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2017-19 Biennium Budget Decision Package

Agency: 405 Department of Transportation Decision Package Code/Title: 5W Fuel Costs Budget Period: 2017-19 Regular Session Budget Level: ML – Maintenance Level Program: X – Ferries Maintenance & Operations Agency Recommendation Summary Text: The department requests a reduction to appropriation authority consistent with projected fuel prices from the March 2017 Five Percent Biodiesel (B5) Adjusted Forecast and the effect of fuel hedges that have been executed. A portion of the requested authority will also biennialize the fuel budgets for the third 144-car vessel that will be added to the fleet at the end of the 2015-17 biennium – increasing the partial-biennium authority to cover a full 24-months of use. Finally, the fuel gallons are reduced for savings in gallons once the fourth 144-car vessel comes on line in fiscal year 2019.

Fiscal Summary:

Operating Expenditures FY 2018 FY 2019 2017-19

Total FY 2020 FY 2021

Washington State Department of Transportation (WSDOT) Total

Fund 109-1 State -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Total Cost -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Staffing FTEs 0.0 0.0 0.0 0.0 0.0

Program X - Operating

Fund 109-1 State -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Total by Fund -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Staffing FTEs 0.0 0.0 0.0 0.0 0.0

Object of Expenditure FY 2018 FY 2019 2017-19

Total FY 2020 FY 2021

E. Goods and Services -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Total Cost -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Program X - Operating

E. Goods and Services -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Total by Program -7,712,000 -2,545,000 -10,257,000 -5,128,000 -5,129,000

Package Description Washington State Ferries (WSF) is the largest consumer of biodiesel fuel in state government. Ferries’ fuel budget is based on the number of gallons consumed per-year at the anticipated per-gallon price. The per-gallon price used to calculate the necessary budget adjustment was the March 2017 Fuel Price Forecast of biodiesel (B5), non-hedged, including all applicable taxes and fees, and then adjusted for the impact of fuel hedges executed.

The department uses actual B5 biodiesel prices, including delivery fees, applicable taxes, and the markup costs WSF must pay as the baseline in forecasting. On July 1, 2013, WSF began receiving a sales tax exemption on biodiesel fuel purchases. This exemption has been incorporated into the baseline B5

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biodiesel price forecast. An adjustment to the baseline to mitigate volatility is then applied to the B5 biodiesel price to derive the unhedged fuel-price forecast.

This adjustment is intended to mitigate the volatility of using a single price point in its forecasting. The department compares the crude oil prices of five forecasting entities – WSDOT official forecast, Global Insight, New York Mercantile Exchange (NYMEX), Consensus Economics, and Economy.com – and determines the difference between the baseline forecast and the five forecasting entities’ average price. These data are used to adjust the baseline for a forecast of non-hedged B5 biodiesel prices. Based on the March 2017 Forecast, the average non-hedged B5 fuel price is projected to be $1.86 per-gallon for the 2017-19 biennium, up from the $1.72 per-gallon price from the February 2016 forecast. The non-hedged per-gallon forecasted prices are then adjusted to account for fuel hedges that have been executed.

To date, the department has hedged 20,244,000 gallons for the 2017-19 biennium at an average price of $1.80 per-gallon, down from the $2.30 per-hedged gallon reflected in the February 2016 forecast. Hedges are entered into for budget stability and have always been locked in below prices that are forecasted at the time of the hedge. The final per-gallon price of B5 biodiesel, taking into account both the March 2017 forecast and hedges executed to-date is $1.83 per-gallon for the biennium. This results in a price that is lower than the 2016 enacted budget.

Narrative Justification and Impact

What specific performance outcomes does the agency expect? Approval of this request will align the WSF budget to expected costs, consistent with continuing to provide the current level of ferry service.

Performance Measure Detail N/A

Identify important connections or impacts related to this proposal. This is a technical adjustment to align the budget to most-recently forecasted fuel prices and fuel hedges executed to-date.

What alternatives were explored, and why was this alternative chosen? The alternative of not adjusting the WSF fuel budget would dedicate unneeded resources to this activity, unnecessarily committing account balance and precluding its use for other priorities.

