Technology expedites fall propane deliveries

Making your winter propane deliveries and locking in your margins now can help to ease any concerns surrounding product shortages and price spikes this winter. (Photo: Andyqwe/iStock / Getty Images Plus/Getty Images)

Propane inventories are at their lowest levels since the fall preceding the propane shortage of January 2014, and wholesale prices and propane’s value as a percent of crude oil prices are at their highest levels since 2011.

Propane marketers may manage this risk through a combination of strategies such as increased storage and financial instruments. There’s no better way to reduce the risk of a supply shortage than having the propane on hand, and financial instruments such as futures and call options can be effective ways to reduce the damage that may be caused by the price spikes that inevitably come from a supply shortage, especially for propane marketers who offer price caps to their customers.

These risk management tools unfortunately require time and money. Bulk storage is expensive, and if you want to own that storage and locate it at one or more of your plants, there’s a lot of lead time involved. And the high volatility in current markets, combined with the low liquidity associated with propane financial instruments, make call options particularly expensive for propane marketers who want to ensure their ability to honor price cap commitments.

One simple, elegant solution is to reduce the need for storage and the volume of financial instruments by delivering your winter gas now before the shortages and price spikes occur. In short, use the tanks in your customers’ backyards as storage, and lock your margin by delivering the gas now.

The obvious challenge is that this simple, elegant solution requires the customer’s help in the form of an auto-fill delivery method and financial indifference to the timing of the fill. We have addressed that through pre-buys, pre-paid caps and budget plans that require the customer to be on the auto-fill delivery method. We use technology tools to implement and manage these programs, together with tank monitors to efficiently time and route the deliveries.

Customers who call to inquire why they are getting a delivery in July, August and even September (and some of them will call) almost always understand when you tell them that you are reducing the risk of a potential product shortage by delivering it now when it’s available.

Here’s how it might be done and how technology tools may help:

Maximize customers on the auto-fill delivery method. Require pre-paid and budget program participants to use the auto-fill delivery method, and consider offering a discounted price to customers who do not participate in these programs to elect the auto-fill delivery method. This increases the availability of your backyard storage.

Make sure every customer is aware of your pre-paid and budget programs. We use our customer management software, websites and social media to do this:

• Email delivery: Just under 90 percent of our customers have a working email address on file with us.
• Invoices, statements, websites and social media: Our invoices and statements accommodate message highlights, and we use those to make sure we reach our customers if they happen to miss the email. Our website and social media also help get the message out to both our customers and, perhaps more important, prospective customers.
• Budget plans: Our software has enabled us to prepare and execute budget plans for every active customer using “mass customization.”
• Plan generation: Our software prepares a budget proposal for the customer based on their usage history and other parameters that we specify. For customers not actively participating on our budget plan, the proposal appears on the customer record as inactive, but it’s there for our customer service representatives to review with the customer and, when appropriate, modify to more closely fit the customer’s needs.
• Plan communication: Our software’s letter writer allows us to craft a message to the customer that describes (markets) the program and presents the budget proposal in an easy-to-read format.
• Auto-pay: Our budget plan participants are required to use our auto-pay method on a day of the month selected by them with a payment method on file. These payments are processed with a simple push of the button each business day, making it easy to track, report and record payments.

Put a monitor on every auto-fill tank. We have outlined the benefits of monitors in this column. One of the biggest benefits is managing the timing of a delivery. Using a combination of the monitor readings and other information in our customer management software, we can conduct group deliveries based on gallon levels and location to optimize deliveries.

We are using our technology tools, pre-paid price protection programs and budget program to make sure we fill our customer tanks much earlier than we might in a typical year and hope to complete as many deliveries as possible before Oct. 1.

We are prepared to accept a lower average delivery to accomplish this, but that increased cost is something we can control with precision using the detailed monitor information we have on hand. Of course, this increased cost will be more than offset by a combination of the reduced hedging cost and summer wholesale index prices.

What’s your plan?

Christopher Caywood is a co-owner of Caywood Propane Gas Inc.