CRAFFuelIndex.ppt

USTRANSCOM

CRAF FUEL INDEX

William J. Prather

GOOD AFTERNOON!

I BRIEFED AT THE MOREP THIS PAST SEPT SOME PRICING ISSUES WE WOULD FACE WITH FOR FY09 CONTRACT – AS WE MOVE FROM CONTRACTING THE CRAF REQUIREMENTS UNDER FAR 15 TO FAR 12 (COMMERCIAL CONTRACTING).

THE PRIMARY ISSUE WE FACE AND THE REASON WHY WE ARE HERE TODAY IS HOW TO MAKE THE MONTHLY FUEL ADJUSTMENTS UNDER FAR 12 - SINCE ACTUAL FUEL COST IS NOT ALLOWED.

THIS BRIEFING PROVIDES OUR RECOMMENDATION OF MONTHLY FUEL ADJUSTMENTS BASED AS BASED ON A FUEL INDEX

AS I GO THROUGH THE BRIEFING AND YOU HAVE ANY QUESTIONS– PLEASE STOP ME.

WE HAVE ALLOTTED PLENTY OF TIME AT THE END OF THE BRIEFING TO DISCUSS THE FUEL INDEX.

INTRODUCE THE PRICING STAFF.

OVERVIEW

Background FAR 12 Commercial Contracting CRAF Fuel Index Summary Questions Received by Carrier Discussion

THIS IS AN OVERVIEW OF THE BRIEFING TODAY.

PROVIDE YOU BACKGROUND OR UNDERSTANDING TO WHY WE ARE MOVING FROM CONTRACTING UNDER FAR 15 TO FAR 12

GO INTO THE MAIN PART OF THE BRIEFING WHICH PARALLELS THE PACKAGE YOU ALL RECEIVED 8 FEB.

SUMMERIZE

AND OPEN FOR DISCUSSION.

BACKGROUND

OSD Oversight & FAR Ref.12.214 Government Cost and Accounting Standards (CAS) Waiver & TINA Compliant CRAF Contract Under FAR 12

CHANGES THAT HAVE OCCURRED SINCE OUR MOVE TO TRANSCOM LAST JAN ARE THE RESULT OF OSD OVERSIGHT OF OUR CRAF PROGRACM AND NEW FACES HERE AT USTRANSCOM REVIEWING OUR PROGRAM.

WE CURRENTLY HAVE A CAS WAIVER THROUGH FYO9 AND FOR US TO BE EXEMPT FROM CAS STANDARDS WE NEED TO CONTRACT THE CRAF REQUIREMENTS UNDER FAR 12 (COMMERCIAL PRACTICES)

THE WAY WE CONTRACT NOW UNDER FAR 15 WE ARE REQUIRED TO BE TINA COMPLIANT – YOU DO $650k IN GOV’T BUSINESS – SUBMIT COST AND PRICING DATA FOR THE ANNUAL RATE REVIEW.

UNDER FAR 12 THIS CEILING TO SUBMIT COST AND PRICING DATA CAN BE MOVED BACK TO $5M.

OUR MOVE TO CONTRACT UNDER FAR 12 RESULTS IN COMING UP WITH A FUEL INDEX METHODOLOGY.

FAR 12 – COMMERCIAL CONTRACTING

FAR Part 12 would lead to several changes in pricing and cost package submission. Following is a comparison of the main items.

This chart summarizes the major differences between contracting under FAR 15 our current method and FAR 12 “Commercial Practices”.

OBJECTIVES

Maintain Current Monthly Fuel Reporting Process Fuel Data For Ratemaking Representative of Carriers Fuel Cost

WE HAD THREE PRIMARY OBJECTIVES IN MIND WHEN WE BEGAN OUR PROCESS OF COMING UP WITH A FUEL INDEX.

WE WANTED TO KEEP THE NEW FUEL ADJUSTMENT PROCESS AS CLOSE TO WHAT WE CURRENTLY HAVE.

SELFESH REASONS – WE NEED THE FUEL DATA FROM THE MONTHLY FUEL REPORTS FOR RATEMAKING.

FOREMOST WE WANTED THE FUEL INDEX TO BE REPRESENTATIVE OF THE CARRIERS INCURRED COST.

I BELIEVE WE HAVE ACCOMPLISHED THE THREE OBJECTIVES

YOU ALL HAVE THE FINAL SAY ON THIS

FUEL INDEXES

Producer Price Index Air Transportation Association Oil Price Information Service Energy Information Administration

THESE ARE THE INDEXES WE CONSIDERED IN OUR PURSUIT OF A FUEL INDEX.

