Conversations About Customer Contracts Reducing Risk in Fuel Contracts
My last two articles covered “ contract basics .” The concepts were broad , but important to the validity of a contract . Now that spring is here , many retailers will be offering fuel pricing contracts to their customers . In this article , I am shifting focus from broad concepts to a specific topic – risk management . I ’ ve attended many financial seminars that offered great information about fuel purchasing options that are available to back future sales of fuel . However , these presentations rarely discussed how customer contracts should align with their financial counterpart to reduce company risk .
In my marketing area , it was common practice for retailers to purchase 80 % of the futures contracts over time to cover anticipated sales . The retailers would then average their purchase costs , add their margin , and launch one big marketing blitz to sell the fuel and secure customers for the upcoming season . The terms of purchase were misaligned with the terms of sale . For example , most purchases were made months before an offer , and customers often had months to decide if they wanted to accept .
[ After the 2008 financial crisis ] many oil retailers were left holding unsold futures gallons … Some filed for bankruptcy . Others got an education .
Business changed as a result of the 2008 market crash . In July of that year , oil prices peaked at almost $ 150 per barrel and then fell sharply to a low of approximately $ 40 per barrel in the second half of 2008 , as the global financial crisis hit . Many oil retailers were left holding unsold futures gallons , which resulted in financial trouble . Some filed for bankruptcy . Others got an education .
After 2008 , my company ’ s fixed price prepaid offer changed significantly to better align with the market and the terms of futures purchase contracts . Instead of offering one customer contract for the season , we purchased and sold smaller batches at different prices throughout the year , and the customer was given a shorter window to secure a contract . Another shift that took place after 2008 is that fewer companies offered fixed price budget contracts , which , in my opinion , had always been a bit risky and challenging to administer . While fixed price budget contracts dwindled , cap price contracts became more popular and remain so today .
The 2008 market crash gives us a good example of a historical event that affected customer fuel pricing contracts . Some of those changes were mandated by individual states , while others were implemented by retailers based upon need . Regardless , our industry responded in a manner for which we are well known – we adapted .
As changes continue , I am reminded of the importance of updating our customer contracts to reduce risk . In addition to the usual yearly updates , these are a few items to consider :
What effect will the various states ’ Clean Heat Standards have on customer contracts ? Will fees or carbon taxes be imposed retroactively ?
Does the customer contract language align with the supplier contract language ? And are there any gaps between the two force majeure clauses ?
In the event of customer default , a formula for liquidated damages may be easier to enforce than a flat fee . The latter is more likely to be viewed by the courts as a penalty .
Does the cap contract state that cap fees are deducted from customer payments before the cost of fuel ? This would be useful if the customer cancels early in the contract season .
There was a recent class action lawsuit filed against a fuel retailer , based upon the retailer ’ s market price as it applied to a cap contract in a market downturn . Consider adding a definition to the contract , such as : “’ retailer ’ s market price ’ means the price per gallon that the company charges for fuel , to similar non-contract customers , in good faith and observance of reasonable commercial standards of fair dealing , regardless of competitor ’ s pricing .”
I hope these suggestions are helpful as you prepare your fuel pricing contracts for the upcoming season . As always , consult an attorney on legal matters . Happy writing ! l FON
Leslie Cernak
BIO :
Leslie Cernak has been involved in the fuel oil industry for more than 36 years , running operations for her own company , and later working in compliance for an energy company .
She recently earned a master ’ s degree in legal studies for energy law from the University of
Oklahoma , College of Law .
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