Vancouver City Council |
ADMINISTRATIVE REPORT
Date: May 13, 2003
Author/Local: L. BERGLUND/7254
RTS NO. 03397
CC File No. 1805
Meeting Date: May 27, 2003
TO:
Vancouver City Council
FROM:
General Manager of Engineering Services and
Manager - Materials ManagementSUBJECT:
Contract Extension - Contract No. 97-01
Supply of Diesel and Gasoline FuelsRECOMMENDATION
THAT Council approve the extension of the contract with Chevron Canada Limited, for the supply of diesel and gasoline fuels for an additional 1-year period from June 01, 2003, at an estimated annual cost of $3,570,000 including all applicable taxes.
COUNCIL POLICY
The policy of Council is to award contracts for the purchase of equipment, supplies and services that will give the highest value based on quality, service and price.
On March 04, 1980, City Council authorized co-operative purchasing "when benefits to the City are indicated."
Contracts with a value over $300,000 are referred to Council.
PURPOSE
The purpose of this report is to request Council approval for the City to exercise the first of two 1-year extension options for the continued purchase of diesel and gasoline fuel on the British Columbia Petroleum Products Buying Group (BCPPBG) contract with Chevron Canada Limited.
BACKGROUND
The City has been a participant in the BCPPBG since February 18, 1997, when City Council authorized the Manager of Materials Management, as a member of the co-operative negotiating team, to negotiate and accept on behalf of the City of Vancouver, a contract for the supply of gasoline and diesel fuels. The City has been under contract with Chevron Canada Limited through the BCPPBG since June 1, 1997.
On March 15, 2001, City Council approved the renewal of the contract with Chevron Canada Limited for an additional 2-year period from June 01, 2001 with optional two 1-year extensions.
Prices for gasoline and diesel have been very favourable for the City throughout the term of the contract. While there have been drastic increases in fuel prices for all consumers, the City has, as an example, avoided approximately $215,000 in additional fuel cost during 2000. In addition to more favourable pricing due to the combined volume, the BCPPBG prices have been based on changes in the manufacturer's raw materials rather than a market driven based pricing system (rack). As a result, when market conditions caused an increase in fuel prices, the City has been protected.BCPPBG uses a consultant who has extensive knowledge in fuel/petroleum products and costing information for both public and private sector organizations throughout Western Canada. In anticipation of the May 31, 2003 expiry of the current contract with Chevron, the consultant has provided the buying group members with a detailed report on current market conditions and fuel pricing.
DISCUSSION
The BCPPBG is able to negotiate favourable terms for its members due to its combined buying power and it is unlikely that any one individual member could achieve the same pricing. At the beginning of contract 97-01, the combined co-operative fuel purchase volume was estimated at 20 million litres with 31 communities participating in the BCPPBG. The City of Vancouver's annual portion was approximately 6 million litres. The BCPPBG now has 60 members with an annual volume of approximately 40 million litres of fuel.
The current contract expires on May 31, 2003 and the contract document allows for two 1-year extensions by mutual agreement between BCPPBG and the contractor. After in-depth review of current market conditions and analysis of current pricing, the negotiation team headed by the consultant, negotiated with Chevron Canada Limited to reach an agreement for the first 1-year extension option. The terms of the agreement are contingent on extension of all member contracts.
The proposed pricing includes an increase of $0.015 per litre for gasoline only or an estimated annual increases of $39,000. This increase does not take into consideration the regular monthly oil price fluctuation or any additional pipeline tariff and tax increases in the next 12 months. Price for diesel and all other terms and conditions remain the same.
In addition to the favourable diesel prices, the BCPPBG price for gasoline is substantially below current market levels. Therefore, despite this increase, the City, as a BCPPBG member, will continue to realize an approximate annual cost saving of $260,000 when compared to other similar size wholesale consumers in the market for gasoline and diesel fuel purchases.
Based on the consultant's experience and knowledge, the existing price change mechanism that the group presently enjoys will not be available if and when the co-op group goes to market. The existing price changes once per month based upon increases or decreases in the raw material cost affecting producers of gas or diesel. The most widely used mechanism offered to those who tender supply in today's market is rack. Rack based pricing is designed to reward manufacturers with higher margins during periods of supply and market turmoil (i.e., war, refinery and supply chain breakdowns, labour disruptions ).
FINANCIAL IMPLICATION
Due to the significant increases in world oil prices in the last quarter of 2002 and the first quarter of 2003, staff projects that fuel costs will exceed the original 2003 budget projections by approximately $300,000. In addition, changes to the motor fuel tax rates by the provincial government will add an additional $170,000 to the City's fuel costs in 2003. The total commodity and tax increases of $470,000 have already been added to the final 2003 budget presented to Council. The estimated $39,000 increase which results from this new contract pricing is in addition to the previously approved budget. Funding for fuel purchases are provided from the Capital and Operating Budgets.
CONCLUSION
Based on the consultant's analysis of current contract prices being offered by the major oil companies to other customers; the BCPPBG's preferential price change mechanism; the forecasted potential saving for the City; and the past performance of Chevron in meeting the City's requirements, we are recommending that this contract be renewed with Chevron Canada Limited for an additional 1-year period. The consultant has indicated, based on his insight into the current market, that it is highly unlikely that the BCPPBG will obtain better pricing if the group went out to bid.
We therefore recommend that this contract be extended for an additional 1-year period until May 31, 2004 at an estimated annual cost of $3,570,000 which assumes that crude prices will average out at levels similar to those of 2002.
* * * * *