WE SOON REALIZED WHATEVER INDEX WE USED IT WOULD NOT BE REPRESENTATIVE OF CRAF CARRIER’S FUEL COST.

THIS IS BECAUSE OF HIGHER FUEL COST CRAF CARRIERS INCUR AT FOREIGHN LOCATIONS.

SO WE DEVELOP OUR OWN INDEX BASED

FUEL INDEXES (Cont)

Two Fuel Market Price Sources:

Defense Energy Supply Center (DESC) Energy Information Administration (EIA) With an Adjustment Factor

THE INDEX RECOGNIZED THE DESC STANDARD FUEL FOR FUEL UPLIFTED AT MILITARY LOCATIONS

EIA INDEX FOR FUEL PURCHASED AT COMMERCIAL LOCATIONS.

EIA INDEX WOULD INCLUDE AN ADJUSTMENT FACTOR

I WILL GO INTO MORE DETAIL ON ANOTHER SLIDE.

CRAF FUEL INDEX DEVELOPMENT

Fuel Data Base Pegged Fuel Price (Base-Line) DESC Fuel Price EIA Index Adjustment Factor

THE NEXT SEVERAL SLIDES STEPS THOUGH THE PROCESS WE TAKE IN

THE DEVELOPMENT OF THE CRAF FUEL INDEX

FUEL DATA BASE

Fuel Data Base:

DOD/Commercial Fuel Prices Gallons Uplifted (Military versus Commercial)

- Cargo – Military Locations

- Passenger – Commercial Locations

THE SOURCE OF OUR FUEL DATA BASE ARE YOUR MONTHLY FUEL DATA BASE.

USE THIS INFORMATION TO GET FUEL PRICES (DOD & COMMERCIAL)

GALLONS UPLIFTED (MILITARY VS. COMMERCIAL)

OBTAIN PERCENTAGE RATIOS USED FOR OUR INDEX

PEGGED FUEL PRICE

Pegged Fuel Price (Fuel Price in Rate) Current Fuel Reports Current Commercial Market Fuel Prices Projected DESC Fuel Price

Final Rate Set In Jun DESC Prices – Sep Pegged Fuel Price May Need Adjustment

THE PEGGED FUEL PRICE IS THE PRICE OF FUEL WE HAVE BUILD INTO THE RATE.

WE NORMALLY FINALIZING OUR RATES IN THE JUNE TIMEFRAME FOR EACH RATE REVIEW.

- CURRENT FUEL REPORTS – DOD/COM’L PRICE TRENDS & GALLONS

- CURRENT COMMERCIAL MARKET FUEL PRICES

PROJECTED DESC FUEL PRICES (SEPT PRICES PUBLISHED)

UNDER OUR FUEL INDEX METHODOLOGY – MORE CRIDCAL PEGGED FUEL PRICE IS CORRECT.

A FINAL ADJUSTMENT TO THE RATES MAY BE NEEDED WHEN DESC PRICES ARE PUBLISHED.

DESC FUEL PRICE

DESC Fuel Price JP-8 Standard Fuel Price

Apply For a Tax Exemption By Going to www.desc.dla.mil/DCM/Files/DESC-I-3.pdf

WE CHOOSE TO USE THE JP8 FUEL PRICE IN OUR FUEL INDEX MODEL BECAUSE OVER 90 PERCENT OF FUEL PURCHASES FROM DESC IS FOR JP8 FUEL.

ALSO JP8 FUEL IS FUEL TYPE COMMONALLY PURCHASED COMMERIALLY

EIA INDEX

Monthly EIA Index – Five Spot Markets New York Harbor U.S. Gulf Coast Los Angeles Rotterdam Singapore EIA Index - Simple Average

THESE ARE THE FIVE SPOT MARKETS USED IN EIA INDEX.

THE PRICE THAT USED IN THE CRAF FUEL INDEX MODEL IS AN AVERAGE OF THESE FIVE MARKETS.

ADJUSTMENT FACTOR

Adjustment Factor Applied to EIA Index EIA Index Not Representative of Higher Cost CRAF Carriers Incur EIA Index does not Include Into-Plane Fees and Taxes

WE INCORPORATED AN ADJUSTMENT FACTOR IN THE INDEX MODEL

TO ACCOUNT FOR THE HIGHER COST OF FUEL CARRIERS INCUR FOR PERFORMING CRAF REQUIREMENTS

AND RECOGNIZE THE FACT THAT THE EIA INDEX DOES NOT INCLUDE INTO PLANE FEES AND TAXES.

