Transit Agencies Don’t Buy Fuel the Way the Rest of Us Do

The average motorist goes to the gas station and pays whatever price is listed on the sign. This time last year it was a little over $3 a gallon,

on average

. Today it’s about $4.32. Diesel, which powers buses and trains, hit an

all-time record high

of $6.52 last month and has only come down a little bit since then.

High fuel prices are a major budgetary concern for public transit systems, school districts, and other public agencies that operate large fleets of vehicles. For the moment, though, many of them are paying yesterday’s prices.

That’s because of a practice called hedging, in which agencies lock in a price for a certain amount of fuel ahead of time when they know they’re going to need it. This shields them from rising costs and lets them know how much to budget. When prices drop they may end up paying extra. But when prices spike, like they have done dramatically since the start of the U.S. war in Iran, they pay less.

The Metropolitan Transportation Authority in New York, by far the biggest transit system in the country, began hedging fuel in 2011. It avoided an

estimated

$43 million in fuel costs in the first half of this year alone because of its hedging program. The Massachusetts Bay Transportation Authority in Boston has saved

an estimated $9 million

so far this year. As big as those figures are, savings isn’t really the point of hedging. Predictability is.

“Transit agencies have to buy fuel. It’s not like they can say, ‘Gee, it’s too high. We’re not going to buy fuel today,’” says Jeff LeMunyon, owner of Minnesota-based Linwood Capital, which manages hedge programs for public authorities. “If you have a degree of certainty as to what that cost is going to be beforehand, you can plan and budget around that. From a basic level it’s because they want to manage their budget risk.”

It’s not as simple as stockpiling fuel ahead of time. When an agency wants to lock in a price for a certain amount of fuel in a future year, say 100,000 gallons of diesel, it has to enter into a swap with a bank. The agency takes a fixed position, say $4 a gallon, and the bank takes a floating position tied to a fuel price index that mirrors the average market price of diesel.

The agency continues to fuel its vehicles as needed, paying the market price as it goes. But if it pays more than $4 a gallon, the bank is required to pay back the difference through scheduled settlements. If the agency pays less than $4 a gallon, it pays the difference back to the bank. Clearly there’s a potential downside to hedging. But in either case, the agency knows it can budget $400,000 for fuel.

“You’re going to lose money half the time and you’re going to make money half the time,” LeMunyon says. “Over the long term the gains and losses add up to zero, and what you get along the way is the certainty of costs.”

Most agencies that hedge don’t hedge their entire fuel budget at once. The MTA hedges half of its fuel. The Southeastern Pennsylvania Transportation Authority in Philadelphia, which budgeted about $26 million overall for fuel in fiscal year 2027, has varying portions of its fuel needs hedged in successive fiscal quarters.

That helps the agency “limit exposure to a single market cycle,” says Michael Kendall, SEPTA’s assistant treasurer. SEPTA has scheduled hedges and also uses hedging “opportunistically” when prices are especially low, Kendall says. Right now the agency is getting money back from the banks. But because prices are historically high, it’s not adding additional layers of hedging in future years. Public agencies like SEPTA want to pay the lowest price they can for goods and services, but they also want to have predictable budgets.

“This is where the treasurer has to exercise their discretion,” Kendall says. “How do you balance the mandates between budget certainty and fiscal stewardship?”

Not all public transit agencies practice fuel hedging. The Utah Transit Authority

decided to forego

hedging a decade-and-a-half ago, citing state laws that its leaders believed prevented the practice. And there are political pitfalls to the practice. If an agency takes a big loss upfront it can lose the confidence of the public. Oregon’s TriMet got some bad press when it

lost money

on a hedge contract in 2009 and later discontinued the practice.

“What would be probably the worst thing is to jump in now as a first-time hedger because we’re at the top of a spike,” says Jim Murphy, managing director at Evercrest Advisors, an independent hedging advisor that has public agencies among its clients. “My view is the best strategy is to layer in hedges on a predetermined schedule and do it every year.”

Financial instruments like hedging and swaps involve a degree of risk, and some public officials are hesitant to get involved with them. But hoping for a good fuel price in the future is a risk too. TriMet, for example, has

paid

84 percent more than it budgeted for fuel during parts of this year, even as it is trying to navigate a funding crisis.

In the context of volatile fuel markets, Murphy says, “Not hedging is more of a bet than hedging.”