What happens when a customer pre-buys gallons of heating fuel and then doesn’t use them?
Lamprey Energy sells heating fuel in two distinct ways:
The first is called “Rack to Retail.”
We collect fuel from the depot and pay the wholesale price per gallon on that day. We deliver to the customer and charge the Market Price—the wholesale price plus our markup (to cover overheads and profit). The risk for the customer is that fuel prices will go up and so their heating bills will go up. Conversely, prices may go down and so their bills will go down.
The other is through a “Fuel-Buying Contract” or “Prebuy.”
We enter into a contract with our customer. The contract is for a certain number of gallons and the contract price is the wholesale price plus markup on the day of signing. The price is fixed, it won’t go up or down, no matter what the Market Price subsequently does. However, the only way we can guarantee that price is by taking out a contract for the same number of gallons with our wholesaler, also at a price fixed on the day of signing. In other words, when our customer “prebuys” from us, we “prebuy” from the wholesaler.
But what does that mean?
Here’s an example: Let’s say that our prebuy customer decides they want 1,000 gallons. Today’s wholesale price is $1.00 per gallon. Our margin is 40¢ per gallon. So today’s Market Price is $1.40 per gallon. Thus, for their 1,000 gallons the prebuy customer pays $1,400.
BUT, what if it turns out to be a warm winter and the customer doesn’t use all 1,000 gallons but actually only uses 800? Now we have 200 gallons that we’ve bought but which the pre-buy customer doesn’t want. So the pre-buy customer asks for a refund.
But, to make matters more complicated, not only was the winter warm but also the price for fuel has gone down. Now, the wholesale price is only 70¢ per gallon, making our current Market Price only $1.10 per gallon. If we refund the pre-buy customer, we’ll have 200 gallons for which we paid $1.00 but which we will have to sell on for just $1.10, giving us a mark-up of just 10¢ per gallon, which will not cover our costs—let alone bring us a profit.
It doesn’t happen often. Indeed, this scenario has only happened twice in the past 10 years but those two occasions have both been within the past 5 years. Sadly, we’re not able to continue to take ALL the risk in our pre-buy business.
We understand that no can know for sure exactly how many gallons they will need in any given winter and because of that we think it’s only fair that we share the risk with our customers.
So, as long as the customer uses 90% or more of their pre-bought gallons, we give a full refund/credit at the pre-buy price. In other words, we take ALL the risk on the first 10%. But, if there’s more than 10% unused, then the risk is shared.
If we use the example above, the risk would be shared equally— we would take the loss on the first 100 gallons, the customer would take it on the second 100 gallons.
Here’s how that example works out in numbers:
1,000 gallons purchased
800 gallons used
200 gallons purchased but not used
Pre-buy price: $1.40
Today’s Market Price: $1.10
Price difference (also known as liquidated damages) 30¢
Total liquidated damages on 200 gallons = 200 x 0.30 = $60
Refund on first 100 gallons given at the pre-buy price: $1.40 = $140
(Lamprey Energy covers liquidated damages of $30)
Refund on next 100 gallons given at today’s price: $1.10 = $110
(Customer covers liquidated damages of $30)
Total refund for 200 gallons = $250
And that’s it. It bears repeating that the scenario is not typical, but it can happen and it’s something to think about when you’re trying to calculate how much fuel to prebuy.
If you want help figuring out how many gallons to buy, want to look back to previous years and see what your usage has been or, indeed, want to ask about anything else to do with prebuy or your account in general, don’t hesitate to ask. We’re here Monday through Friday 7:30am to 4:00pm. Come in and see us at 63 Atlantic Avenune in North Hampton or give us a call at 603.964.6703. We’re here to help.