corporation chose Hess Energy Solutions to manage the conversion. According to the terms of the agreement, Hess will manage the conversion from start-to-finish, providing turnkey project management and funding as part of a natural gas supply agreement, which, according to Hess, will eliminate the need for upfront capital or bank financing. In addition to managing the boiler conversion, Hess provided documentation needed for Lindsay Park to take advantage of approximately $227,000 in New York State Energy Research and Development Authority (NYSERDA) incentives for converting from fuel oil to natural gas, as well as a $200,000 rebate from National Grid, payable upon completion, for the installation of natural gas piping. Hess will work with National Mechanical Services Inc., a mechanical contractor, to complete the Lindsay Park boiler conversion.
Once the project is completed in the second quarter of 2012, Lindsay Park plans to use natural gas for its seven buildings, well ahead of local legislative requirements. This project is expected to reduce Lindsay Park’s annual energy costs by approximately 30 percent after five years.
“Lindsay Park’s boilers were more than 40 years old. Converting them to natural gas was an opportunity to make Lindsay Park more energy efficient while we met the new regulatory requirements,” said Cora D. Austin, president of the corporation’s board of directors. “We have a long relationship with Hess, so when they shared how we could convert to cleaner-burning natural gas without the need for an upfront capital investment, our board was definitely interested in acting now.”
Just as fuel customers want to get the best prices possible, most fuel companies want to provide the best product possible, ensuring long-term business relationships with the co-ops and condos they serve. “We’re conscious of the dynamic oil market and are constantly monitoring the futures contracts in order to exploit opportunities to purchase during dips in trading,” says Loughlin. “This allows us to provide competitive pricing to our customers even below the daily prices.”
Romita also suggests that it’s important to look beyond the bottom line. “Pricing is not the only thing fuel purchasers should be concerned about,” she says. “It is very important to know who is delivering your fuel. Reputable fuel suppliers are extremely cautious about who they allow to deliver their fuel for them. This allows us a greater degree of control of our product from the terminal to delivery into our customers’ tanks. We take all shortage reports very seriously and thoroughly investigate each one to ensure our customers receive every drop of fuel they pay for.”
As with most things, the best way to ensure top quality service, an exceptional product and the right pricing option is to build a strong relationship with that building’s fuel provider. They can help tailor a program for the specific needs of each building and each budget, ensuring a match that benefits all parties.
Liz Lent is a freelance writer and a frequent contributor to The Cooperator. Associate Editor Liam P. Cusack contributed to this article.