What are the consequences of not funding this request? N/A

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Expenditure Calculations and Assumptions The budget estimate is based on the March 2017 Adjusted B5 Biodiesel Forecast for the 2017-19 biennium (please see attachment A). All fuel purchased at Harbor Island is based on a five percent biodiesel blend, with the price based on the department’s March 2017 official forecast for biodiesel. The calculation:

1) Compares projected costs for 2017-19 to the value of the fuel budget in the 2017-19 carry-forward level (which is the 2015-17 appropriation enacted in the 2016 Legislative session);

2) Adds the incremental amount needed to biennialize the 2015-17 addition of the third 144-car vessel to the fleet; and

3) Adjusts for the deployment in 2017-19 of the fourth 144-car vessel, which is more fuel-efficient than the vessel it is scheduled to replace (the MV Hyak).

2017-19 Fuel Budget $ in millions_

For base fuel assumed in 2017-19 (36,467,404 gallons):

2015-17 ferries fuel budget (2017-19 carry-forward level) $78.3

2017-19 calculated cost @ March 2017 hedged & non-hedged price of $1.83 per-gal. 66.7

Difference associated with base (11.6)

Additional gallons to biennialize the third 144-car ferry (801,960 gallons):

2017-19 calculated cost @ March 2017 Forecast for non-hehdged B5 price of $1.86 per gal. 1.5

For projected savings on gallons for fuel for the fourth 144-car ferry (-77,000 gallons):

2017-19 calculated cost @ March 2017 Forecast for non-hedged B5 price of $1.86 per gal. (0.1)

Total Adjustment Requested ($10.3)

Which costs and functions are one-time versus ongoing? What are the budget impacts in future biennia? All costs are ongoing

Attachment A

Total Budget FY 2018 FY 2019

2017‐2019 

Biennium 

(Projected)

2015‐17 Fuel Approp in Section 221(4), Laws of 2016. 41,658,000$       36,648,000$       78,306,000$      

Consumption Assumed in 2015‐17 Budget  18,233,702          18,233,702          36,467,404

3rd Olympic class vessel 407,760               394,200               801,960

4th Olympic class vessel ‐                        (77,000)                (77,000)

Total Gallons Required 18,641,462         18,550,902 37,192,364

Hedged

 Total Gallons Hedged 14,196,000 6,048,000 20,244,000

          Average price per gallon hedged fuel, including fees $1.79 $1.82 $1.80

Subtotal Cost of Hedged Fuel, Including Fees (rounded to $ in 1,000s) $25,479,918 $10,985,496 $36,465,414

Non‐Hedged

Total Gallons Not Hedged 4,445,462 12,502,902 16,948,364

          Average price per gallon biodiesel (B5), including fees $1.89 $1.85 $1.86

Subtotal Cost of Non‐Hedged Fuel, Including Fees (rounded to $ in 1,000s) $8,415,260 $23,067,854 $31,483,114

TOTAL Fuel Costs Including Fees  (rounded to $ in 1,000s) $33,895,000 $34,053,000 $67,949,000

 Average Cost per Gallon, Including Fees $1.82 $1.84 $1.83

 Fuel Hedging Consultant Cost $50,000 $50,000 $100,000

Total Cost of Fuel and Hedging Consultant $33,945,000 $34,103,000 $68,049,000

 Average Cost per Gallon Including Fees and Hedging Consultant $1.82 $1.84 $1.83

Variance: Updated Cost Estimate versus Appropriation ($7,713,000) ($2,545,000) ($10,257,000)

Washington State Ferries Fuel Cost Estimates

Estimates Based on March 2017 Motor Fuel Price Forecast(as of March 16, 2017)

Note: Chapter 16, Laws of 2011 (2ESSB 5742) exempts WSF from having to pay sales tax on fuel purchased for ferries beginning in 2013‐

15.

Addendum for WSDOT 2017-19 Decision Package

Decision Package Code and Title: Ferries Fuel Costs

Base Budget: The Enacted 2016 Supplemental baseline ferries fuel budget of $78.3 million was based on the February 2016 Fuel Cost Estimate. The appropriation is from the Puget Sound Ferry Operations Account-state (109-1).

What are other important connections or impacts related to this proposal?

