Rural electric co-op will ship its own fuel

Expensive fuel means expensive power, but an electric cooperative in Western Alaska is looking to cut costs by reaching up its own supply chain.

Alaska Village Electric Cooperative, the electric utility that powers 53 villages from Old Harbor to Kivalina, has decided to take control of its fuel supply by building two shallow tug-and-barge sets and shipping in its own fuel instead of buying it from established shippers. Diesel-powered generators are the most common form of electrical generation in rural Alaska.

If successful, AVEC's move could model a new tool for state electrical co-ops and signal the entry of a new fuel shipper in western Alaska to boot.

"I would certainly hope that all of western Alaska would benefit from the fact that there will be more than one provider of fuel," AVEC president and CEO Meera Kohler said.

The two tug-and-barge sets, which will be purchased without using state or federal funds, will cost about $10 million, according to Kohler. AVEC will build the tugs and barges, but they will be chartered and operated by a new shipping company, Vitus Marine. Vitus will begin a five-year contract shipping to AVEC villages in spring 2011. Kohler estimates that the move will save AVEC customers $2.5 million over the life of the contract, which means fuel will be about 10 cents cheaper per gallon than in the past. AVEC uses about five million gallons of fuel each year.

Vitus will have one main customer, and since it's leasing the ships from AVEC instead of buying them, startup costs will be minimal, according to Vitus founder Mark Smith.

"We will have a marine distribution company that has low capital costs and low overhead," Smith said.

The Vitus barges will also carry freight, mostly cargo for AVEC as the utility develops new projects.

The barges' capacity will exceed AVEC's needs, which means Vitus will also be able to sell fuel to retail outlets and local governments, potentially snapping up even more market share. Smith estimated that Vitus will sell about one million gallons beyond what it provides to AVEC.

Currently western Alaska is served by three fuel shippers: Crowley Maritime, Delta Western, and Ruby Marine. Of the five million gallons of fuel that AVEC burns each year, Crowley ships about three million, according to Craig Tornga, a vice president at Crowley.

Tornga said he couldn't tell whether Vitus would be a new competitor in the region, or if the new company would be the sole source provider for AVEC regardless of price.

"We just want to compete for the gallons," Tornga said.

Delta Western shipped over a million gallons of fuel to AVEC last year and is contracted to ship about 300,000 gallons this year, according to Kirk Payne, vice president of supply and logistics.

Because fuel shippers bid every year against their competitors for contracts with various local governments and utilities, the amount they ship to a given entity can vary widely from year to year.

Payne said that while Delta Western has the potential to lose those AVEC gallons as a result of Vitus' entry into the market, the capital cost of building those barges would seem to outweigh AVEC's estimated savings of $500,000 per year.

"If you're going to take 10 million and invest it somewhere, wouldn't you expect to make more than $500,000 a year?" Payne asked.

AVEC CEO Kohler said while she doesn't think the co-ops fuel suppliers have been "taking us to the cleaners," she does think that now "the delivery agents will have to sharpen their pencils a little sharper in order to compete."

Crowley has 40 vessels in its western Alaska fleet, including about 14 tugs. Delta Western has seven tug-and-barge sets, and Ruby Marine didn't return a call by press time.

Ginny Fay, a professor at the Institute of Social and Economic Research at University of Alaska Anchorage, likened AVEC's move to current business practices of fuel companies in other coastal areas. Some fuel companies servicing Southeast, Southcentral and the Aleutians operate both as wholesaler and as retailer, buying fuel from the refinery and then selling it in their own retail outlets, said Fay, who is also one of the authors of an ISER report on fuel pricing in rural Alaska that was released last week.