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Old Posted Sep 26, 2008, 3:10 AM
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New York Times

How a Plan for Bus Fuel Grew Expensive

Published: September 24, 2008

Five years ago, as they were signing a contract for a cleaner-burning bus fuel, some officials with New York City Transit foresaw the day when similar low-sulfur fuels might become more common and less expensive.

That fuel was custom-made, and over the last two years, fuel suppliers warned transit officials that it might become difficult to get and urged them to consider a cheaper alternative.

But the transit agency never switched.

So last month, it found itself caught off guard when there were no bidders for a new fuel contract. As a result, it rushed through a stopgap agreement with its previous supplier at a much higher price.

The tale of how officials signed a contract that increases the fuel costs for their bus fleet by what could be tens of millions of dollars over the next year, at a time of budgetary crisis, helps show how well-intentioned efforts can go awry and end up affecting riders.

The custom-made fuel costs about 20 cents a gallon more than the more common ultra-low sulfur diesel that suppliers recommended. The fuel also requires special handling that in the new contract adds about 45 cents a gallon to delivery charges. On 50 million gallons of fuel to be delivered over the next 12 months, the extra costs represent an additional expense of more than $30 million.

The transit agency was a pioneer in 2000 when, to combat pollution, it switched its bus fleet to a type of diesel fuel known as ultra-low sulfur kerosene. It arranged for the fuel to be produced at a refinery in Pennsylvania and delivered by a company that is now known as Sprague Energy. In 2003, it renewed its contract with Sprague, this time for five years.

Dana Lowell, who was the head of research and development for buses at the transit agency at the time, said officials knew then that the federal government was preparing to require that all diesel engines switch to ultra-low sulfur fuel.

The wider use, they believed, would lower the cost of the fuel.

“The idea was that the five-year contract would take New York City Transit all the way through the transition, and on the other side of the transition they’d be able to buy fuel in a more natural process because it would be the standard,” said Mr. Lowell, who left the agency in 2004 and is now a vice president of M. J. Bradley, an environmental consulting firm.

Instead, in 2006 the federal government chose a slightly different fuel, commonly known as ultra-low sulfur diesel. Today the fuel can be bought at most gas stations.

The kerosene fuel used by the transit agency is produced only at a Pennsylvania refinery owned by Sunoco, and the agency is now the only large purchaser. Because of its unique characteristics, the fuel cannot be shipped by pipeline but has to be moved by barge and stored in separate tanks, adding greatly to costs.

Nonetheless, the agency decided to stick with the kerosene fuel, which is similar to jet fuel. Officials cited problems with diesel fuel in cold weather as one reason.

On Tuesday, when asked whether the transit agency should have moved earlier to switch fuels, Howard H. Roberts Jr., the president of the agency, said, “In hindsight, absolutely.”

Back in 2003, only two companies had bid on the transit agency’s kerosene fuel contract, and at about the time the federal requirement took effect in 2006, the agency began talks with refiners and suppliers to gauge their interest in future contracts, according to a four-page summary of the issue provided to board members of the Metropolitan Transportation Authority.

The summary said that there was little if any interest in providing the kerosene fuel but that many companies indicated a willingness to provide the more common diesel.

One of those companies was Metro Fuel Oil of Brooklyn. Robert J. Leavy, Metro’s manager of supply and distribution, said on Tuesday that the company had warned the transit agency last year that it could have problems obtaining the kerosene fuel in the future.

“We explained to them that we think that U.L.S.D.” — ultra-low sulfur diesel — “would be a better choice,” Mr. Leavy said. “It’s less expensive and readily available.”

But when the agency made its request for bids public in July, it was once again for the kerosene fuel.

Officials at the agency said that after lengthy discussions this summer with Sprague and Metro, they believed both companies might bid. Neither did.

Mr. Leavy said one reason Metro was unable to bid was that the fuel produced by Sunoco did not meet the standard set by the agency for a component known as cetane, which is similar to octane in gasoline. The agency had told the bidders that it was not willing to alter its specifications.

In a letter to the agency dated Aug. 20, Metro said it would not bid and asked the agency to re-evaluate the contract “in light of its excessive cost.” In a second letter, dated Aug. 27, Metro asked the agency to notify it if it was going to change its specifications or seek a new round of bidding.

Mr. Leavy said he got no response.
The materials provided to the authority’s board state that after the bidding process failed, the agency started negotiating with Sprague, reaching a deal on Aug. 29. But Sprague imposed what agency documents described as “onerous conditions,” more than tripling the handling and delivery charges.

The agency estimated that the one-year contract would cost $206 million. The transportation authority’s board approved the contract on Wednesday. The board materials also state that the fuel that Sprague will provide does not meet the cetane rating and will require an additive, which will cause an adjustment, presumably upward, in the price.

Mr. Leavy said his company was never given an opportunity to make a competing offer at these new terms. A representative of Sprague did not return telephone calls.

Stanley Grill, the agency’s head of procurement, said that when the bidding process failed, he tried to get an extension to the old arrangement from Sprague and Sunoco, but was told that the refinery needed an immediate commitment to ensure supply.

At that point, he said, he did not have the option of seeking a new round of bids. “I don’t have the luxury of doing that any more,” he said. “I have to turn to my supplier who can ensure I have continuity of bus fuel.”

Mr. Grill said transit officials had been hesitant to switch to the more commonly available diesel fuel because they worried about how it might affect their engines and pollution levels. There was also concern that it might violate warranties on the engines.

The agency is currently testing the diesel fuel. Officials said the buses need little or no adjustment to use the different fuel.

Copyright 2008 The New York Times Company
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