FY 2016 FY 2017

2015-2017

Biennium

(Projected)

Total Gallons Required 18,233,702 18,233,702 36,467,404

Hedged

Total Gallons Hedged 14,658,000 12,096,000 26,754,000

Average price per gallon hedged fuel, including fees $2.46 $2.10 $2.30

Subtotal Cost of Hedged Fuel, Including Fees (rounded to $ in 1,000s) $36,030,000 $25,427,000 $61,457,000

Non-Hedged

Total Gallons Not Hedged 3,575,702 6,137,702 9,713,404

Average price per gallon biodiesel (B5), including fees $1.56 $1.82 $1.72

Subtotal Cost of Non-Hedged Fuel, Including Fees (rounded to $ in 1,000s) $5,578,000 $11,171,000 $16,749,000

TOTAL Fuel Costs Including Fees $41,608,000 $36,598,000 $78,206,000

Average Cost per Gallon, Including Fees $2.28 $2.01 $2.14

Fuel Hedging Consultant Cost $50,000 $50,000 $100,000

Total Cost of Fuel and Hedging Consultant $41,658,000 $36,648,000 $78,306,000

Average Cost per Gallon Including Fees and Hedging Consultant $2.28 $2.01 $2.15

Washington State Ferries Fuel Cost Estimates

Estimates Based on February 2016 Motor Fuel Price Forecast(as of February 18, 2016)

Note: Chapter 16, Laws of 2011 (2ESSB 5742) exempts WSF from having to pay sales tax on fuel purchased for ferries

beginning in 2013-15.

Non-Hedged Price Per-Gallon from Figure 11, Near-and Long-term Annual Fuel Price, Page 11 of February 2016

Transportation Revenue Forecast Summary (Volume I).

Impact(s) To: Identify / Explanation

Regional/County impacts? No Identify:

Other local gov’t impacts? No Identify:

Tribal gov’t impacts? No Identify:

Other state agency impacts? No Identify:

Responds to specific task force, report, mandate, or exec order?

No Identify:

Does request contain a compensation change?

No Identify:

Does request require a change to a collective bargaining agreement?

No Identify:

Facility/workplace needs or impacts?

No Identify:

Capital Budget impacts? No Identify:

Is change required to existing statutes, rules or contracts?

No Identify:

Is the request related to or a result of litigation?

No

Identify lawsuit (please consult with Attorney General’s Office):

Is the request related to Puget Sound recovery?

No

If yes, see budget instructions Section 14.4 for additional instructions

Identify other important connections

This is a technical adjustment to align the budget to most-recently forecasted fuel prices.

Please provide a detailed discussion of connections/impacts identified above.

Information technology: Does this Decision Package include funding for any IT-related costs, including hardware, software, services (including cloud-based services), contracts or IT staff?

☒ No

☐ Yes Continue to IT Addendum and follow the directions on the bottom of the addendum

to meet requirements for OCIO review.)

2017-19 IT Addendum

Part 1: Itemized IT Costs Please itemize any IT-related costs, including hardware, software, services (including cloud-based services), contracts (including professional services, quality assurance, and independent verification and validation), or IT staff. Be as specific as you can. (See chapter 12.1 of the operating budget instructions for guidance on what counts as “IT-related costs”)

Information Technology items in this DP

(insert rows as required) FY 2018 FY 2019 FY 2020 FY 2021

Item 1 0,000 0,000 0,000 0,000

Item 2 0,000 0,000 0,000 0,000

Total Cost Enter Sum Enter Sum Enter Sum Enter Sum

Part 2: Identifying IT Projects If the investment proposed in the decision package is the development or acquisition of an IT project/system, or is an enhancement to or modification of an existing IT project/system, it will also be reviewed and ranked by the OCIO as required by RCW 43.88.092. The answers to the three questions below will help OFM and the OCIO determine whether this decision package is, or enhances/modifies, an IT project:

1. Does this decision package fund the development or acquisition of a ☐Yes ☐ No new or enhanced software or hardware system or service?

2. Does this decision package fund the acquisition or enhancements ☐Yes ☐ No of any agency data centers? (See OCIO Policy 184 for definition.)

3. Does this decision package fund the continuation of a project that ☐Yes ☐ No is, or will be, under OCIO oversight? (See OCIO Policy 121.)

If you answered “yes” to any of these questions, you must complete a concept review with the OCIO before submitting your budget request. Refer to chapter 12.2 of the operating budget instructions for more information.