THIS ADJUSTMENT FACTOR IS CALCULATED FROM OUR FUEL DATA BASE.

WE WILL USE THE SAME RECENT TIME PERIOD USED TO ESTABLISH THE PEGGED FUEL PRICE AND COMPARE ACTUAL COMMERCIAL FUEL PRICES TO THE EIA INDEX FOR THE SAME PERIOD.

ADJUSTMENT FACTOR IS CALCULATED FOR CARGO AND PASSENGER.

THE NEXT SLIDE SLOWS HOW THIS ADJUSTMENT WAS CALCULATED.

ADJUSTMENT FACTOR PROPOSED

Period Used For Each FY Was Oct - Apr

Process For Setting Final Rate Begins in Jun

Percent Difference:

Average 17.49% 12.70%

Adjustment Factor Updated Annually

THIS IS THE LAST PIECE OF THE FUEL INDEX MODEL BEING WORKED WITH WHEN WE HAD TO CUT IT OFF AND GET THE INFORMATION OUT TO CARRIERS FOR YOUR REVIEW.

AS DISCUSSED FROM THE PREVIOUS SLIDE WE REVIEW COMMERCIAL FUEL PRICES FROM CARRIES FUEL REPORTS AND COMPARE TO THE EIA INDEX. THIS IS NOTHING MORE THAN THE DIFFERENCE CARRIER’S ACTUAL FUEL PRICES AND THE EIA INDEX.

WE LOOKED AT FOUR YEARS OF DATA IN OUR ANALYSIS.

AS YOU CAN SEE NO ESTABLISHED CONSISTANTEY IN THE DATA.

WE LOOKED AT USING CURRENT YEAR DATA

THREE YEAR AVERAGE

FOUR YEAR AVERAGE

WE ARE CONSIDERING THE USE OF A CENTS DIFFERENCE AND ONLY USE THE CURRENT DATA FOR THE ADJUSTMENT FACTOR

THE NEXT SLIDE SHOWS THE CALCULATION USING CENTS VS A PERCENTAGE ADJUSTMENT FACTOR.

FY07 CRAF FUEL INDEX - UPDATED

FY07 CRAF FUEL INDEX - UPDATED

FY07 CRAF FUEL INDEX - PASSENGER

FY07 CRAF FUEL INDEX - CARGO

FY08 CRAF FUEL INDEX - CARGO

FUEL ADJUSTMENT COMPUTATION

Example: Passenger – May 07 Proposed Fuel Adjustment:

$.01 or More Per Gallon Rule Applies

FY07 CRAF INDEX COMPARISON-CARGO

FY07 CRAF INDEX COMPARISON-PASSENGER

SUMMARY

Weighted Index – DESC & EIA

DESC – JP-8

EIA Index – Average of 5 Spot Market Prices Pegged Price is Base-Line For Measuring Price Variance Adjustment Factor – Commercial Fuel Prices From Fuel Reports Compared to EIA Index (Oct-Apr) CRAF Fuel Index (Cargo & Passenger) Maintained and Updated Monthly on www.fbo.gov By 15th of Each Month Price Variance Applied to Monthly Pay Miles and Fuel Burn Rate to Calculate Fuel Adjustment Required to Submit Monthly Fuel Reports

CRAF Fuel Index Becomes Effective With FY09 Contract

Carrier Questions/Comments Proposed EPA not representative of commercial charter practice of direct fuel cost reimbursement.

Increased risk associated to carriers with proposed method without considered compensation.

Is the proposed method accurate and what instruments are in-place to account for taxes, into-plane fees and other costs?

Proposed index cannot capture fuel costs at obscure/high cost locations.

Single comprehensive index is not representative of individual carriers fuel purchase.

4-Year average may not be most appropriate timeframe for adjustment factor.

Will DESC bill fuel at the standard fuel price?

Carrier Questions/Comments (Cont) How will fuel be addressed in the cost package, specifically the:

Adjustment factor Military to commercial ratio Affects on base rate Will the fuel reconciliation process change?

Is the fuel index a temporary or permanent change?

Does fleet or business mix have an impact on the fuel index?

When and where will each month’s index be available?

When do you anticipate FY09 proposed rate release and do you have insight into fuel prices?

CRAF FUEL INDEX

DISCUSSION

USTRANSCOM

CRAF RATEMAKING

William J. Prather Email: bill.prather@ustranscom.mil 618-229-2463

Concludes my briefing.

QUESTIONS!